Considering buying first rental in HI (Oahu)

[Kenneth Burdick]

Hello BP community! Newbie here, so go easy on me :) I live in Southern CA and own a home in which we have over 50% equity. At some point, me and my family would like to relocate to Hawaii ... most likely Oahu, for the weather/beaches/lifestyle, etc. I know this is a difficult market from a LTR perspective, but I continue to be drawn to the idea of buying a duplex/triplex and renting it out for a few years until circumstances allow for us to wisely relocate there (want to let a child graduate from high school and then figure out what the employment situation will be). I'm thinking of putting 20% down on a home (will likely need to leverage some of the equity we have in our current home, either through a HELOC, cash-out REFI, or just selling the house altogether...) that would provide modest positive cash flow out of the gate while allowing us to get our foot in the door of the Hawaii market at current prices rather than higher purchase prices that I assume will exist a few years from now. Eventually, we would move into one of the units there and I would hope to add on and do more real estate investing locally there.

A couple things give me pause:

- COVID fallout. Is this an overly risky time to be buying in Hawaii? I know timing the market is impossible, but I wonder if prices could actually decline over the next year and I might be wise to wait and save a little more.

- Being so new to all of this, is it unwise to start with a million dollar home in a market like this? I don't want to stay on the sidelines unnecessarily because I want to "get in the game" and get some momentum, but I also want to make sure I'm not overextending myself right out of the gate.

Any thoughts you all would like to share would be very welcome. Loving the site so far. Thank you!

[Isi Nau]

Aloha @Kenneth Burdick

You bring up a good point of being financially left behind in this market.  With appreciation as it is here, it's hard for most people to save enough each year to keep up with market prices.  I have met very few people who say they are glad they didn't buy earlier, and a ton who wish they would have bought earlier.

We are in a unprecedented time right now as far as the economy in Hawaii and the residential real estate market.

First, the current economy is effected by a non-financial issue; COVID.  Whereas previous downward pressure on the economy has been financially related; sub-prime mortgages, Japanese boom, etc.  So, hopefully once COVID is resolved (whatever that means) things can turn around.

Second, the September stats were just released and several new records were made. SFH sale price and SFH days on market.

Third, the market here has followed a pretty predictable cycle over the past 70 years.  From 2008-2018 we were in a predictable cyclical pattern, but 2019 and 2020 bucked the trend.  We should have seen several years of low single digit depreciation, but we haven't.  2019 was a slow year, relatively speaking, then early to mid 2020 things were obviously slow.  Now we are in a significant upswing.  An untimely and arguably unfounded upswing.

Fourth, there are no positive economic indicators right now.  They are all very bleak.  Every reputable local economist has painted concerning pictures of the future.  The sky isn't falling, but it's definitely not rainbows.

If we truly are in a natural, non-artificially inflated upswing in the market, that will be very unfortunate.  A few mild depreciation years gives people time to catch their financial breathe and get ready for the next appreciation cycle.  I don't think people are ready.  The gap between the haves and have-nots will widen.

I am not sure what the future holds for the residential market here.  But to provide some context, during the last recession (2008) prices in most neighborhoods dropped a total of 10-15%, which is very good compared to other major cities in the US.  The Hawaii market is pretty well buffered and resilient.  I would anticipate a leveling off or increase in prices once a vaccine is out, or the election is over, or whatever.  Until then, everything could change tomorrow.  The surest hedge against this is finding a home you can build sweat equity in.

If I understand correctly, you are thinking of purchasing a property on
Oahu soon, renting it out for a few years, and then moving into that
property when you move to Hawaii?  One of the trickiest parts to this strategy is finding a home that makes a good rental, but is also a home (and neighborhood) you'd want to live in.  Also, a million dollar home is not over-extending in this market, if done right.

It's possible to make this plan work, but will require more discussion than is appropriate for a forum post (mine is too long already).  Please feel free to reach out to discuss a more in-depth plan.