In many instances we have found upper middle class families confused about the differences between owning a vacation home or second home and investing in a product like a timeshare or fractional ownership. We get this query often and so it makes sense to define these differences.
Owning a holiday home: You own the property as per prevailing property laws in the country and state that the property is in. You enjoy full control over the property (subject to some minor rules if the property is in a gated community) but in general you own complete rights over the property allowing you to profit from the appreciation of the asset as well as unrestricted rights to generate income either through long term rentals or else short term vacation renting the property. You are also generally able to add value to the property by refurbishment, addition of amenities like a swimming pool etc. and in some cases extensions based on the local laws.
Fractional Ownership: In fractional ownership – you essentially buy shares in a company that owns the property. The developer typically retains enough shares to ensure that they control the property and the board of the company and if they don’t own the majority of the company they amend the constitution documents such that they exercise complete control over the board and governance of the company and as such over the property that is owned by the company. Here a lot depends on the ethics and genuineness of the administrator of the property as well as the laws in the country where the company is formed. So theoretically while you may be a fractional owner of a nice villa, in reality you exercise no control over the same and have negligible control of your destiny. Some of these sellers of fractional ownership tell you that you will be able to use the villa for a certain number of weeks per year – however, it is in our experience a hollow promise as in general it is difficult to co-ordinate travel plans of such a large number of owners and ensure that they are all accommodated. It is also very easy for the controlling shareholder to pay out significant commissions to their marketing companies and thus depress the earnings to the majority shareholders who however have no power to change the marketing partner. All in all, not a good situation or a wise investment.
Time share: Time shares have become popular while actually compared to ownership having absolutely no ownership. We want to be clear about this – When you buy a timeshare product e.g. Club Mahindra or Sterling resorts – the products we have seen mean that you have NO ownership at all in the underlying asset. What you are getting is a contract that says you are entitled to stay in one of the properties for a certain number of days within a certain time period during the year if you continue to be a member in good standing. Let us examine this a little bit more carefully: How do you remain a member in good standing ? By paying maintenance charges- So effectively you have no ownership. You have to continue to pay maintenance charges that are linked to inflation and the maintenance of a property that you don’t own and you have a relationship with a company that while today has a strong motivation to keep the resorts in good condition because they are at the moment dependent on new members- as soon as the market swings to where new members addition drops and their cash flow becomes dependent on maintenance charges – the writing is clear – they will have to raise maintenance charges or else drop service levels at their properties. This is nothing new and has been the challenge for the time share industry worldwide. While there are benefits of buying a timeshare – it should be looked at as primarily an expense and not an investment by any angle. It will never appreciate and the resale value is theoretical without a vibrant resale market. It is also interesting to note that if all the owners of timeshare weeks decided to take their vacation, the timeshare companies would need to increase the size of their properties by 3-4 times at the minimum.
Does a timeshare suit you: A timeshare property suits someone who is OK with the idea that he has no ownership and is happiest holidaying in a full service resort or hotel. It gives him the ability to exchange his timeshare with another at a different resort and location, and because of this exchange facility, it allows him to explore different parts of the world with ease. So you need to decide whether you are comfortable with this arrangement. If not then time-share is definitely not for you.
Disadvantages: The foremost drawback of timeshares in a property is that you do not actually own the property. You can only use it for a specific period of time every year.
Second, buying timeshares in a property is not cheap. Depending on the timeshare, week and flexibility, you have to pay a hefty upfront sum. Then you need to pay an annual fee which again can be somewhat costly. In most cases, in the long run, it is less expensive to buy a holiday home where you can save yourself a good amount of money.
Third, it can also be difficult to get a reservation at a timeshare property during the peak seasons.
Fourth, you can’t enjoy the appreciation of the property if the developer decides to sell it.
Fifth, timeshare can only be cost-effective if you holiday just once a year. If you holiday more than once in a year, then buying a holiday home makes more sense.
Sixth, in timeshares, if you do not use the week that you purchased, you lose the right for the year. So you paid all that money and you wasted it because your boss did not allow you time off.
Seventh, while timeshares can be flexible and exchangeable, enabling you to enjoy your vacation whole-heartedly, the joy of sole ownership is however missing.
So it goes without saying that buying a holiday home scores several points over timeshare! While the cost of acquiring a vacation home may be significant – a good point to compare it with would be the overall cost of owning a timeshare i.e. the upfront cost along with the yearly inflation linked maintenance charges and other food and entertainment charges on the property.