Walgreens, CVS, and Rite Aid – What RE Investors Should Know in 2011
Walgreens, CVS or Rite-Aid: Which Tenant Is Best in 2011?
There are 3 major drugstore chains in the US: Walgreens, CVS, and Rite Aid. Below are some key statistics about the 3 major drugstore chains as of July 2010:
Walgreens
ranks #1 with market cap of $29.33 Billion, $66.25 Billion in revenue, and S&P rating of A+. According to Walgreens, 75% US population lives within 3 miles from its stores. On Oct 1, 2009, Walgreens opened its 7000-th store in Brooklyn, New York. In April 2010, it acquired 258 Duane Reade drug stores in New York Metropolitan area.
CVS
ranks #2 with market cap of $42.09 Billion, $99.1 Billion in revenue (CVS revenue alone is less than Walgreens if revenue from its Caremark group is taken out), and S&P rating of BBB+. CVS opened its 7000-th store in Little Canada, Minnesota on October 5, 2009 and currently operates 7025 drug stores..
Rite Aid
ranks #3 with market cap of $869 Million, $25.53 Billion in revenue, 4780 drug stores and S&P rating of B-.
Investors purchase properties occupied by these drugstore chains for the following reasons:
The drugstore business is very recession-insensitive. People need medicine when they are sick, regardless of the state of the economy. Both rich and poor people in the US have access to medicine. Some even argue that low-income people use more medicine due to free or low-cost drugs offered by government-assisted programs. So the tenants should do well during tough time and have money to pay rent to landlords.
The drugstore business has a good prospect in the US:
People are living longer and need more medicine to sustain longevity, e.g. Actonel for osteoporosis, Aricept for Alzheimer’s symptoms. Older people tend to use more medicine than younger ones as they often have more medical problems. As the 78 million baby boomers are getting closer to retiring age starting from 2008, the drugstore chains anticipate the demand for medicine to increase in next 20 years.
The drug market continues to expand as the US population will continue to grow. More and more Americans suffer from various diseases. The number of Americans suffers from seasonal allergies doubled in the last 15 years to 37 million people per Fortune magazine. They spent $5.4 Billion in 2009 for allergy drugs. As their waist lines balloon (75% of Americans are forecasted to be either overweight or obese by 2020), more Americans are diagnosed with diabetes, high cholesterol at younger and younger ages. In addition, doctors also recommend treating various diseases sooner than later due to better understanding about the diseases. For example, doctors now prescribe antiretroviral drugs for patients soon after infected with HIV virus instead of waiting for the infection to become AIDS. More doctors combine insulin with oral medicines to treat type-2 Diabetes instead of just oral medicines alone. All these factors increase the size of the drug market.
Advance in genetic engineering has introduced various new genetic DNA testing kits which allow the genetic diagnosis of vulnerabilities to inherited diseases and disorders. Genetic testing is currently the highest growth segment in the diagnostics industry. Some of these genetic tests will probably transform into direct-to-consumer testing kits available in drug stores in the near future. Upon FDA approval, these new products will potentially bring in additional revenue for drug stores.
The passage of Health Care Reform Bill on March 23, 2010 provides insurance coverage to an estimated 33 million more American. This is a major present to the drugstore industry.
There are new drugs to treat previously untreatable illnesses, and new diseases, e.g. Viagra for men’s unhappiness, Zoloft for depression, Avastin for colon cancer, Herceptin for breast cancer, Nicotine patches for smokers to kick the habit, Tamiflu for a potential bird flu pandemic, vaccine for swine (H1N1) flu pandemic, Tekturna/Rasilez for hypertension and various new drugs for AIDS and Attention Deficit Disorder (ADD). The new medicines are very expensive, e.g. a year’s supply of Avastin costs about $55,000. Eli Lilly has sold about $4.8 billion of Zyprexa in 2007 for schizophrenia and yet most people have never heard of this medicine.
There are existing drugs now approved to treat new illnesses and thus increase their sales revenue. For example, Lyrica was originally intended to treat pain caused by nerve damage in people with diabetes. It is now approved by FDA to treat Fibromyalgia which affects 5.8 million Americans per WebMD.
Big advances in genetics, biology and stem cells research are expected to produce a new class of drugs to treat diabetes, Parkinson’s and various rare genetic disorders. For example the new drug Ilaris from Novartis targets genetic causes of an inherited disorder that there are only 7000 known cases worldwide. However, Novartis hopes to gradually broaden its drugs to a blockbuster drug to more common disorders caused by similar genetics.
Technology and modern life introduce and require new products, e.g. pregnancy test kits, Lamisil for stronger clearer toe nails, Latisse for longer & thicker eyelashes, Premarin for menopausal symptoms, diabetic monitors, electronic toothbrushes, contact lenses, lenses cleaners, diet pills, vitamins, birth-control pills, IUDs, nutrition supplements and Cholesterol-lowering pills (Americans spent nearly $26B in 2006 on Cholesterol medications alone per IMS Health, a Connecticut-based consulting company that monitors pharmaceutical sales.) There are also more surgeries: C-sections, Kidney transplants, open-heart triple by-pass, and breast augmentations. More surgeries mean more medicines are needed such as Vicodin for pain management and Warfarin to prevent blood clots in surgeries.
Before the customers can get to the medicine aisles or pharmacy counters, they have to pass by chocolates, sodas, digital cameras, watches, toys, dolls, beers and wines, cosmetics, video games, flowers, fragrances, and greeting cards. Drug stores hope you use the one-hour photos services and exchange your liquid propane tanks there. The stores also carry seasonal items, e.g. Halloween costumes, and “As Seen on TV” merchandise, e.g. Shamwow. As a result, customers buy more than their prescriptions and medicine in these drugstores. Rite Aid sells more 28,000 non-pharmacy items in its stores while Walgreens has 22,000 different items on store shelves. CVS reported that non-pharmacy sales represented 30% of the company’s total sales in January of 2007. The figure for Walgreens is 34% and 37% for Rite Aid. Many pharmacy locations are in effect convenience stores especially ones that are in residential or rural areas. And so Walgreens hopes that customers also pick up WD-44, and screw drivers at its stores instead of at Home Depot; Thai Jasmine rice, and fish sauce to avoid a trip to Safeway or Kroger Supermarkets. During the recession, sales of these non-drug items are down as customers buy what they need and not what they want. Walgreens tries to reduce the number of items by 4000. It also introduces its own private label which has higher profit margins.
There are more and more generic medications on the market as a number of enormously popular brand-name blockbusters will lose their 20-year long patents, e.g. Lipitor (best selling drug in the world to lower cholesterol) in 2010, Viagra (you know what it’s for) in 2012. Drugstores prefer to sell generic drugs to customers due to higher profit margins than the brand-name medications.
Some people are addicted to pain killers, e.g. Hydrocodone and consume a large amount of medicine, e.g. 30-day dosage in a day to get high. According to testimony from the National Institute on Drug Abuse, US retail pharmacies dispensed nearly 180 million prescriptions in 2007 for opiates, e.g. Hydrocodone. A high percentage of these prescriptions are probably not used for any legitimate medical purposes.
This author estimates that at least 10% of the dispensed prescription drugs are not used at all and sit idle in the medicine cabinets. They are eventually expired and thrown away.
These companies sign very long-term, NNN leases, guaranteed by their corporate assets. This makes the investment in the underlying property fairly low risk, especially for Walgreens with an A+ S&P rating. In fact, these properties are sometimes referred to as investment-grade properties. Once the drugstore chains sign the lease, they pay the rent promptly and timely. This author is not aware of any properties leased by one of these drugstore chains in which the tenants failed to pay rents. Even when the stores are closed due to weak sales (Walgreens closed 119 stores in 2007), these companies may sublease the properties to other companies and continue to pay rents on the master leases.
A typical Walgreens lease consists of 20-25 year primary term plus 8-10 five-year options. During primary term and options, there will be no rent increases in most of the leases. This is the main disadvantage of investing in Walgreens drugstores.
A typical CVS lease consists of 20-25 year primary term plus 4-5 five-year options. The rent is normally flat during the primary term and then there is a 2.5%-10% rent increase in the in each 5-year option.
A typical Rite Aid lease consists of 20-25 year primary term plus 4-8 five-year options. The lease often has a rent increase every 5-10 years.
Investment Risks: Although the pharmacy business in general is recession-insensitive, there are risks involved in your investment:
The main downside about investing in pharmacies is there is little or no rent bump for a long time, e.g. 20-50 years, especially for Walgreens. So the rent is effectively reduced after inflation is factored in. This is one of the main reasons these properties do not appeal to younger investors.
The 3 drugstore chains now have a new formidable competitor, Wal-mart. Wal-mart sells prescription drugs in more than 4000 Wal-mart, Sam’s Club and Neighborhood Market stores in 49 states. The retail giant is known for launching in 2006 a highly-publicized $4 generic prescription drug program which now sells 350 generic medications for a 30-day supply. The actual number of medications is less as the medications with different strengths are counted as different medications. For example, Metformin 500 mg, 850 mg, and 1000 mg are counted as 3 medications. Wal-mart probably makes very little profits on these medications if any. However, the marketing campaign–created by Bill Simon, the President and CEO of Wal-mart US, generates a lot of publicity for Wal-mart. Wal-mart hopes to draw customers to its stores with other prescriptions where it has higher profit margins. In an unscientific survey with just one brand-name prescription of Lyrica, this author finds the lowest price at Costco, the highest price at Walgreens and Wal-mart at the middle. Other drug chains try to counter Wal-mart in different ways. Target now offers the same 350 generic medications for $4 for a 30-day supply. Walgreens has a Prescription drugs club with membership fee which offers 1400 generic medications for as little as $1/week. CVS says it will match any offers from its competitors.
Chief Business Correspondent Rick Newman from US World & News Report predicted that Rite Aid might not survive in 2009. While Rite Aid is still around in 2010, dire predictions continue. The study by Audit Integrity gave Rite Aid about a 10.5 percent chance of filing for bankruptcy in 2010.
Drugs are also sold in thousands of supermarkets, Target stores, and Costco warehouses. However, there are no drive-through windows at these stores or Walmart to conveniently drop off the prescriptions and pick up medicines. Customers will not be able to pick up their prescriptions during lunch hour or after 7PM at Target stores or supermarkets. They need to have membership to buy medicines at Costco. Others may not fill their prescriptions at Walmart because they don’t want to mingle with typical Walmart customers who are in lower income brackets. And some babyboomers don’t want their prescriptions filled at Target or Walmart because there are no comfortable chairs for them to sit down to wait for their medicines.
Many leases in areas with hurricanes and tornados are NNN leases with the exception of roof and structure. So if the roof is damaged, you will have to pay for the expenses.
The tenant may move to a new location down the road or across the street when the lease expires. This risk is high when the property is located in small town where there is low barrier for entry, i.e. lots of vacant & developable land.
The tenant may ask for rent concession to improve its bottom line. The possibility is higher if the tenant is Rite Aid and if the store has low sales revenue and/or higher than market rent.
More Americans are walking away from their prescriptions, especially the most expensive brand-name medicines. This may have negative impact on the sales revenue and profits of drug stores and consequently may cause drug store closures. According to Wolters Kluwer Pharma Solution, a health-care data company, nearly 1 in 10 new prescriptions for brand-name drugs were abandoned by people with commercial health plans in 2010. This is up 88% compared to 4 years ago just before the recession began. This trend is driven in part by higher and higher co-pays for brand name drugs as employers are shifting more insurance costs to their employees.
Among 3 drugstore chains, Walgreens and CVS pharmacies in general have the best locations-at major intersections while Rite Aid has less than premium locations. Walgreens tends to hire only the top graduates from pharmacy schools while Rite Aid settles with bottom graduates to save costs. When possible all drugstore chains try to fill the prescriptions with generic medications which have higher profit margins
Walgreens: the company was founded in 1901 by Charles Walgreen, Sr. in Chicago. While the company has existed for more than 100 years, most stores are only 5-10 years old. This is the best managed company among the three drugstore chains and also among the most admired public companies in the US. The company has been run by executives with proven track records and hires the top graduates from universities. Due to its superior financial strength–S&P A+ rating– and premium irreplaceable locations, properties with leases from Walgreens get the highest price per square foot and/or the lowest cap rate among the 3 drugstore chains. In addition, Walgreens gets flat rent or very low rent increase for 20 to 60 years. The cap rate is often in the low 6% to 7.5% range in 2009. Investors who buy Walgreens tend to be more mature, i.e. closer to retirement age. They are looking for a safe investment where it’s more important to get the rent check than to get appreciation. They often compare the returns on their Walgreens investment with the lower returns from US treasury bonds or Certificate of Deposits from banks. Walgreens opened many new stores in 2008 and 2009 and thus you see many new Walgreens stores for sale. It will slow down this expansion in 2010 and focus on renovation of existing stores instead
CVS: CVS Corporation was founded in 1963 in Lowell, MA by Stanley Goldstein, Sidney Goldstein, and Ralph Hoagland. The name CVS stands for “Consumer Value Stores”. As of 2009, CVS has about 6300 stores in the US, mostly through acquisitions. In 2004, CVS bought 1,200 Eckerd Drugstores mostly in Texas and Florida. In 2006, CVS bought 700 Savon and Osco drugstores mostly in Southern California. And in 2008 CVS acquired 521 Longs Drugs stores in California, Hawaii, Nevada and Arizona for $2.9B dollars. The acquisition of Long Drugs appears to be a good one as it CVS does not have any stores in Northern CA and Arizona. Besides, the price also included real estate. It is also bought Caremark, the largest pharmaceutical services company and changed the corporation name to CVS Caremark. When CVS bought 1,200 Eckerd stores, it formed a single-entity LLC (Limited Liability Company) to own each Eckerd store. Each LLC signs the lease with the property owner. In the event of a default, the owner can only legally go after the assets of the LLC and not from any other CVS-owned assets. Although the owner loses the guaranty security from CVS corporate assets, this author is not aware of any incident where CVS closes a store and does not pay rent.
Rite-Aid: Rite Aid was founded by Alex Grass (he just passed away on Aug 27, 2009 at the age of 82) and opened its first store in 1962 as “Thrif D Discount Center” in Scranton, Pennsylvania. It officially incorporated as Rite Aid Corporation and went public in 1968. By the time Alex Grass stepped down as the company’s chairman and chief executive officer in 1995, Rite Aid was the nation’s largest drugstore chain in terms of total stores and No. 2 in terms of revenue. His son, Martin Grass, took over but was ousted in 1999 for overstatement of Rite Aid’s earnings in the late 1990s. Rite Aid is now the weakest financially among the 3 drugstore chains. In 2007, Rite-Aid acquired about 1,850 Brooks and Eckerd drugstores, mostly along the East coast to catch up with Walgreens and CVS. In the process, it added a huge long term debt (currently owes over $5.69 Billion) and is the most leveraged drugstore chain based on its market value. The integration of Brooks and Eckerd did not seem to go well. Revenue from some of these stores went down as much as 20% after they change the sign to Rite Aid. In 2009, Rite-Aid had over 4900 stores and over $26 Billion in revenues. The figures went down in 2010 to 4780 stores and $25.53 billion in revenue. On January 21, 2009 Moody’s Investor Services downgraded Rite Aid from “Caa1″ to “Caa2″, eight notches below investment grade. Both ratings are “junk” which indicate very high credit risk. Rite Aid contacted a number of its landlords in 2009 trying to get rent concession to improve the bottom line. In June 2009, Rite Aid successfully completed refinancing $1.9 Billion of its debts. However, it continues to struggle in 2010 as same store sales decreased 2.5% in June, 1.7% in May, 1% in April,.1% in March, 3.2% in February, and 2.1% in January..
Things to consider when invested in a pharmacy
If you are interested in investing in a property leased by drugstore chains, here are a few things you should consider:
If you want a low risk investment, go with Walgreens. In stable or growing areas, the degree of safety is the same whether the property is in California where you get a 6% cap or Texas where you may get a 7.5% cap. So, there is no significant advantage to invest in properties in California as the property value is based primarily on the cap rate. In 2010, the offered cap rate for Walgreens seems to come down from 7.5%-8.4% in 2009 to 6.5%-7.5% for new stores.
If you are willing to take more risk, then go with Rite-Aid. Some properties outside of California may offer up to 10% cap rate in 2010. However, among the 3 drug chains, Rite Aid has 10.5% chance of going under in 2010. Should it declare bankruptcy, Rite Aid has the option to pick and choose which locations to keep open and which locations to terminate the lease. To minimize the risk that the store is shuttered, choose a location with strong sales and low rent to revenue ratio.
Financing should be an important consideration. While the cap rate is lower for Walgreens than Rite Aid, you will be able to get the best rates and terms for Walgreens. A 7.25% cap Walgreens with 5.25% interest rate on the loan will generate more cash flow than a 10% cap Rite Aid with 9% interest rate (if you could find a lender for Rite Aid).
If you are not a conservative investor or risk taker, you may want to consider a CVS pharmacy. It has BBB+ S&P credit rating. Its cap rate is higher than Walgreens but lower than Rite Aid. Some leases may offer better rent bumps. On the other hand, some CVS leases, especially for properties in hurricane areas, e.g. Florida are not truly NNN leases where landlords are responsible for the roof and structure. So make sure you adjust the cap rate down accordingly. Some of the CVS locations have onsite Minuteclinic staffed by registered nurses. Since this clinic idea was introduced recently, it’s not clear having a clinic inside CVS is a plus or minus to the bottom line of the store.
All 3 drugstore chains have similar requirements. They all want highly visible, standalone, rectangular property around 10,000 – 14,500 SF on a 1.5 – 2 acre lot, preferably at a corner with about 75 – 80 parking spaces in a growing and high traffic location. They all require the property to have a drive-through. Hence, you should avoid purchasing an inline property, i.e. not standalone and property with no drive-through windows. There is a chance that these drugstores may not want to renew the lease unless the property is located in a densely-populated area with no vacant land nearby. In addition, if you acquire a property that does not meet the new requirements, for example a drive-through, you may have a problem getting financing as lenders are aware of these requirements.
If the pharmacy is opened 24 hours a day, it is in a better location. Drugstore chains do not open the store 24 hours day unless the location draws customers.
Many properties may have a percentage lease, i.e. the landlord can get additional rent when the store’s annual revenue exceeds a certain figure, e.g. $5M. However, the revenue used to compute percentage rent often excludes a page-long list of items, e.g. wine and sodas, tobacco products, items sold after 10 PM, drugs paid by governmental programs. The excluded sales revenue could account for as much as 70% of store’s gross revenue. As a result, this author has seen only 2 stores in which the landlord is able to collect additional percentage rent. The store with a percentage rent is required to report its monthly sales to the landlord. As an investors, you want to invest in a store with strong gross sales, e.g. over $500 per square foot a year. In addition, you also want to check the rent to revenue ratio. If the figure is in the 2-4% range, the store is likely to be very profitable so the chance the store is shut down is low.
It does not matter how good the tenants are, avoid investing in declining and/or low-income areas or small towns with less than 30,000 residents within 5 miles ring. In a small town, it may be the only drug store in town and captures most of the market share. However, if a competitor opens a new location in the area, revenue may be severely affected. These properties are easy to buy now and hard to sell later. In 2009 where the credit market is tight, you may have problems finding a lender to finance these properties.
Many properties have an existing loan that the buyer must assume. If you have a 1031 exchange, think twice about buying this property. You should clearly understand loan assumption requirements of the lenders before moving forward. Should you fail to assume the existing loan (assuming an existing loan is a lot more difficult than getting a new loan), you may run out of time for a 1031 exchange and may be liable to pay capital gain.
With few exceptions, drugstore chains do not own the stores they occupy for several reasons. Here are just a couple of them:
They know the pharmacy business but don’t know real estate. Stock investors also don’t want Walgreens to become a real estate investment company.
Owning the real estate will require them to carry lots of long term debts which is not a brilliant idea for a publicly-traded company.
About 10% of the drugstore properties for sale and typically CVS pharmacies require very small amount of equity to acquire, e.g. 10% of the purchase price. However, you are required to assume an existing fully-amortized loan with zero cash flow. That is, all of the rent paid by the tenant must be used to pay down the loan. The cap rate may be in the 7% range, and the interest rate on the loan could be attractive in the 5.5% to 6% range. Hence, the investor pays off the loan in 10 to 20 years. However, the investor has no positive cash flow. This requires you to come up with outside cash to pay income tax on the rental profits (the difference between the rent and mortgage interest). The longer you own the property, the more outside cash you will need to pay income taxes as the mortgage interest will get less and less toward the end. So who would buy this kind of property?
The investors who have substantial losses from other properties. By acquiring this zero cash flow property, they may offset the income from the drugstore tenant against the losses from other investment properties. For example, a property has $105,000 of rental profits a year, and the investor also has losses of $100,000 from other investment properties. As a result, the combined taxable profits are only $5,000.
The uninformed investors who fail to consider that they have to raise additional cash to pay income taxes.
Out of the Box Thinking If you put too much weigh on the S&P rating of the tenants, you may end up either taking a lot of risks or passing up good opportunities.
Good location should be the key in your decision on which drug store to invest in. It’s often said a lousy business should do well at a great location while the best tenant will fail at a lousy location. A Walgreens store that is closed down later on (yes, Walgreens closed 119 stores in 2007) is still a bad investment even though Walgreens continues paying rent on time. So you don’t want to blindly invest in a drug store simply because it hasa Walgreens sign on the building.
No company is crazy enough to close a profitable location. It does not take a rocket scientist to understand that a financially-weak company like Rite Aid will make every effort to keep a profitable location open. On the other hand, a financially-strong Walgreens will need justifications to keep an unprofitable location open. So how do you determine if a drug store location is profitable or not if the tenant is not required to disclose its profit & loss statement? The answer is you cannot. However, you can make an educated guess based on store’s annual gross revenue is often reported to the landlord as required by the percentage clause in the lease. With the gross revenue, you can determine the rent to income ratio. The lower the ratio, the more likely the store is profitable. For example, if the annual base rent is $250,000 while the store’s gross revenue is $5M then the rent to income ratio is 5%. As a rule of thumb, it’s hard to make a profit if this ratio is more than 8%. So if you see a Rite Aid with 3% rent to income ratio then you know it’s likely a very profitable location. In the event Rite Aid declares bankruptcy, it will keep this location open and continue paying rent. If you see a Rite Aid drug store with 3% rent to income ratio offering 11% cap, chances are it’s a low risk investment with good returns. The weakness of corporate guaranty from Rite Aid is probably not as critical and the risk of having Rite Aid as a tenant is not really that significant.
Drug stores with new 25 years leases tend to sell at lower cap, e.g. 7-7.5% cap on new stores versus 8.0-8.5% cap on established locations with 8-10 years remaining on the lease. This is because investors are afraid that the tenants may not renew the leases. Unfortunately, lenders also have the same fear! As a result many lenders will not finance drug stores with 2-3 years left on the leases. The fact that drugstores with new leases have a premium on the price means they have potential of 10% depreciation (buying new at 7.3% cap and selling at 8.3% cap when the leases have 10 year left). Some investors will not consider investing in drug stores with 5-10 years left on the lease. They might simply ignore the fact that the established stores may be at irreplaceable locations with very strong sales. Tenants simply have no other choices other than renewing the lease.
You Can Be a Cruise Ship Owner Even If You Are Not Rich
Unlike fractional ownership of aircraft and houseboats, fractional owners of a cruise ship can all use the ship simultaneously. There is plenty of room for you and the other owners to live on the ship any time you want, or all the time. You can use it as a full-time residence, and so can the other co-owners.
The first obvious benefit of shared ownership is acquisition cost. There are many cruise ships on the market in all price ranges, sizes, ages, and conditions. There are many smaller and older cruise ships available for less than one million dollars. At the lower end, some smaller cruise ships in fair condition can be acquired for about $250,000. At the highest end, the biggest new mega cruise ships now cost about $500 million to build.
Do the math. If one hundred buyers pool resources in exchange for a percentage of ship ownership, the acquisition cost will be divided by that same number. One percent ownership of a $250,000 cruise ship would cost a mere $2500 for ship acquisition. At the other end of the scale, one percent ownership of a brand new mega cruise ship would cost five million dollars.
There are some other figures that must be tabulated into the total cost of ownership. Acquisition cost is first and foremost. The next figure is the cost to put the ship in service. On an older ship this cost may be higher than the acquisition cost. On the other hand, the cost to put a ship into service can be much lower if you were to get a good deal on a ship that already meets the international standards for ship safety, especially SOLAS (Safety of Life at Sea). Maintaining compliance with Chapter II SOLAS 74 amendments is cost prohibitive for some older ships and they are typically scrapped instead of being refurbished at great expense. There is a very important SOLAS implementation date coming up on January 10, 2010. On that date all commercial international ships will be required to be in compliance with the new fire safety codes. The most important new codes deal with the use of combustible materials in the ship. It will be expensive to replace all combustible materials in ships with non-combustible or flame resistant SOLAS compliant materials that meet the new safety standards. This will result in many ships being sold for scrap metal.
The looming SOLAS 2010 implementation date offers both perils and opportunities. The biggest peril is the possibility that the expense to bring a ship into full compliance with international standards will be greater than the value of the ship. However, there is a silver lining in this cloud. This pending SOLAS implementation date has already started to show up as a primary factor in the asking and selling prices of ships on the market today.
SOLAS 2010 also offers a tremendous opportunity for those who may prefer to have a very large houseboat instead of a commercial ship. Ships that are not in compliance with SOLAS 2010 are now selling for a song (inexpensively). A cruise ship can easily be converted into a megayacht with the stroke of a pen. Privately owned yachts, not in commercial service, and not carrying passengers or cargo for hire are exempt from many of the SOLAS requirements. Operating costs are also lower for a private yacht. It cost less to register, flag, and insure a private yacht. Megayachts can be flagged and classified for unlimited service. That means that a megayacht can go practically anywhere you want it to go. There is one major drawback to registering a cruise ship as a private yacht. You cannot use the yacht commercially. This cuts off a potential revenue source.
There are many decent cruise ships for sale at prices of less than one million dollars that would make good private megayachts. For example, take the ‘VERGINA SKY’ is a ship that I have personally inspected and so I can talk first hand about it. The asking price was $750,000. Here are the specifics of the ship in a nutshell:
Current Name: Vergina Sky
Ship Details: Built: 1971 in Japan – totally rebuilt 1992 in Greece
Dimensions: LOA 97.8m x LBP 82m x beam 14.6m x draft 4.49m Dwt: 500 on 4,49 GT/NT: 4,668 / 1,717
Description: Pielstick 2 x 8400bhp, twin screw, bow thruster, 3 x 500kw generators, 16 knots, 2 saloons, restaurant, 3 bars, casino, duty free shop, disco, swimming pool, 120 cabins for 318 guests. Lying Greece
My Comments after inspecting the ship
This is a well built little ‘Pocket Cruiser.’ At just over 320′ in length overall, it is a small cruise ship. Many experienced cruise passengers prefer smaller more intimate cruise ships for a variety of reasons. This ship can go places where the big cruise ships cannot reach, such as shallow draft ports and even many rivers. It has an omni-directional bow thruster and can turn on a dime (relatively speaking of course). I have carefully examined this ship from the engine log to the ultrasound hull report. This is a sound and safe little cruise ship. It is also a very fuel efficient and economical ship. My first time on this ship was in the middle of the summer in Greece when it was very hot outside. The ship is fully air conditioned and it was cool and comfortable inside the ship. I checked the engine room to see how many generators were running. I am happy to report that all the electric and air-conditioning requirements can be met by running just one of the three Daihatsu generators. These generators are very economical to operate in terms of fuel consumption and maintenance.
I was able to negotiate with the owner, John Kosmas and get some concessions. I got the price down to $500,000. And at that price, he agreed to bring the ship into compliance with SOLAS 2005 and also to include new paint topside. The ship was fairly well furnished even including bed linen, but the ship had been laid up for years. Its most recent service was in the Mediterranean and Black Seas. Cruise ships that trade exclusively in the Mediterranean and Black Seas tend to have smaller cabins and fewer amenities than the typical cruise ships that frequent the Caribbean. The bottom line is that this ship was an economy model, not a luxury model. When I was inspecting the engine room, I asked for the engine log. When I opened it I noticed all the entries were in Greek. I was able to discern some dates and other data that told me when the ship was last in service, but I could not read the Greek entries so I handed the engine log back to the ship owner, and told him “It’s all Greek to me.” Being Greek, Mr. Kosmas failed to find the humor in that.
Let’s look at the numbers on this ship. 100% of the acquisition cost would have been $500,000. 1% thus = $5000. One hundred buyers could own one percent each. There are 120 cabins so each co-owner could have a private cabin with 20 cabins left over. However, these cabins are a bit on the small side. Every cabin does have a bath and shower, but the size is just too small to be comfortable for most people, especially if the owners intend to live onboard full time. On a ship this size I would recommend that there be no more than 60 joint owners so each can have two cabins and will have the option of converting those two cabins into a two room suite. To keep the numbers simple lets say that this ship has 50 buyers who each buy 2% of the ship. Buy in cost per owner would then be $10,000. If there were only ten buyers, then the acquisition cost per buyer would be $50,000. $50,000 will not buy much of a house on land, but on this ship it would buy 10% of a ship like the Vergina Sky and twelve cabins that could be converted into a fairly large home.
At the economy end of the scale, a co owner could buy 1% of an economical cruise ship for about $5000. However it is not necessary for all co owners to have equal shares in the ship. Ownership can easily be divided up into 1% increments. If one buyer wanted 5%, then his cost of acquisition would be $25,000. He would be entitled to 5% of the ship’s cabins, and would have five votes on operations and management of the ship, such as itinerary planning.
Before becoming a joint owner, it would be imperative to find other people who have similar goals. I would suggest composing a preliminary DCCR (DECLARATION OF
COVENANTS, CONDITIONS AND RESTRICTIONS). You can do this before you even shop for a ship. Write your version of how you envision the shared ownership of a cruise ship as it should be. Then see if you can find some people who agree with your goals and your DCCR, subject to some revisions and concessions to accommodate other joint owners.
Step One: Determine if you and your family have the desire and financial capability to become joint cruise ship (or megayacht) owners.
Step Two: Find others who agree with your concept for shared ownership of a ship.
Step Three: Shop for a ship. This is the fun part.
Step Four: Buy a ship.
Step Five: Put the ship into service.
Even if you are not rich, you can afford to jointly own a cruise ship. But then comes the next logical question: Why would you or anyone want to live on a cruise ship? Who would this be suitable for?
If you are retired or otherwise have a stable income from a dependable source you probably can afford to be a cruise ship co-owner and live full-time onboard a cruise ship. If you work in a field where you can work from home online, then you too can probably afford to become a co-owner of a cruise ship. Most modern ships have satellite Internet service available 24-7.
Operating a cruise ship is expensive. The expenses include the cost of fuel, labor, maintenance, repairs, spares, food, port charges, insurance, technical management, shore management, registration, and the other costs of operating the ship. At first glance these costs may seem expensive, but in reality the cost of living at sea is actually a bargain considering what you get based upon what you pay. The best value does not always translate to the cheapest price. If the ship is well managed, the management will seek the highest quality goods, services, and labor at the very best global value. If the owners are dissatisfied with either technical or shore management, they replace them.
If there are many other co-owners of the ship to split the operating expenses of the ship, it can be affordable for those with a moderate level of income, such as a retirement check. I do have specific operating cost figures but I won’t bore you with that data. The bottom line is that it would not be prohibitively expensive for a middle-class average person to be able to afford to own a fraction of a cruise ship and be able to afford to live on the cruise ship full-time if they elect to do so.
For comparison purposes it is noteworthy that you have expenses in land based housing too. Those expenses include property taxes, homeowners insurance, maintenance and repairs, yard care, and utilities. Additionally you have transportation costs and of course food costs. Most people also spend money on entertainment too. When these expenses are added up the maintenance fees for living aboard a ship are comparable.
There are actually some savings resulting from living aboard a ship. The ship’s executive chef buys food and kitchen supplies in bulk for the ship and can get better prices than the average shopper. Other savings result from the large freezers and the mobility of the ship giving the food service management the ability to stock up on supplies in countries where prices are low. Some crew and owners may choose to fish for leisure. This can supply some fresh food at even lower costs to the owners. Labor savings are realized when the crew is hired based upon the best global labor rates. The laws of supply and demand drive prices down in some places in the world. Proper ship management can capitalize on these disparities. All the savings would be passed on to the cabin owners resulting in an economical cost of living similar to what you could expect to spend with a conventional home. Ship management should have accounting transparency will all books (financial records) open and available for any owner to inspect. Also ship management should submit all financial records quarterly to an outside auditor for the peace of mind of the owners. Anybody in the chain who spends any of the ship’s operational funds should also be periodically audited. For example, a good way to audit the executive chef would be for one or more of the live-aboard co-owners of the ship to go to the food market district of each port of call and they should try to haggle and get a better price for the same food than the price the executive chef was able to acquire. If the executive chef cannot find better deals than the ship’s co-owners, then the executive chef should be given his walking papers. The executive chef position is a vital position on a cruise ship. This is a position of trust because he will bill the food he buys to the ship. He must never be tempted to accept bribes from vendors or suppliers. Therefore, he should know that he will be routinely audited and any substandard performance will result in termination of his employment.
The biggest value of all onboard cruise ship is in labor costs. The better cruise ships tend to be labor intensive, providing passengers with unrelenting attention and extravagant pampering. The hotel staff on all cruise ships provides the basic services including food preparation and serving, laundry, cabin stewarding, entertainment, casino operation, beauty shop operations, This is one area where I would prefer to not scrimp because of the very good value in these services due to the low cost of international labor. I would prefer to go beyond the level that most cruise ships go in the area of spas. Land based luxury and specialty resort spas are very expensive, but the exact same level of service, professionalism, skill, and treatments can be provided on a cruise ship at extremely low cost. Labor is the key and the primary reason for most of the expense of spas. Labor is a tremendous value on a cruise ship because the cruise ship managers can choose workers from the global marketplace where it is easy to get the best value for the money.
Spas
Spa treatment is customized for each client. Spas commonly offer services such as:
Soothing massage therapies, skin and body treatments drawing from European and Eastern principles, expert hair and nail services, and a full menu of therapeutic treatments utilizing a deep-cleansing facial at the start of the program, as well as a series of detoxification and contouring wraps, lypo-reduction wrap, as well as marine mud and herb wraps. Massage Therapies including: Swedish Massage, Shiatsu Massage, Deep Tissue Treatment, Maternity Massage, Therapeutic Foot Massage (Reflexology), French Hydrotherapy Massage.
The healing therapies include a variety of massages, reflexology, facials, firming and many other body treatments. Plus a wide variety of services and wellness programs specially designed to meet the individual’s needs and desires. A full service salon offers all manner of hair treatments (including a certified colorist), as well as a variety of manicures, pedicures, and ‘facelifts’ for your hands. Extensive skin care includes: Age Management Therapies including, Glycolic Facial, Anti-Aging Facial Peel, Microdermabrasion; Facials including: Aromaplasty Facial, Teen Facial, Gentleman’s Facial, Nutrisource Facial, Regulating Acne Facial, Vitamin “C” Skin Renewal Facial; Body Treatments including: Decleor Sauna Mask, French Hydrotherapy Massage, Andromeda Salt Glow, Mummy Mud Mask, Seaweed Body Wrap, Safe Sun Treatment, Herbal Wrap; as well as various hair and nail treatments.
Additionally, spas also can facilitate weight reduction programs, and even administer physical therapy. In short, you can be treated like a king, on the budget of a pauper.
Labor Costs – International competition provides the most value to the ship owners.
On paper it seems to make good sense to man the ship with a Philippine crew. I love the Philippines. I have been there several times. English is still widely spoken and usually spoken quite well. The people are usually friendly and happy to see foreign tourists. A large percentage of ships worldwide are manned by crews from the Philippines. The Philippine government has a pretty good structure and system to facilitate the export of Philippine labor. In spite of how attractive it seems on paper, I would recommend NOT hiring a crew from the Philippines. Philippine workers tend to be envious of others, and especially of everybody else’s wages. They tend to think they are getting the raw end of the deal. It is rare to find a Filipino who is happy with his employment. While I am sure there are many good employees from the Philippines, there are more who are dissatisfied than satisfied with their employment. There seems to be a cultural anomaly in the Philippines where people feel that employers are bad guys. I would hesitate to recommend a crew from the Philippines in spite of the apparent advantages on paper.
My recommendation (for what it is worth)
I do know something about what I am writing about here. I am the former President of Adventure Spa Cruise. My advice is not just uninformed ranting. Back to the point now, the second best manning nation for a ship is India. I highly recommend India for the medical staff and the entire hotel staff, including the spa, and every other position except the deck and engineering. The labor costs in India are very attractive. I would also recommend using an Indian based manning agency. It is best if the ship’s owners do not have to deal with every employee issue or concern. The manning agency takes the pressure off the ship’s management, and their service is very reasonable. Indian employees tend to make better employees than do Filipinos. Indians also speak English, albeit not quite as well as Filipinos. I know Americans tend to get all worked up when someone uses a broad brush to paint an entire ethnicity. I love the people from the Philippines, but as employees they tend to be more problematic than do Indian employees. I realize that this statement is politically incorrect, and these days that might get me thrown in jail. I usually do not worry so much about being politically correct. I call it the way I see I and I let the cards fall where they may, and hope I can stay out of jail for speaking my mind.
All deck and engineering positions should be filled with an all Ukrainian crew. The ship will realize the most value for the money with Ukrainian deck and engineering staff. The Ukraine has a long maritime history and tradition. Maritime training and standards in the Ukraine are among the best in the world. Ukrainian deck and engineering staff are as good as or better than any other, but the cost of their labor is a very good value. The labor for deck officer and engineering staff are governed by international agreements, including STCW (Standards of Training, Certification and Watchkeeping for Seafarers).
Putting a cruise ship into service
After acquiring the ship, it will require some more investment to put it into service. At this point the joint owners will need to reach some agreements on many points. The cost of putting a cruise ship into service as a megayacht (very large private yacht) is much less than putting the ship into commercial service. However, if you can afford to buy a ship can easily meet SOLAS 2010 requirements, and can afford to flag and register it as a commercial ship then you can use the ship commercially to produce income and ROI (return on investment).
There are many marketing options for a commercial cruise ship. If the owners use no more than half the cabins, then that will leave sufficient means to produce enough revenue to at least pay for operating costs, and possibly produce a profit above operating costs. I will just briefly touch on some of the options available for marketing cruise ship capacity.
1. Conventional cruises. There is a trade-off here. You can produce revenue by providing conventional cruises. This will require that the ship have an itinerary that suits the commercial cruising market.
2. Freight and cargo. Some cruise ships have enough cargo capacity to produce some revenue by booking freight.
3. Assisted living. A cruise ship is well suited for assisted living, including crew and facilities. The going rate for assisted living in the average city in America is higher than the average cost of a cruise of the same duration.
4. Timeshares. This is an option not available to conventional cruise ship operators but could be facilitated if your co-owners agree to this type of marketing to fill cabins not used by co-owners. I will not go into the figures here, but timeshares tend to be high profit sales. There is a good chance that if the joint owners use no more than half the ship’s cabins for their own personal use, the remaining cabins could easily produce more than the total amount all the joint owners combined have invested.
Ships that would easily meet SOLAS 2010 tend to cost a bit more money to buy up front, and cost more to put into service. So I will give you couple of examples.
The Orient Venus is one of my favorite high-end ships. The specs:
M/V ORIENT VENUS
BUILT: JULY 1990 AT I.H.I.TOKYO
JAPANESE FLAG
JG. NK OCEAN GOING
GRT: 21,884 TONS
DWT: 4,863 TONS ON 6.50 M
LOA x B x D : 174.0×24.0×8.7 M
M/ENG: DIESEL UNITED-12PC2-6V x 2 SETS ,
TWIN SCREW CPP
SPEED: SERVICE ABT21.0 KNOTS / ABT 56.70MT /D
FUEL TANKS CAPA: IFO 1,500.4 M3 /MDO 87.30M3
GENERATOR: 1,600KWxAC450Vx60HZx 3 SETS
ENGINE ROOM M0 SYSTEMS
CRUISING RANGE: ABT 7,000MILE
PASSENGERS: MAX 606 PERSONS
CREW: 120 PERSONS
ABA WOG
DELIVERY: BY ARRANGEMENT
INSPECTION : KOBE.JAPAN
OWNERS PRICE USD 22 MIL net here
My personal assessment of the Orient Venus
It is a late model and beautiful ship. It has many highly desirable attributes for a residential ship. It is a high end luxury cruise ship with an extraordinarily high tonnage to passenger ratio. This is very important for a residential ship. More living room and more space per passenger is far more essential for a residential ship than for a conventional cruise ship. When passengers are only on a ship for a short time, they can tolerate cramped living quarters, but when they live year-round on a ship, the extra space is quite valuable. The owners have been trying to sell this ship for $22,000,000. That may seem like a high price, but when you divide it by the number of cabins (195) the asking price per cabin is $102,564. This price is in line with what you would expect to pay for a condominium. The last word I got from the owners is that they will sell the ship for $18,000,000 now ($92,307 per cabin). The cabins are all “outside” cabins and are large. The ship can accommodate 606 passengers and a crew of 120, for a total of 726 people.
Several ship brokers have this ship listed. I usually do not talk to ship brokers. I prefer to talk directly with the ship owners. I am in contact with the owners of the Orient Venus. I could probably get this stunningly beautiful ship for less than $15,000,000 today, and get some concessions and extras thrown in to boot.
Another example of a high end ship that would make do well as a commercial cruise ship, plus accommodate a hundred or so full-time live aboard co-owners is the Dream Princess, originally named Song of Norway.
GRT: 22,945
Max Draft: 6.7 M in sea water
Length: 194 M.
Total No. of Cabins: 538
Total No. Of Beds + Berth: 1280
Outside Cabins: 346
Inside Cabins: 192
Cabins size range: SQ. M: 11 -18.
Main Engines: 4 Wartsila Sulzer – 18,000 HP.
Service Speed: 16 Knots.
Public Rooms:
Main Dinning room – “King & I”- about 500 pax.
South Pacific Lounge about 400 pax.
My Fair Lady Lounge about 500 pax.
Bars- 5
Self Service Restaurant on the swimming pool deck
Large Swimming pool
Disco
Casino
Duty Free Shops
Gym
8 passenger decks
extensive outdoor areas
Ship was redecorated / refurbished extensively during 2005.
The asking price on this ship is $31 million USD. Divide the asking price by the number of cabins and the average cost per cabin would be $57,620. Of course some cabins are better than others so co-owners would have to agree of the shared usage before agreeing to the purchase.
I have some bad news for the ship owners and some good news for you. This ship will not sell for the asking price.
Fuel
Ship fuel is cheaper than automobile fuel for a few reasons. There are no road taxes on ship fuel of course and also it is different fuel. Ships main engines usually run on IFO180 or IFO380. Generator engines tend to be more finicky and commonly require diesel (MDO), which is still cheaper than automotive diesel. IFO 180 and 380 costs much less than MDO, usually about half the price. Ships consume a lot of fuel. So fuel cost is a major concern. I have some suggestions. If I were a co-owner of a ship I would be willing to invest a little more in the ship to increase fuel efficiency, and thus lower operating costs. There are many things that can be done to increase fuel efficiency. I would start with hull resistance. There is a new silicone-based paint from International Paints that when applied to the hull reduces amount of resistance in the water sufficiently to result in a 3 to 5% decrease in fuel consumption. A similar coating for the propellers also has been proven to increase fuel efficiency.
In addition to hull and prop coatings, there is an even more promising way to achieve dramatic fuel savings.
There is a company called Kiteship that has developed and produces kites for racing sailboats. These sailing kites do not require a mast. The kites fly high above the vessel, attached by cable and controlled from the vessel. Dave Culp of Kiteship has done a technical feasibility study on fitting a very large kite onto a conventional cruise ship. This would dramatically reduce fuel consumption. It would convert a fuel guzzler to a “green machine.” This is tantamount to converting a powerboat into a sail boat. The design of a cruise ship limits the amount of sail that a conventional ship can safely accommodate. A cruise ship lacks the ballast of a sail boat. If used in addition to the main engine(s) the kite will increase fuel efficiency. If the kite is used to pull the ship with the main engines shut down the ship’s speed will be reduced substantially. However, in this case, not only would the ship save IFO (main engine fuel) but also save MDO (generator engine fuel). If the kite were pulling the ship unassisted by the ship’s engines, then the propellers could be used to propel the ship’s generators without firing up the diesel generator engines. Even if the ship were traveling very slowly in the water, the propellers would turn in reverse if freed from the main engines. This is a very simple and easy task for the ship’s engineer to accomplish. In other words, the ship can be pulled by the kite, and that motion will push the ship’s propellers providing power to produce electricity and power the air-conditioning without using any fuel. The trade-off is a loss of speed and also some tacking is required, further reducing actual speed. What’s the rush? Why not go for maximum fuel savings? The salient point is that a high flying large kite can pull a cruise ship. If I were a co-owner of a cruise ship I would hope to find like minded co-owners who would be receptive to using such state-of-the-art technologies to save fuel.
There are hundreds of cruise ships on the market but I will just mention one more here. This cruise ship has RO/RO (Roll-On, Roll-Off) capability. This would be very convenient for live aboard owners who want to bring their “toys” with them. The garage deck will accommodate 6 to 8 trucks, or 60 to 80 cars. That converts to a lot of co-owner toys such as motorhomes, travel trailers, campers, cabin cruisers, ski boats, jet skis, sailboats, houseboats, bass boats, motorcycles, ATVs, cars, and trucks.
Specifications:
650 PASSENGER CRUISE SHIP FOR SALE
VESSEL IS FULLY FITTED WITH SPRINKLERS
SOLAS 2005/2010 FITTED
TWIN SCREW CRUISE
VESSEL DIMENSIONS LOA 137.10 X BREADTH 21.00 X 5.8 METERS DRAFT
BUILT 1981 / POLAND
REBUILT 1991
REBUILT – UPGRADED 1999
REBUILT – RENOVATED – REFURBISHED 2002
CLASS R.S. ICE CLASS L2
GRT 12637
PASSENGERS 650 IN 230 CABINS (BASIS 3 BERTH OCCUPANCY)
ALL CABINS WITH PRIVATE FACILITIES (INCLUDING SUITES AND SEMI SUITES)
9 DECKS
HELICOPTER PAD
MAIN ENGINES SULZER 4 X 4,350 BHP
SPEED ABOUT 17.5 / 15 KNOTS ON ABOUT 45 / 36 M/TONS + 9 TONS DIESEL OIL
BOWTHRUSTER 800 BHP
STABILIZERS
120 TONS PER DAY WATER MAKER
RECEPTION
LOUNGE
RESTAURANT (420 SEATS)
NINE BARS
CASINO
DUTY FREE SHOP
CHILDREN’S PLAY ROOM – TWO DISCOS
TV/MOVIE CORNER
DUTY FREE SHOPS
HAIRDRESSING SHOP
JACUZZI
ONE PASSENGER ELEVATOR
LAUNDRY SPA & HEALTH CLUB
TWO SAUNAS
CLINIC
TWO SWIMMING POOLS (ADULT & CHILDREN)
Cost per cabin based on asking price, $71,739. This ship will sell for less than asking price. It is already SOLAS 2010 compliant. It would cost very little to put into commercial service.
Conclusion
Becoming a co-owner of a cruise ship is not a far fetched idea. It is practical and feasible if you are able to find like minded people who would be willing to share the expenses.
12 Basic Stock Investing Rules Every Successful Investor Should Follow
There are many important things you need to know to trade and invest successfully in the stock market or any other market. 12 of the most important things that I can share with you based on many years of trading experience are enumerated below.
1. Buy low-sell high. As simple as this concept appears to be, the vast majority of investors do the exact opposite. Your ability to consistently buy low and sell high, will determine the success, or failure, of your investments. Your rate of return is determined 100% by when you enter the stock market.
2. The stock market is always right and price is the only reality in trading. If you want to make money in any market, you need to mirror what the market is doing. If the market is going down and you are long, the market is right and you are wrong. If the stock market is going up and you are short, the market is right and you are wrong.
Other things being equal, the longer you stay right with the stock market, the more money you will make. The longer you stay wrong with the stock market, the more money you will lose.
3. Every market or stock that goes up will go down and most markets or stocks that have gone down, will go up. The more extreme the move up or down, the more extreme the movement in the opposite direction once the trend changes. This is also known as “the trend always changes rule.”
4. If you are looking for “reasons” that stocks or markets make large directional moves, you will probably never know for certain. Since we are dealing with perception of markets-not necessarily reality, you are wasting your time looking for the many reasons markets move.
A huge mistake most investors make is assuming that stock markets are rational or that they are capable of ascertaining why markets do anything. To make a profit trading, it is only necessary to know that markets are moving – not why they are moving. Stock market winners only care about direction and duration, while market losers are obsessed with the whys.
5. Stock markets generally move in advance of news or supportive fundamentals – sometimes months in advance. If you wait to invest until it is totally clear to you why a stock or a market is moving, you have to assume that others have done the same thing and you may be too late.
You need to get positioned before the largest directional trend move takes place. The market reaction to good or bad news in a bull market will be positive more often than not. The market reaction to good or bad news in a bear market will be negative more often than not.
6. The trend is your friend. Since the trend is the basis of all profit, we need long term trends to make sizeable money. The key is to know when to get aboard a trend and stick with it for a long period o ftime to maximize profits. Big money can be made by catching large market moves. Day trading or short term stock investing can
capture the shorter moves while waiting for the longer term trend to establish itself.
7. You must let your profits run and cut your losses quickly if you are to have any chance of being successful. Trading discipline is not a sufficient condition to make money in the markets, but it is a necessary condition. If you do not practice highly disciplined trading, you will not make money over the long term. This is a stock trading “system” in itself.
8. The Efficient Market Hypothesis is fallacious and is actually a derivative of the perfect competition model of capitalism. The Efficient Market Hypothesis at root shares many of the same false premises as the perfect competition paradigm as described by a well known economist.
The perfect competition model is not based on anything that exists on this earth. Consistently profitable professional traders simply have better information – and they act on it. Most non-professionals trade strictly on emotion, and lose much more money than they earn.
The combination of superior information for some investors and the usual panic as losses mount caused by buying high and selling low for others, creates inefficient markets.
9. Traditional technical and fundamental analysis alone may not enable you to consistently make money in the markets. Successful market timing is possible but not with the tools of analysis that most people employ.
If you eliminate optimization, data mining, subjectivism, and other such statistical tricks and data manipulation, most trading ideas are losers.
10. Never trust the advice and/or ideas of trading software vendors, stock trading system sellers, market commentators, financial analysts, brokers, newsletter publishers, trading authors, etc., unless they trade their own money and have traded successfully for years and/or provide third party verification of performance.
Note those that have traded successfully over very long periods of time are very few in number. Keep in mind that Wall Street and other financial firms make money by selling you something – not instilling wisdom in you. You should make your own trading decisions based on a rational analysis of all the facts.
11. The worst thing an investor can do is take a large loss on their position or portfolio. Market timing can help avert this much too common experience.
You can avoid making that huge mistake by avoiding buying things when they are high. It should be obvious that you should only buy when stocks are low and only sell when stocks are high.
Since your starting point is critical in determining your total return, if you buy low, your long term investment results are irrefutably better than someone that bought high.
12. The most successful investing methods should take most individuals no more than four or five hours per week and, for the majority of us, only one or two hours per week with little to no stress involved.
How to Enroll for BDO Online Banking
Banco de Oro has many products and services catered for its clients. Included in it businesses is BDO Internet banking or they commonly called BDO Retail Internet Banking (RIT).
Internet banking has several benefits for its clients like connection to your account anytime and anywhere provided you have Internet access; pay bills online; transmit or transfer money to your kin and organization you support; financing your investments in mutual funds, UITF, and stocks; and viewing your statement of account online.
Perks of BDO Online Banking
With Internet banking, you can course your accounts and do banking transactions anytime and anywhere provided you have Internet connections. Some of the perks you can get from online banking are the following:
1. You can pay bills online. Pay your credit card charges, water and electricity bill or other agents. You may also make schedule payments for post-dated and recurring bills.
2. Move funds online to other BDO bank accounts or cash card accounts
3. View the money remaining on your CA/SA, term deposit, cash card, credit cards, customer loan account, and trust account for free
4. Check the transaction history of your bank accounts
5. Reload your Smart Prepaid mobile phone, Globe and Touch Mobile phones
6. Look into the balance of your credit cards
7. Reorder checkbooks and ask for for stop payment orders on given forth checks online
8. Apply for international and domestic telegraphic transmittals online
You may request for Internet banking in BDO Philippines if you formerly have a savings account in them. However, if you don’t have a bank account, you must start first an account and then request for RIT at the same time.
In essence, enrolling for BDO Internet banking is not complicated, actually, you may enroll online. So in spite of you are overseas or far away from your branch, you may still open for online banking.
There are some facts you should learn before you can register for RIT. Here are the data you will need to be able to finished your enrollment.
1. BDO account number
2. authentic e-mail address
3. Telephone or Cellphone Number
Procedures in Enrolling for BDO Retail Online Banking
If you formerly have a BDO account and you wish to register for their Internet banking, you can follow the advises outlined below. However, if you do not have a savings account, you should apply first for it and enroll your account to Internet banking at the same time.
1. Visit https://www.mybdo.com.ph and click the enroll to online banking. Receive the electronic banking terms and conditions of use.
2. Furnish all necessary information that are needed such as user ID, password, account number, email address, phone banking number, and telephone number banking.
3. Confirm all verification e-mails and keep in mind your log in ID and password.
Online banking is a great tool to manage and course your savings accounts anytime, anywhere. By using it, you may get many benefits like paying off bills online, transfer or move money to other accounts, see statement of accounts online and many more.
It is easy to enroll for BDO Internet banking when you have the complete facts about your savings account. Assure you ready the needed data when you want to have online banking account.
Money Investments
Money investments can be made in the foreign exchange market, stock market, or futures trading market. The foreign exchange or “Forex” market was not accessible to the average investor in the past, but of late, it has become a popular option for investment. Stock market deals with a combination of government and company bonds as well as preferred and common stocks from various business establishments and other forms of securities and assets. Futures trading market comprises of financial arrangements where an undertaking is signed by a seller to provide a commodity or any other pre-decided asset on a pre-determined date to the buyer.
With the help of technology, everyone can derive the benefit of the low risk, high return foreign currency exchange market. For beginners, many online websites of Forex brokers offer demo or trial accounts that help the investors practice their trading skills. These accounts also help increase the understanding of working of the real time Forex market.
For investment in the stock market, investors have to create their portfolios that are a collection of investment securities owned by an institution or an individual. This practice of creating or holding a portfolio is a part of an investment and risk-limiting strategy, which is known as diversification. It means that by acquiring varied types of assets, certain risks can be reduced. A portfolio can comprise of stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is likely to maintain its worth.
Futures trading involves a buyer and a seller, in which the seller is required to provide the agreed upon commodity at a fixed price to the buyer at the time specified on the futures contract. The profits or losses incurred are determined by the contract’s price changes that are in relation to the price that are fixed at the beginning of the contract.
In all types of money investments, trading strategies make a lot of difference, for which traders must understand the trends of the market.
Characteristics of Depreciation, Basic Factors of Determination of Depreciation
Characteristics of Depreciation
Depreciation has the following characteristics:
(1) Depreciation is charged in case of fixed assets only, e.g., Building, Plant and Machinery, Furniture ‘etc. There is no question of depreciation in case of current assets-such as Stock, Debtors, Bills Receivable etc.
(2) Depreciation causes perpetual, gradual and continuous fall in the value of asset
(3) Depreciation occurs till the last day of the estimated working life of asset
(4) Depreciation occurs on account of use of asset In certain cases, however, depreciation may occur even if the assets are not used, e.g., Leasehold Property, Patent right, Copyright etc.
(5) Depreciation is a charge against revenue of an accounting period.
(6) Depreciation does not depend on fluctuations in market value of asset
(7) The amount of depreciation of an accounting year cannot be determined precisely-it has to be estimated. In certain cases, however, it may be ascertained exactly, e.g., Leasehold Property, Patent Right, Copyright etc.
(8) Total depreciation of an asset cannot exceed its depreciable value (cost less scrap value).
Basic factors of determination of depreciation
(1) original cost of fixed asset i.e., purchase price plus freight and installation expenses;
(2) estimated amount of expenditure on repairs during the useful life;
(3) estimated useful life of asset after which it will be discarded;
(4) estimated residual or scrap value;
(5) interest on investment-the amount invested on purchase of asset, if it had been invested in some other investment what interest would have been earned;
(6) possibility of obsolescence.
Fixed Installment or Original Cost or Straight Line Method, reducing/Diminishing Balance method
Under this method depreciation is not calculated on cost of asset. It is computed on the book value. of asset. The book value of the asset is obtained by deducting depreciation from its cost. The book value of asset gradually reduces on account of depreciation charge. Since the depreciation percent rate is applied on reducing balance of asset. this method is called reducing balance or diminishing installment method or written down value method.
Merits and demerits.
Declining balance method not only equitably matches depreciation expenses against the related revenue but also fairly spreads. the incidence of depreciation and repairs (viz higher depreciation but heavier repairs in later years.) on profit and loss account over the assets life span. Elimination of major portion of cost in early years also minimizes the impact of obsolescence. It is equally useful to management as accelerated depreciation means smaller taxable profits and taxes hence lesser outflow of cash.
Accelerated Depreciation Methods
Sum-of-the year’s digits (SYD). This method of depreciation accelerates depreciation expenses so that the amount recognized in the earlier periods of an asset’s useful life are greater than those recognized in the latter periods. The SYD is found by estimating an asset’s useful life in years, then assigning consecutive numbers to each year, and totaling these numbers. For n years,
SYD = 1 + 2 + 3 + 4 + … +n
Annuity Method
The method recognizes the time value (Interest) of money and hence regards the real cost of using a long-lived asset equivalent to the actual amount invested thereon plus the interest lost on the acquisition of asset. Under this method, so much depreciation is written off each year as after debiting the asset account with interest upon the diminishing value, will reduce the asset to nil at the end of its life. Thus, the amount written off as depreciation is the same every year, but the interest will diminish each year.
The amount of annual depreciation to be written off by Annuity method will be ascertained from Annuity Tables
Depreciation Fund method or Sinking Fund method
Under this method, a fixed amount is charged as depreciation every year. It endeavors to provide the required lump sum cash at the retirement of a long, lived asset by annually setting aside and investing a fixed sum in readily realizable securities. These securities earn interest at fixed rate and the same being reinvested along with successive fixed installments of depreciation, allowed to accumulate at compound interest. The sinking fund method thus takes into account of this probable income from interest while fixing the annual depreciation and investing the same which together with compound interest accumulated to the asset’s depreciable cost by the end of its useful life. Obviously, the fixed installment of annual depreciation is here smaller as compared to straight line method. Its magnitude, however, rests on the asset’s life span and interest rate. Longer the span and higher the rate, smaller is the annual depreciation per rupee of depreciable cost.
Shortcomings of Depreciation Fund Method
Depreciation fund method assumes constant rate of return on every periodic investment in identical securities. This is hardly true in this dynamic world where rates do vary now and then. Any variation in the rate of return upsets the earlier periodic allocation for depreciation and entails refection thereof. Further the amount realized on the sale of security rarely agrees with its acquisition cost owing to made fluctuations which may be both erratic and considerable. Those may cause a wide gap between the required and supplied cash.
Insurance Policy Method
This method endeavors the supply of required cash at the retirement of a specified asset in return of periodic contribution (premium). Under this a trader takes a ‘Capital Redemption Insurance Policy’ from an insurance company which undertakes to pay at a given date a certain sum if the trader, paying a fixed number of premiums after regular intervals. The trader treats the periodic payment as depreciation and charges it to profit and loss account. In this case, depreciation is charged at the end of the year, whereas, the premium is paid at the beginning of the year. At maturity, the insurance company pays the policy money which is normally sufficient to replace the retired set. Normally, amount received is more than total premium paid as the policy yields interest.
Revaluation Method
Under the system, each year the asset is valued and the value is compared with that in the beginning of the year. The fall is treated as depreciation. Suppose if the value of the tools at the beginning of the year was Rs. 8,000, during the year tools worth Rs. 6,000 were purchased and at the end of the year, on valuation these amounted to Rs. 11,000. The amount of depreciation for the year will be : 8,000 + 6,000-11,000 = Rs. 3,000 . This method is useful for charging depreciation on livestock and loose tools.
Depletion Method
Natural resources include physical assets like mineral deposits, oil and gas resources and timber stands. These natural resources get exhausted by exploitation. In some cases, the reduction in physical deposits is offset by growth or development of additional deposits.
The cost of natural resources is the price paid for its acquisition plus price paid for development of such asset in order to bring it to a state suitable for production.
The periodic depletion is better not calculated in terms of year. Rather it is better to calculate the cost per unit and then multiply the cost of unit to units produced in that particular year.
Machine Hour Rate
Under this method, the total number of working hours of a machine during the whole of its effective life is estimated, and then the cost of machine is divided by the expected number of hours of useful life, this gives the rate per hour. The annual depreciation is calculatedly multiplying this rate by the number of hours, the machine actually runs in a year.
Mileage Method
This method is used only for those assets whose useful life depends upon the fact that how many kilometers they have been driven e.g. buses, cars, trucks and rolling stock etc.
Global Method
Under this method, the value of the assets, irrespective of their nature is added together and depreciation is charged at an average rate on aggregated value.
Choice of a Method
Aforesaid methods of depreciation reveal that none is absolutely best or worst as each method has its own merits and demerits. Suitability of every method is relative and depends upon various factors. Most important of these are the type of the asset and purpose of depreciation.
Straight line method suits to buildings and lease etc.. reducing installment method fits to machinery equipment etc. and depletion method for wasting assets like mines. quarries etc. However, the underlying purpose is the basic determinants of the propriety of a depreciation method. Important purpose comprise of true reporting of accounts, tax benefits, comparative product cost, financial flexibility, replacement and expansion etc. For example. depreciation fund method envisages that the amount set aside for depreciation is to be invested outside the business in specific securities. Similarly under insurance policy method, the amount so set aside is handed over to insurance company. If a business is having working capital problems the advisability of these methods is questionable.
Of the above-mentioned methods (1) Fixed Installment and (2) Reducing Installment methods are most widely used.
Distinction between Fixed Installment Method and Reducing Installment Method
Fixed Installment Method
1. The rate and amount of depreciation remain the same each year.
2. Depreciation rate per cent is calculated on cost of asset each year.
3. At the end of its life the value of asset is reduced to zero or scrap value.
4. The older the asset, the larger the cost of its repairs. But the amount of depreciation remains the same each year. Hence, the total of depreciation and repairs increases every year. This reduces annual profit gradually.
5. Computation of depreciation comparatively easy and simple.
Reducing Installment Method
1. The rate remains the same, but the amount of depreciation diminishes gradually.
2. Depreciation rate percent is calculated on book value of asset.
3. The value of asset is never reduced to zero at the end of its life.
4. The amount of depreciation decreases gradually, while the cost of repairs increases.
So the total of depreciation and repairs remains more or less the same each “year. Hence, it causes little or no change in annual profit/loss.
5. Depreciation can be computed without any difficulty, but it is not so easy and simple.
Apartment Building Classifications
Lender Ratings of Residential Investment Properties
Lenders have developed general classifications of apartment buildings so that they can communicate amongst themselves and other members of the industry with some level of uniformity. The classifications are Class A, Class B, Class C, and Class D.
Grade 1. Class A…..Newer, Institutional
Grade 2. Class B…..Older, Institutional
Grade 3. Class C….. Older, Declining Area
Grade 4. Class D……Older, Declining Area, Poor Condition
Class A Apartments – Institutional buyers like new, larger apartments in prime locations because of low deferred maintenance. These properties are typically occupied by white collar workers and have amenities such as garages, in-unit washer/dryers, pools, spas, exercise gyms, the latest technology, etc. They are typically between 1-10 years old. Typically they are in the path of progress and as of this writing (July 2008) can be bought at cap rates of 7%. They will likely have less cash flow than properties with higher cap rates but will have greater appreciation potential.
Class B Apartments – Class B buildings are in good areas with many of the same amenities as Class A properties, but Class B buildings are 10-20 years old and occupied by both white and blue collar workers. Class B properties are often owned by investment groups, such as limited partnerships and limited liability companies. As of this writing (July 2008) they can typically be bought at cap rates of 8% – 9%. These properties will have decent cash flow and decent appreciation potential.
Class C Apartments – These apartments are older properties built within the last 21-30 years in working class areas typically occupied by blue collar workers and even some Section 8 tenants(please see my article on Section 8). The properties may be in declining areas but not necessarily dangerous areas. The units in Class C buildings are smaller than those in Class A and B buildings and the projects have fewer amenities. The occupancy rates are typically higher than Class A 0r B because they are more affordable. Individuals usually own Class C properties, which as of this writing (July 2008) can be bought at cap rates of 10%. These properties will have decent cash flow but little opportunity for appreciation.
Class D Apartments – These buildings are older, in declining and even dangerous areas and as a result may have high vacancy rates, deferred maintenance, functional obsolescence and demand a high level of hands-on management from their individual owners. As of this writing, they can typically be purchased for cap rates of 12% but may generate less income than other properties despite their higher cap rates because of higher maintenance and management demands.
Rules of Thumb:
1. Class A & Class B properties are purchased for appreciation potential.
2. Class B & Class C properties are purchased for cash flow
3. Unless you are an experienced investor, don’t buy Class D properties.
The goal is to buy a particular class of property in the same area class. In other words, buy a Class B property in a class B area. Alternatively, buy a lower class property in a higher class area. In other words, buy a Class C property in a class A area or one in the path of progress. The reasoning is so that you can possibly change the Class B property bought at higher cap rates (lower in price) into a Class A property which can be sold for lower cap rates (higher prices). This “infill opportunity” is typically only possible if the area is better than the property. For a better understanding of cap rates, please read my numerous other articles which give detailed information on the subject.
I Am Broke, What Should I Do?
When it comes to having money you will find that most of the people who you socialise with will tell you that they haven’t got any money, they will tell you in your face, I am broke. When I come across an individual like that I cannot but help to think how sad they are. This is because when someone claims that they are broke, usually they are, they are just too stingy to show you any money in case you might want some of their cash. But the thing that most annoys me is the saying, I am broke. This is because usually when someone says that, it means that they are too lazy to get a job or do anything about their self chosen unfortunate situation.
So after seeing these people I decided to do something for them, for example give them ideas on how to raise finance. So if you are one of those individuals, please stop looking for the pay check to drop from the sky, and take a look at opportunities in the home based business industry. I suggest that you look online because I assume these individuals are lazy enough to even think about making a trip to the job centres. The home based industry can be your escape to having some money, for some even the ticket to live the extraordinary life that is only seen in dreams. Learn how to earn cash from the comfort of your own home, there are many ways you can earn online these days. Perhaps the biggest one of all for you to start earning, BIG TIME. So please stop saying I am broke, because I know 13-year-olds who do not know the meaning of that word, who are earning over $1000 a month online.
Do Upside Down Mortgage Holders Have Another Option Besides Short Sales?
Are there any other options for upside down mortgage holders besides short sales? There answer is now yes. A new program known as a Principal Balance Reduction is being offered to upside down homeowners that meet a few basic qualifications. As long as the mortgage(s) is worth at least 25% more than the value of the property and the applicant can document a debt-to-income ratio of 50% or less (based on the new, lower monthly mortgage payment) the negative equity can be completely eliminated through a Principal Balance Reduction program.
A Principal Balance Reduction program is essentially a large scale Note purchase program consisting of heavily upside down homeowners, some current on their payments and others that have already stopped making their mortgage payments. Due to the fact that property owners who owe more than their property is worth are very likely to default in the not so distant future, the Notes are sold to the new buyer (in this case a $5 Billion dollar hedge-fund) at a steep discount to current market value. The new owner of the Notes, the hedge-fund, then turns around and changes a couple of terms of the existing Note they just acquired. The outstanding mortgage balance is reduced to 95% of current market value and the interest rate is changed, to either 6.25% or 7.25% depending on the homeowners credit score. The once upside down homeowner now has a permanent principal reduction often amounting to hundreds of thousands of dollars in savings and the hedge-fund makes a quick profit and turns around and repeats the process with new clients.
Are short sales a thing of the past? Possibly. If a homeowner qualifies for the program, why just walk away from the property and let someone else get a great deal. Also, short sales have negative tax implications and don’t do your credit any good. A Principal Balance Reduction program allows the homeowner to essentially short sell the property to themselves without the negative tax implications or ruining their credit rating.
The hedge fund has a very high success rate at purchasing these Notes at a substantial discount to market value. The portfolios presented to the lender, often consisting of over 100 properties, are all upside down by at least 25%. These are toxic assets that if haven’t soured yet and going to at an alarming rate in the coming months. The banks know that homeowners with no equity and especially those so upside down as the participants in this type of program are very quick to hand the keys back to them if the slightest financial challenge comes their way. Rather than wait a year or two and have to go through the expense of a foreclosure only to end up with what they are being offered now to take this entire lot of souring “assets” off their books, the banks are understandably jumping at the opportunity.
There is a nominal fee to participate in the program and it is paid after the homeowner has been prequalified and is submitted with the complete package of supporting documentation. In California, there are absolutely no upfront fees to participate in a Principal Balance Reduction program. Once the word gets out that a program like this even exists, the flood gates will open with homeowners rushing to shave hundreds of thousands of dollars in negative equity permanently from their mortgage balance. If you would like more information about a Principal Balance Reduction program, visit http://www.short-sales.org and request a free consultation with a Principal Reduction Specialist.
An Overview of the Hilton Grand Vacations Club (HGVC) Timeshare Points System
Hilton Grand Vacations Company, LLC (HGVC) markets and operates the Club, which is a points-based vacation ownership and exchange system that is a wholly owned subsidiary of Hilton Worldwide, formerly known as Hilton Hotels Corp. HGVC also provides property management services to Club and Affiliate resorts. At the date of publish, there are 50 HGVC affiliated resorts worldwide!
Hilton Worldwide was purchased in July 2007 by the Blackstone Group LP (stock ticker symbol BX) in a deal valued at $26 Billion. Blackstone also owns a number of other well known companies including Universal Studios Parks, Legoland, Madame Tussauds, Houghton Mifflin Harcourt Publishing, Allied Waste, Pinnacle Foods, and even the Weather Channel!
Early History of the Brand:
In 1919 Conrad Hilton went to Texas to take advantage of the oil boom. When he arrived, he found the local hotels so overbooked that he could not secure a room! One hotel owner told him that he wanted to sell. Within a week, Conrad had put together an investment group and purchased the Mobley Hotel in Cisco, Texas. Business continued to boom and the next year Conrad purchased two more Texas properties, the Melba Hotel in Fort Worth and a hotel in Dallas named after the famous Waldorf. Thirty years later, Conrad came full circle when he purchased the lease on the actual Waldorf-Astoria!
Conrad’s ambition and business savvy created an empire of wealth so vast that even the legendary spending of his second wife Zsa Zsa Gabor and great granddaughter Paris Hilton haven’t made a dent in the family fortune! Today, this behemoth brand owns, manages, and franchises thousands of hotels and the Hilton name continues to be one of the most recognizable in the world.
The Timeshare Resorts:
HGVC destinations offer both developed and affiliated resorts. Most people don’t realize, but only a few timeshare resorts have actually been built and developed by the Hilton brand. The majority of Hilton Grand Vacation Club properties are actually affiliate resorts. These resorts were developed by other companies, and then later entered into an affiliation agreement to participate in the Club. HGVC manages many of the affiliated resorts, but not all of them. Regardless of the original developer, you can be assured that all affiliated resorts conform to the high standards and renowned luxury of the Hilton brand, earning numerous award designations such as RCI’s coveted Gold Crown rating!
Affiliation and reciprocal usage agreements are always subject to future change, but at the time of writing this article the HGVC vacation destinations include:
Carlsbad, California: • Grand Pacific Marbrisa • Grand Pacific Palisades • Carlsbad SeaPointe Resort
Palm Desert, California: • Club Intrawest Palm Desert
Breckenridge, Colorado: • Valdoro Mountain Lodge
Orlando, Florida: • HGV Club at SeaWorld International Center • HGV Club on International Drive • Parc Soleil by Hilton Grand Vacations
Miami Beach, Florida: • HGV Club at South Beach
Stuart, Florida: • Plantation Beach Club at Indian River Plantation Resort
Captiva Island, Florida: • The Cottages at South Seas Island Resort • Harbourview Villas at South Seas Island Resort • Plantation Bay Villas at South Seas Island Resort • Plantation Beach Club at South Seas Island Resort • Plantation House at South Seas Island Resort • South Seas Club at South Seas Island Resort
Fort Myers, Florida: • SeaWatch on the Beach Resort
Marco Island, Florida: • The Charter Club of Marco Beach • Club Regency of Marco Island • Eagle’s Nest Beach Resort • Sunset Cove Resort • The Surf Club of Marco
Sanibel Island, Florida: • Casa Ybel Resort • Hurricane House Resort • Sanibel Cottages Resort • Shell Island Beach Club Resort • Tortuga Beach Club Resort
Sandestin, Florida: • Club Intrawest Sandestin
Island of Oahu, Hawaii: • Grand Waikikian • Hilton Hawaiian Village- Kalia Tower • Hilton Hawaiian Village- Lagoon Tower
Big Island of Hawaii, Hawaii: • HGV Club at Waikoloa Beach Resort • King’s Land by Hilton Grand Vacations • Bay Club at Waikoloa Beach Resort
Las Vegas, Nevada: • HGVC at the Flamingo • Hilton Grand Vacations Club Las Vegas • HGVC on the Las Vegas Strip
New York City, New York: • The Hilton Club New York • West 57th Street by Hilton Club
British Columbia, Canada: • Club Intrawest Whistler
Quebec, Canada: • Club Intrawest Tremblant
Cancun, Mexico: • Fiesta Americana Villas Cancun
Acapulco, Mexico: • Fiesta Americana Villas Acapulco
Los Cabos, Mexico: • Fiesta Americana Villas Los Cabos
Yucatan Peninsula, Mexico: • The Explorean Kohunlich
Zihuatanejo, Mexico: • Club Intrawest Zihuatanejo
Vilamoura, Portugal: • Hilton Vilamoura Vacation Club
Coylumbridge, Scotland: • Hilton Coylumbridge
Craigendarroch, Scotland: • Hilton Craigendarroch
Dunkeld, Scotland: • Hilton Dunkeld
Introduction to Ownership, System Rules, and Usage Strategies:
The First Rule of Timeshare is that ownership should never be considered a financial investment in real estate. Timeshare properties do not generally appreciate over time. Often, the only true gauge of a timeshare’s value is your usage and enjoyment of the property, and in the photos and memories of your incredible vacations!
You should never make an impulse purchase for any type or vacation ownership program! Also, take time to consider the secondary or resale market. Purchasing a timeshare interest on the secondary market from a current owner who no longer uses their ownership can save you thousands on your purchase price. Some benefits may not transfer via the resale market, so you’ll have to compare the positive and negative aspects carefully before buying. Finally, purchasing from an experienced and respected brokerage is the safest way to ensure you have all the information you need to ensure the timeshare you purchase provides you with years of great vacations!
Ok- now on to specific info about the Hilton Grand Vacations Club system…
The Club is in reality just a point based reservation system. Club members receive a point allotment based on the villa type and season they own (or have reserved in some cases) at their home resort. As with any point system, proper planning can greatly enhance your usage and satisfaction. It’s important to understand the different ownership types available, the benefits of ownership, the basic rules of the system, as well as some strategies that current owners utilize to maximize their usage and enjoyment.
Ownership Types:
When learning about this system, the distinction between HGVC developed resorts and HGVC affiliated resorts becomes important. The ownership and usage rules may be quite different depending on which home resort you own. For example, some of the affiliated resorts located in the southwest region of Florida were originally sold as fixed week timeshares. For fixed and event week ownerships, the home week is automatically reserved each year unless the owner cancels the reservation. Most HGVC developed and built resorts are all sold as floating week timeshares. The underlying ownership is always based on the home resort. Because of this, usage strategies will vary slightly based on your home resort.
The deed itself may also vary from resort to resort. Some ownership documents show a specific week and unit, even if they are just used for inventory purposes. HGVC at Seaworld is an example of this type of deed. Other ownership deeds don’t have an assigned week and unit, but instead show a usage type in a specific villa size. HGVC on International Drive uses this second type of deed format. Finally, when you consider the international affiliates Fiesta Americana resorts in Mexico- these properties are sold as non-deeded right to use leaseholds with a specific expiration date when your usage will end.
Also, it’s very important to understand that Elite Status designation cannot be obtained via resale purchases and that not all affiliate resorts allow the Club membership rights to transfer on the resale market. For example, the Carlsbad affiliates do not allow the HGVC point usage to transfer to a buyer but the Fiesta Americana contracts do allow the point usage to transfer. Another distinction is that some affiliates require a $399. reconversion fee be paid to Hilton after the transfer deed is recorded, in order for the new owner to be enrolled into the Club and have the ability to convert their week into Club points. If you are not sure what type of ownership exists at a specific resort, consulting with an experienced real estate broker or associate is something that you need to do before you buy! Contact us with any questions you may have.
Seasons:
This is another area which can often be confusing to newbies! Generally, there are four main season names that are used by HGVC: Platinum, Gold, Silver and Bronze. The particular weeks that fall within these seasons will vary depending on the resort. Some locations will have all four seasons, while others may only be divided into two or three seasons. The real confusion begins with a few of the affiliates. Some affiliate resorts were originally sold with different season designations than those used by Hilton. Also, a few of these resorts may have a float season that encompasses weeks which fall into different HGVC season designations. It’s possible that an owner may have the ability to reserve a week in part of the platinum and also the gold season. For these ownerships, the amount of Club points the owner receives may actually vary from year to year depending on the actual week that is reserved. The good news is that this example is the exception rather than the rule.
The Club Point values for the weeks, seasons, and unit sizes for each Club resort can be found in the published Member’s Guide http://www.hiltongrandvacations.com/mg/. Most resale buyers tend to focus on the Hilton built properties, to avoid confusion and ensure they receive a consistent number of Club points each year.
Exchange Options:
There are different ways to exchange your ownership week for another resort. The easiest way is often simply using the Club points to reserve at another Club affiliate. To go outside the Club, a third party exchange system must be used such as RCI, Interval International, or a smaller system such as SFX Resorts. Your home resort will determine which exchange systems you have access to as an owner.
Fees:
Maintenance fees are determined each year based on the overall operating budget of the home resort. Fees can vary widely from one resort to another, and these assessments will vary from year to year. Maintenance fees will increase over the years. You should always consider maintenance fees before making a decision to purchase, and should compare fees between several resorts as part of your research. In some cases, the annual fee can actually be more important over time that the negotiated purchase price!
Generally, the unit type and size determines the base maintenance fee amount, not the point allotment. A one bedroom villa in the platinum season will be assessed the same base maintenance fee as a one bedroom in the silver season. Only the property tax is likely to vary because of the season, so the tax assessment does create a slight difference between the one bedroom platinum and the one bedroom silver. It’s often a good buyer strategy to purchase a 1 bedroom platinum season ownership rather than a 2 bedroom lower season week, even if the 1br villa has a higher purchase price! Your brokerage can help you compare different scenarios to determine which property best meets your needs and your budget.
There can also be some differences in when fees are paid from resort to resort. A good example of this is can be seen in ownerships at the Bay Club at Waikoloa. For a Bay Club owner to borrow points from a future usage year, they will have to prepay an estimated amount for the next year’s maintenance fees (any difference from the estimate is paid or credited at the time the fees are actually billed). International owners at Craigendarroch cannot prepay, so are unable to borrow from a future allotment. An owner at HGVC at SeaWorld can borrow next year’s points without paying the equivalent annual dues as long as their account is current at the time of reservation.
Club dues must also be paid each year. For most resort, members living in the US and Canada are currently charged $99. while members living outside the US or Canada are currently charged $139. (West 57th owners are charged $197. and $232. respectively). Members who own a US resort and also an international resort may be required to pay Club dues for each account as the two systems may not be able to be combined into a single billing account. This is very rare and seems to be a system glitch rather than intentional.
Finally, point systems also have incidental fees that may be charged for various services and transactions such as making club reservations, point rescue, changeable option reservations, guest certificates, and RCI exchange system deposits. It also is a good idea to ask about resort specific fees such as parking fees and tourist taxes prior to confirming a reservation. If you aren’t aware prior to arrival, parking fees at destinations like New York and South Beach can be quite a surprise!
Reservations:
Hilton Grand Vacations Club has five reservation types.
Home Week Reservations are a full seven night stay in the exact unit type and season owned at your home resort. Reservation can be from nine months up to one year out of your check in day. The required check in day varies from resort to resort. Because owners get a longer reservation window at their home resort, it’s often a good idea to buy at the resort you believe you will use most often, in the unit and season that best meets your future plans. Home week reservations have the greatest opportunity at finding availability, other than fixed and event week ownerships.
Home Resort Reservations are currently only available to owners of the West 57th by Hilton Club resort in New York City. There is no minimum stay requirement for these reservations, but the reservation must be made at the West 57th resort. These reservations may be made from 45 days up to nine months in advance of the check out date.
Club Reservations can be made up to nine months prior to the requested check out date at most resorts. Club reservations must be for three days or greater in duration. Reservations can be made at most resorts during this period (West 57th in New York for example, only allows Club Reservations to be made up to 44 days prior to the check out date) and all points owners have an equal opportunity to get reservations. You can reserve any type of villa, and in any season- only being restricted by the number of points that you own!
Open Season Reservations can be made at most resorts (West 57th is excluded) up to 30 days prior to your date of check out and require only a two day minimum stay. These reservations are paid for with cash, but at rates that are heavily discounted! Currently, the 1br open season reservation rate is $80/night for Sun-Thurs and $100/night for Fri-Sat reservations.
Hilton Honors Reservations are reservations made via the Hilton Honors system. All HGVC members are given Silver VIP privileges in the Hilton Honors program. Owners can choose to deposit their ownership week into the Honors program in return for Honors points which can be used for a variety of services and hotel accommodations into affiliated Hilton brands. These deposits must be made more no later than December 31st of the year prior to receiving the points. (In other words, the points for the 2010 use year would have to be deposited prior to Dec. 31, 2009). Trading your timeshare ownership week for hotel stays is not generally a strategy that is recommended, but a few owners find this perk to be beneficial.
Point Charts:
Please review the Member’s Guide for the latest point charts and season calendars.