Wednesday, February 20, 2008

A Better Alternative to Timeshares: Vacation REITs

OK, so you want to buy a timeshare or a vacation property. Why? Because on your travels you have fallen in love with a particular city, or a particular climate. That's perfectly natural. But before you take the plunge, you should consider some of the drawbacks of timeshares and vacation properties. And you should consider using Real Estate Investment Trusts (or REITs) as an alternative to investing in vacation property, and as a way to fund annual vacations.

The Ugly Truth About Timeshares

What makes a REIT better than a timeshare? For one, timeshares are generally overpriced by at least 50% when they are sold to the public. Think about it: who pays for all of those "free vacations" offered to people who agree to sit through a pitch for a time share? The people who actually purchase the timeshares after hearing the pitch, usually taking on loans at high interest rates to do so. As an investor, I don't want to buy anything that somebody is working that hard to sell me, and I certainly don't want to pay for the free vacations enjoyed by the people who walk out of timeshare presentations early. If you need further proof, you have only to peruse sites that sell used timeshares, such as Today I logged on and found an unused timeshare within seconds that was purchased for $1800, offered for $8000 (44% of sale price). This was not a recent posting; it was over a month old. All of which means that you cannot count on selling a timeshare quickly if you need the money, even if you are selling at a deep discount to what you paid. The advantages of being able to stay at a variety of locations are hardly offset by the fees ($700 per year in this case) and the puny returns that timeshares offer their investors.

Vacation Properties have Problems, Too

Vacation properties can be better than timeshares, but they have their own problems. If you rent them out, you will likely experience some of the unpleasantness that I did during my life as a landlord. And unless you have a lot of money to invest, you will have to rent your vacation property out to pay the mortgage, property taxes, and maintenance. And if you sour on the location that you choose for your vacation property, you will have to pay comissions to get rid of it. And did I mention that many vacation properties are in tropical areas which are occasionally damaged by hurricaines?

Is this sounding like fun, yet?

An Alternative: The "Vacation REIT"

I've spent some time pointing out the drawbacks of both timeshares and vacation properties, so now I will tell you what you should buy instead: REITs, specifically REIT Indexes. REITs are shares of companies that own and manage rental properties, and that are required to pass on 80% of their profits as dividends. The Vanguard REIT ETF, an index of REITs, has a yeild of 7% as of this writing. However, given the ongoing problems in the housing and credit markets, it is very likely that we will see this yeild increase to 10% before the drop in real estate prices is over. That is when I will start buying, and when you should consider buying some REIT Index shares as well.

What this all means is that instead of buying a timeshare, or tying up all of your money in a vacation property, you can buy an asset which will track real estate prices over time and that will put money in your pocket which you can spend to vacation anywhere that you wish, if that his how you want to spend it.

Ask yourself: would you rather pay $18,000 for an illiquid, overpriced, timeshare that costs you $700 per year to own; or $18,000 for a few hundred shares of a REIT index that pays you $1800 each year, which you can spend (if you wish) vacationing in a different location each year, and which you can sell in seconds?

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