Posted by Scott Startsman on Tuesday, March 1, 2022 at 9:50 PM By Scott Startsman / March 1, 2022 Comment
Thinking about grabbing that gorgeous piece of Hawaii Real Estate for your next investment?
What kind of investment will it be? There are multiple ways that one can invest in Hawaii real estate. Hawaii housing trends have been steadily showing rising prices for years due to the limited landmass available for development. And as the pandemic winds down there are expectations that tourism will roar back into play, signaling possible boosts for short term rentals.
Investments in general are a complex topic that can’t truly be covered in one blog post, but there are certainly a few potential difficulties we can cover when it comes to the basics of investing in Hawaii Real Estate. Here are a few things to keep in mind.
Investing Misconception - Instant Returns
Hawaii has plenty of opportunity for real estate investments - but it’s not like the mainland. Investing is all about crunching the numbers and letting your money grow. What makes a good investment depends entirely on you. It all depends on your window of time and your time value.
Properties in Hawaii tend to have difficulty acquiring cash flow in the short term and can seem expensive from a mainland perspective. Investment properties are intended to bring in money, so this can seem like a big downside - but it’s only part of the picture.
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While it’s true that Hawaii has a higher cost to get into a property and break even, historical analysis over time shows Hawaiian investment properties to generally be significantly better than investment properties on the mainland.
Window Of Time
The window of time for your investment is the time period that stretches between your initial investment and the point where you sell.
Periods of under a year are generally considered short term investments, while over a year are generally considered long-term investments. This largely comes down to personal preference. Some people prefer investments that offer quick returns, while others prefer investments that slowly appreciate over time. Many people build portfolios of both short-term and long-term investments.
Property in Hawaii tends to appreciate a lot more than other places, due to the limited landmass available and difficulty acquiring construction materials. Expecting short-term returns on property here can be tricky due to short-term capital gains tax. But if you can afford the hefty down payment and delayed cash flow, real estate in Hawaii can be a great long-term investment.
There are other factors to consider before making the leap, however.
Your Time Value
Your time value is how much your time is worth to you in strictly dollar terms.
Properties require regular upkeep, and investment properties especially so. Investment properties have to be treated like running a business. Whether purchasing a property to rent, to flip, or to live in, your time has value - and the time you spend working on that property needs to be accounted for.
If you’re looking to do construction on an investment property, are you going to be working on it yourself? If you’re buying a rental property, are you going to be managing it yourself?
Managing Your Oahu Investment Properties
Managing an Oahu vacation rental is basically running a business. Either you manage it, or you hire out someone else to manage it. If the property you’re managing is on Oahu, you MUST live on the island, and if you’re not licensed you can only manage one property.
Managing a rental property means doing everything required to keep it in good working condition. This includes booking guests, checking in guests, checking out guests, cleaning the room in between guests, and taking care of wear and tear. There’s always turnover too. If something breaks or requires maintenance, someone has to take care of it before the next guest arrives.
If you live on the mainland, that means finding a third party to manage your investment property and take care of the day to day business. While this reduces the time you personally spend working, it eats into the expected profit.
Better make sure it’s a good management company - if you have issues with your property managers and need to personally step in, it can be a big challenge. It can be especially aggravating if you need to address issues while you’re on vacation, causing you to lose precious relaxation time.
Other Unexpected Difficulties
There are a few other unexpected difficulties with Hawaiian investment properties that one should know before diving in.
The first is that as an island state, things can cost more to acquire and take longer to get. This includes everything from furniture to raw construction materials to windows and doors. It takes a couple weeks minimum to ship things from the mainland. Workers, handymen, electricians, and other professional trades are in short supply as well, so you better be ready when your materials are lined up.
Another unexpected difficulty is running into bad tenants who eat into your time and energy. Everyone’s had to deal with horrible people at some point or other in their lives - but a bad tenant is a problem all of its own that can cause big headaches.
Finally, there are some additional tax considerations that need to be made. Mainlanders selling their Hawaiian investment property need to be aware of HARPTA, while foreign sellers need to be aware of FIRPTA.
Hawaii Real Property Tax Act (HARPTA) is a tax withholding of 7.25% of the gross sales price when non-residents sell Hawaii Real Estate.
Foreign Real Property Tax Act (FIRPTA) is the Federal Equivalent to HARPTA, a tax withholding of up to 15% of the gross sales price of U.S. Real Estate by a foreign person.
Is This A Comprehensive Investment Guide?
No two investments are the same, and none of this should be considered advice on your personal investment. Always be sure to crunch the numbers yourself or with a professional to make sure it makes sense for you. While this outlines a few unexpected difficulties specifically for Hawaiian real estate investments, it would ultimately be impossible to list every situation that could come up.
Real estate in Hawaii can be a great investment - we’re not trying to discourage anyone. We just want potential investors to be prepared for the difficulties that can come associated with it. Properties here tend to appreciate over the long term, but can have a slower start on the cash flow side of things. By paying attention to the long term trends, you stand a better chance of seeing returns.
If you’re ready for a consultation on Oahu Investment Property, reach out and let us know!
