An economist’s first-hand take after attending a timeshare sales presentation in South Carolina offers a clear, numbers-led view of whether a timeshare makes financial sense.
Leading economist
Arnold Kling earned a PhD in economics from the Massachusetts Institute of Technology before working in research for the Congressional Budget Office and the Federal Reserve Board. He later worked for many years as Chief Economist at the Federal Reserve Board.
In the private sector, Kling was recruited by major US financial institution Freddie Mac (FM), where he oversaw the development of option pricing models for mortgage default and prepayment risk. He also pioneered research into automated underwriting, helping lead the use of credit scores and statistical methods for property appraisal.
Arnold Kling has published multiple scholarly books and articles on economic topics. He is an Adjunct Scholar for the Cato Institute and is affiliated with the Mercatus Center.
It is fair to say Mr Kling is someone who knows his way around numbers.
Timeshare pitch
The Kling family attended a timeshare sales presentation at Hilton Head’s Spinnaker Resort in South Carolina. Arnold and his wife, Jackie, chose not to sign and left with the salesman’s parting remark — "I don't believe you're really an economist," — ringing in their ears.
Kling recalls, with quiet amusement, that the salesman drew a picture of a bin to explain (in very simple terms) where the family’s holiday rental money was supposedly “going”.
Awkward theatre aside, Kling’s objection was straightforward: once you do a proper timeshare vs renting cost comparison, the numbers can look very different from the pitch.
Profitability formula
"I had determined that the deal was a loser," says Arnold, "based on (the salesman's) figures and an economic formula for the profitability of buying vs. renting.
Arnold’s formula is: Profitability = Rental rate + Appreciation rate - Interest cost
"When profitability is positive," explains the economist, "you should buy. When it is negative, you are better off renting."
When people take a week’s holiday, they typically rent accommodation. People who return to the same destination year after year might buy a flat or apartment there. A timeshare sits somewhere in between: you don’t buy the unit itself, and you don’t simply rent it. Instead, you pay for a membership that entitles you to one week of accommodation each year.
So, does a timeshare make financial sense just because “buying” is meant to beat renting?
Kling says no. "If you have to pay $500,000 to buy something, and you could rent it for a nickel a year, would you still buy it? No. In fact, the decision to rent or buy depends on prices, rents, and other factors that go into the profitability formula."
Renting vs owning
Buying often comes with the idea that you retain value and can sell later — in other words, that you come out ahead. But that depends on what you own and what it does (or doesn’t) do over time.
"The value of a piece of property will depend on the rate at which the price appreciates," says Arnold. "That is why the appreciation rate is in the formula.
"When you own the place where you are staying, you do not have to pay rent. Therefore, you can add in the rental rate (the ratio of the rent to the purchase price) to the profitability calculation."
Buying also means tying up cash (or borrowing it), so interest needs to be included as well.
The salesman's figures used in Arnold Kling's formula
- For the rental rate, the Kling family’s holiday rent was $1,200 for the week. The timeshare price was about $12,000 ($11,900). At face value, that looks like a 10% rental rate.
- Arnold then adjusts for fees. The timeshare maintenance fee was $433.25 per year, plus a membership fee of $200 per year, a publication subscription fee of $67 per year, and a “processing fee” of $93 per year.
- The fees added up to $793. So instead of saving $1,200 in rent each year, the net savings were $1,200 - $793 = $407.
- Dividing $407 by the timeshare price ($11,900) produces a rental rate of 3.4% — the first number needed for the formula.
- In the pitch, the salesman used the classic timeshare assumption that rents and prices rise by 10% per year. Kling used that as the appreciation rate.
- The quoted financing rate was 17.9%, which Kling used as the interest cost.
Putting those figures into the formula gives:
Profitability: 3.4 + 10.0 - 17.9 = minus 4.5%
A negative figure means buying the timeshare would cost 4.5% more per year than renting.
"To illustrate the economic value of this timeshare, you should draw an even bigger trash can," noted Arnold dourly.
A second illustration
Kling also totalled the cost of all 52 weeks and compared it with what he believed the apartment itself might be worth.
"The total price for all the weeks came to about $600,000. My guess is that the condo did not cost more than $200,000. And on top of that $400,000 in profit for the timeshare company come all those lovely annual fees.
"I don't want to generalize and say that all timeshare salesman are sleazebags, only the ones that I've met. Nor do I mean to criticize people who buy timeshares. I'm sure there are some happy owners. However, the economics are very unfavorable for the buyer."
Industry expert's advice
"The people who benefit from timeshares are not the customers," agrees Andrew Cooper, CEO of European Consumer Claims. "The only winners in a timeshare sale are the resort owners and the sales team."
If you own a timeshare and no longer feel it offers value — or you believe you were mis-sold — get in touch with our team at the Timeshare Advice Centre for advice on your options.
