To me, the single most differentiating factor of a DC vs. a Villa rental is the EXCLUSIVE nature of the product. If you are a member, you are a member of an exclusive club. You know the American Express tagline "membership has its privileges." A DC is a case in point.
DC's cater to the affluent. The average net worth of a DC customer is $3M. So, they have a significant amount of assets and disposable income. When you are at that level of networth, there are many products developed just for your income/networth bracket. Those luxury products include high end jewelry, boats and yachts, high end cars, Luxury home furnishings, SPAs, country clubs and other types of memberships and more. High networth people hire many more services than middle income folks as well. A DC is a hyrbid luxury product with services built into it.
One very important attribute of high networth customers is Exclusivity. Not anyone can be a member. Try getting an American Express Black Card. Here is a picture of one:
Here is a description of it:
American Express Black Card description
This is one of the most exclusive products on earth. It has an annual fee of $2500 with a $5000 initiation fee. And, it has an annual spending requirement of $250,000.
You can get an American Express Platinum Card for free. And, if you have high networth and great credit history, you can charge $250,000 or more per year. So, why would anyone pay these high fees to get one. In an word, EXCLUSIVITY.
Now, there are some potential upside benefits to owning a DC such as potential capital appreciation of your member deposit. So, that is something that you can model financially.
But, just like in purchasing Disney Vacation Club points vs. other high end Timeshares, you can estimate the cost of exclusivity like you can the cost of magic. Someday, when I have more time, I'll create a model for it. For simplicity purposes, here is what I would use for my own calculations.
Assumptions:
- Member fee = whatever it is
- Annual fee = whatever it is
- Number of days = whatever your plan calls for
- Breakage = realistic number of days that will go unused.
- 5% annual appreciation of underlying assets
- 20% loss of initial investment given 80% rule.
- holding period = 5 years (pick any amount of time)
- 11% hurdle rate given membership deposit = unsecured subordinate interest free loan
- 5% inflation on the annual fee. On the low side given last 5 year record
The hurdle rate you choose depends on whether or not there is competition for your cash for alternatives that you would be considering. For instance, if you have money that would otherwise sit in a bank account doing nothing, then you can use the lower number of 11% given the risk level of your deposit. Alternatively, if you actively invest capital, you should use whatever your expected return on capital is if you have opportunities that can return more. This will give you a more accurate picture of your real costs.
You take all these inputs, model them in a simple spreadsheet and you can estimate your real expected cost per night by discounting all of the cash flows to the present. Using the 5 years expected holding period is good because you can use that as the expect time by which your initial member deposit will grow in capital appreciation where it will return your original cash deposit. In addition, if you hold the DC for longer durations, it is possible for this investment to return even more to you. However, the longer you hold it, the higher probability that you won't use 100% of your use nights either. As with anything, if you own an asset long enough, you start using it less over time as other interests take precedence in your life. Given the choices available to high net worth people, it doesn't take 5 years to get bored with something.
I think I read a post where one DC had an entry level deposit of $225,000 plus $12900 annual fee for 35 nights. And, you can't book holiday weeks easily at this level.
So, using my model the average per night would be over $1000 per night of use assuming 100% occupancy of my nights.
You can get once heckuva rental for $1000 per night.
Just like there is a cost of Magic for purchasing Disney Vacation Club points, there is a cost of Exclusivity for DC purchases. If you can afford it and don't care about the money involved, it could be a good thing. It just depends on how much exclusivity is worth to you.
