This article compares the financial aspects of owning a luxury second (or third or fourth) home to being a member of a destination club. It includes a spreadsheet to let you compare the economics of these two popular forms of vacations for wealthy families.

According to the National Association of Realtors, around 78% of people who buy a second home use them for recreational purposes while about 21% of vacation homeowners own two or more vacation homes, During real estate booms a large number of people also buy them for investment purposes.

The first destination club was started in 1998 and they have since grown rapidly so that there are now about 25 clubs. For background information on what they offer, read the overview of destination clubs.

From a purely financial aspect, the membership deposit to join a destination club is usually less than the 20% down payment that you would need to buy an equivalent second home. What's more, the annual membership dues for a destination club are significantly lower than the annual costs of running and maintaining a comparable home. However with second home ownership you do have the potential upside (or downside) from changes in the value of your home, whereas only equity destination clubs offer this potential upside.

The calculation below compares the long-term value of being a member of a destination club compared to the value of owning a second home. This is done by calculating the net present value (NPV) of the cash flows for club membership compared to second home ownership. The calculation has two scenarios for second home ownership:

1. Home Values Equal. The first comparison assumes that instead of joining a club a person buys a house of equivalent value to the ones in the club.
2. Down Payment Equal: The second assumes that the initial club membership fee is equivalent to the (20%) down payment on a house purchase. The value of the purchased house would be lower than under the first scenario.

The calculation assumes a 10-year ownership or membership period and assumes joining a club with $3m homes with a $325,000 membership plan and annual dues of $22,000. For the home ownership scenarios we've assumed a 20% down payment and that the balance is financed with a 7% interest only mortgage. The annual running costs of the home (taxes, repairs, utilities, maintenance etc) are assumed to equal 2.5% of the homes value and we've assumed 5% annual property appreciation.

Note the calculation ignores capital gains taxes that a homeowner would pay on the sale of the home and ignores any tax deductions that may be available for the mortgage interest payments. As a home owner you could also rent out your home and make some income, but we've assumed that this is purely a family home and that the home will not be rented.

When compared to both home ownership scenarios the destination club membership has a less negative NPV and so is better value than home ownership. This full spreadsheet can be downloaded here. Within the spreadsheet you can adjust the assumptions and adjust a lot of variables and see how this affects the NPV calculation. You can also run the calculation for different house values and different destination clubs. Most notably if you assume that house prices will rise at 8% per year over the 10 year period then the NPV of home ownership becomes more favorable.

One big caveat on this analysis is that it is done purely from a financial perspective. Just as importantly you need to weigh up the pleasure and satisfaction you may get from owning your own home, against the headaches that it will bring as you have to repair and maintain it. Our earlier article has the full comparison of all the aspects of destination clubs compared to vacation home ownership.