Second Homes 411

If you had $18,000 to invest in your IRA should you buy a blue chip stock or 6 timeshare weeks?

Fractional and timeshare is not generally known as an ‘investment real estate product’. But as real estate prices drop, and rents remain relatively constant, especially for vacation properties, buying a resale timeshare for rental purposes might actually be an alpha trade.

Consider the math a client of mine is considering: He recently retired from an auto company with a 401k that he rolled over into a Self Directed IRA, which allows him to invest in anything from gold to art, mortgage notes, and investment real estate. He owned a vacant lot in North Carolina (purchased for $74,000), his thoughts of building a vacation home there  have disappeared with his forced early retirement from the auto company, so he is putting the lot up for sale. He was able to ‘purchase’ the lot from himself and use his IRA funds, freeing up $74,000 in cash. Once the lot is sold he plans to buy rental real estate with the $74,000. Since Vacation Finance can lend him up to 70% against homes in his IRA, he can buy $246,000 worth of rental properties with $74,000.

Next he used his IRA to buy a resale Timeshare week on eBay for $2800. He has found someone to rent the Myrtle Beach ‘golf’ week for $1200 this year, the week carries a $490 per year maintenance fee, so he will likely recoup his investment in 4 years, owning a deeded golf week after this point. When an asset is in your IRA it must be an investment and cannot be used personally. He doesn’t plan to officially ‘retire’ for 5 more years and by this point he will buy back the timeshare week from his IRA (from himself) and stop renting, using it as his golf week away. At the point he can take withdrawals from his IRA, the IRA will get a tax deferred gain, he will have a free and clear timeshare week.

The same method could be used with Fractional ownership, a condo hotel or a traditional second home. What is interesting about timeshare is that you could buy multiple weeks. Consider if you love to ski, boat, and golf and in retirement you’d like to spend 6 weeks a year traveling doing all three. With the math above, you could purchase $18,000 worth of ‘used’ timeshare, I just checked eBay and it’s true, there is plenty of timeshare out there for resale varying between $2700-$5000 per week. We also have some foreclosed timeshare weeks currently for resale as well. Timeshare sold resale is not always the same ‘package’ as when you buy direct from the resort, caveat emptor. 

So for $18,000, you get 6 weeks, and will have $3000 a year in maintenance. Our cottage a few years ago needed a new roof and well in the same season, we paid for snow removal and lawn service and I had 12 months of utility bills all of which added up to far more than $3000 for my 6 weeks of summer time use. Could timeshare be a better investment?

If I purchased timeshare in my IRA last year, I could  have paid cash for it, instead of buying that stupid Bank of America stock (was $50 a year ago, yesterday it was $3.63!!!) if I had bought timeshare I would be up $3500 (20%) (assumes $1200 rent per week, $500 in fees).

Let’s do the math:

Bank of America stock (blue chip and safe??) purchase price March 2008, $40.00 per share - buy 450 shares for $18,000. Today’s value = $1633. Loss = $16,366. That’s 91% of the value. 

Buy 6 weeks of timeshare, 2 weeks in Hawaii, 2 weeks in St. Maarten, 2 weeks in Orlando for avg of $3000 per week = $18,000 investment in my IRA. Rent each week for $1200 per week (some more, some less), $7200 rent income for my IRA, less expenses of $500 per week = $4200 in net income. At the end of the year I have gained $4200 or 23%. 4.5 years from now I will have recouped my investment. Upon reaching 59.5 years old I can start ‘withdrawing’ weeks from my IRA for my own personal use. But already I’m looking forward to spending 6 weeks in Hawaii, St. Maarten, and Orlando every single year of my retirement - or trading them for other places.

Could timeshare  be a better investment for my IRA than stocks?  Yes, I shouldn’t have bought the BAC stock!