Few years back, my friend Lucky got a call from a representative of a leading timeshare holiday company. “You have won a free holiday for two nights in the domestic location of your choice” said the female voice.
To avail the offer, he had had to visit their office premises along with his spouse.
In the meanwhile, my friend ‘googled’ and figured out that timeshare is a chain of hotels or a luxury resorts in which people get the right to use its property for a specified period (say 25 years). By paying a one-time membership fee, one gets to use their properties for a fixed period of time – say for seven days in a year. Club Mahindra, Sterling Holiday and Country Club were among the popular ones in India.
As proposed, my friend visited the timeshare office along with his wife. After a long presentation, he was urged to go for its life-time membership.
What’s the deal?
They pay Rs 6 lakh as membership fees and thereafter get to vacation for seven nights every year in their properties – for the next 25 years.
The sales executive urged the couple to go for it as they got the opportunity to freeze their hotel costs at Rs 3,400 a night (Rs 6 lakh / (25*7 nights)) for the next 25 years.
That was the interesting math!
They were told that if they headed out for a week-long vacation every year on their own, it will cost them at least Rs 5,000 a night at current rates (for similar properties) or Rs 35,000 every year. Assuming 6 percent inflation rate for room rentals, total hotel cost would add up to Rs 19.2 lakh over the next 25 years.
And by signing for timeshare membership, they get to save 35 percent of the above costs. How? This is because the membership fee (Rs 6 lakh) and annual subscription fees (after adjusting for inflation) total to only Rs 12.5 lakh over 25 years.
So, in all, you incur a total opportunity cost of Rs 1.29 crore if you sign up for timeshare holidays.
Case 1
Are we missing something here?
Yes, the time value of money. First of all, the above calculation doesn’t account for the opportunity cost of blocking your capital (Rs 6 lakh). If invested in equities (@12 percent annually), it would have fetched a crore at the end of 25 years.
And opportunity cost of paying annual subscription fees - of Rs 12,000, which increases at 6 percent every year – is another Rs 28.5 lakh.
So, in all, you incur a total opportunity cost of Rs 1.29 crore if you sign up for timeshare holidays.
Case 2
However, if you hadn’t signed up, there is no membership or annual subscription fees to pay, while room rentals increase every year by 6 percent. In absolute terms, it totals to Rs 19.2 lakh over a 25-year period. And when the opportunity cost is calculated, it adds up to Rs 83 lakh over 25 years.
In all, you save 35 percent by planning your own vacation instead of choosing a timeshare.
