Do Timeshares Work as a Means to Invest?

Structured properly, timeshares can be profitable investments.

Structured properly, timeshares can be profitable investments.

Timeshares are real estate interests that give you the right to use a property for a a set period of time. First used in Europe as a way to make ski vacations more affordable, they have become popular globally. While timeshares have a reputation for being poor investments due to their relatively high purchase cost and low resale values, they can be made to work as investments if you have a good plan.

Timeshare Future Values

One of the biggest problems with using timeshares as an investment is that they typically lose money over time. There are two primary causes for this problem. The first is that some timeshares are sold with a limited life. The closer the timeshare unit gets to its ending date, the less it is worth. In addition, due to the inflexibility of many timeshare units and the high maintenance costs, there are usually a large number of people looking to sell them. The motivation of sellers coupled with the lack of motivation of many buyers for the same reason leads to low prices. With this in mind, if you are going to buy a timeshare as an investment, you need to plan for this eventuality so your returns will still be positive, even if you have to take a loss on it.

Investment or Personal Use

One of the keys to making a timeshare investment work is to avoid using it personally. Timeshares that you hold for investment purposes have all of the same tax benefits as other rental real estate. You will be able to write off all of your expenses, and you can use the likely loss when you sell it to offset other gains or, in some cases, to offset regular income. If you use the timeshare for yourself, however, you could lose the ability to write off those expenses or losses. Another strategy that is popular with vacation homes won't work with timeshares. This strategy lets you take advantage of the fact that the Internal Revenue Service will let you rent out your vacation home for up to 14 days per year tax-free. Given that the tax-free income could outstrip the cost of owning the timeshare, it would be lucrative. However, unless you own a large number of weeks, you won't be able to rent out your timeshare and use it yourself. As such, your best option is use the timeshare exclusively as a rental property.

Buying Timeshares

The key to making a timeshare work is to buy it the right way. Instead of buying a newly developed unit, try to buy it on the resale market. Discounts of more than 50 percent from the original purchase price are not uncommon. By allowing the previous owner to take a hit on their value, you limit your downside risk. You also make it easier for you to profitably rent it out.

Renting Out Timeshares

Once you own a timeshare, the key is to rent it out for an amount higher than the average maintenance cost. The American Resort Development Association reported that the average timeshare maintenance fee was $731 per week in 2010. For an average unit in this example, anything you charge in excess of $104.43 per night would be profit if you had no other costs. To calculate your annual investment return, total your rents, subtract your costs, and divide that amount by your purchase price. For example, if you get $1,400 a week for rental income, have $800 in maintenance fees and $150 in advertising and transaction costs, you would have a profit of $450. If you paid $4,000 for the timeshare week, your annual return would be 11.25 percent.

Photo Credits

  • NA/ Images
Suggest a Correction