What Is a Timeshare?
Timeshares started in Europe in the early 1960s, when many Europeans couldn’t afford vacation homes. Through these programs, people could own otherwise-unachievable vacation property. They then came to the United States in 1969 — and now, the timeshare industry is worth $10.2 billion, according to the American Resort Development Association (ARDA).
In 2018, 9.6 million households owned at least one timeshare.
What Types of Timeshare Contracts Are There?
- Shared deeded contracts share fractional ownership across all timeshare members, allowing them each to use the property during a specific period each year. While each owner gets a deed to the property, they do not own the property outright.
- Shared leased contracts do not give timeshare members ownership. Instead, the property deed stays with the resort or developer. Members pay for a block of time at the property, not ownership.
What Are the Different Types of Timeshare Ownership?
- Fixed week timeshares allow members to pick a specific period each year — usually a week — to use the property. For example, the owner of a ski resort timeshare might book the week between Christmas and New Year’s. Then, they have the option to use the property that week each year.
- Floating week timeshares allow members to pick a week to use their timeshare during a specified period of time. For example, they can select one week between July and September. Reservations operate on a first-come, first-served basis, so there’s no guarantee the property is available for the week the owner wants to reserve, which can be a hassle.
- Points system timeshares equate timeshare ownership to a certain amount of points. (This is also called a "vacation club.") Owners can use those points to reserve time at a property within a timeshare resort system. For example, a developer who owns 10 resorts may sell timeshares using the points system. Members can use their points to book time at any one of the system’s 10 resorts.
How Much Does a Timeshare Cost?
First, you’ll pay the initial purchase price. This can be expensive: The average cost of a timeshare in 2018 was $21,455 — and it’s not easy to finance a timeshare purchase. Most banks won’t lend money for timeshare purchases because timeshare members are not technically buying property. While many timeshare companies offer financing, the interest rates are higher than average.
Expect to pay annual maintenance fees, too, because each individual member is responsible for their share of the property’s maintenance. According to ARDA, the average timeshare maintenance fee in 2018 was $1,000. But maintenance fees increase by 8 percent each year, on average. In other words, after 10 years, your $1,000 annual maintenance fee might turn into an $1,800 annual maintenance fee.
Do the math before buying. How much does a comparable hotel room cost? If you can vacation more affordably without buying into a timeshare, that's likely the best option. Of course, some networks provide different location options, allowing you to visit Hawaii or Florida or Las Vegas, depending on your mood. Comparing the cost-effectiveness of these programs requires more calculations.
How Do You Pay for a Timeshare?
Homeowners looking to buy a timeshare can use a home equity loan, which gives homeowners the difference between their property’s assessed value and the balance on their mortgage, up to a certain point. (Most loans won’t allow you to borrow more than 80 percent of your home’s equity.) For example, a homeowner with $60,000 remaining on the mortgage of a $100,000 home can receive a $20,000 home equity loan. Yet there’s risk inherent in home equity loans: the bank can foreclose on your home if you default on your timeshare agreement.
Borrowing from a 401(k) plan is another way to pay for a timeshare. Most people with 401(k) retirement plans can borrow up to 50 percent of their vested balance. If you have a $150,000 401(k), you can take a loan out against your plan for up to $75,000. But borrowing from your 401(k) means less money invested in your retirement savings. Plus, the IRS requires you to pay back the loan within five years.
Is a Timeshare the Right Choice for a Real Estate Investor?
Indeed, owners can usually rent out their time at their property — but they’re often required to work with a rental agent, who charges for their services. The agent fee decreases the likelihood of an owner recouping the cost via timeshare rentals, let alone making a profit from it.
Also, most timeshares depreciate over time. The longer you own a timeshare, the less valuable it becomes. And it’s often difficult to resell a timeshare. In recent years, only about three percent of owners have resold their timeshares.
Real estate investors will earn better returns by pursuing other investment vehicles, such as owning a rental property, house flipping, or investing in a real estate investment trust (REIT). All of these methods will likely produce a higher return on investment than a timeshare.