Buying vs Renting on Oahu

[Paul K.]

Hey BP family! I'm in the process of moving to Oahu and would appreciate some advice. I'm military and will be moving there for a minimum 1 year assignment, likely will extend to 4+ years.

I currently househack a SFH in Dallas. All my housing expenses are covered and will cash flow even more once I rent my room out when I leave.

The condo I am looking at purchasing is a 2/2 in a great location, one dedicated parking spot & plenty of guest parking. I like the option of the 2/2 in case I do get a roommate later on, friends/family visiting, etc. I would prefer to not have a roommate in Hawaii, but would be able to rent out the extra room for around $1500-1800.

The numbers:

$630k VA, 0% down, 7% interest.

Closing costs: $10k

Principal and Interest: $4200

Taxes & Insurance: $200

HOA: $700 (this will increase in a few years when the building undergoes pipe replacement, unknown how much but I'm estimating around $300).

Electric & Internet: ~$200

Total: $5300, likely $5600+ in a few years 

If/when I move out, I would likely be able to rent the unit for $3300-3500 or $3600-3700 if I rent by the room. Ideally I would refinance in a few years.

Potential rentals (2/1 or 2/2) I’m looking at would cost me around $3300. Likely would not have a roommate if renting.

I could cover the $5300 but it is def not ideal going from $0 in housing expenses to $5300 and would probably get a roommate in this case. 

Other considerations:
I wouldn't be able to use remaining VA entitlement anywhere else with 0% down (except other very high cost of living areas).

Extension not guaranteed but I’m in the guard so I have a lot more flexibility/freedom than active duty in where I want to live/work.

More affordable condos ($520-550k range) are an option (typically no/limited guest parking, fewer amenities, etc). This would reduce monthly payments to around $4700.

Is there anything I’m missing or other things/strategies I should be considering?

Thanks in advance!

[Ricardo R.]

@Paul K.  I'll try to assist using your numbers. 

Okay, when I run your $630K VA with 0% down and at 7% over 30 yrs the P&I (principal/interest) payment I get is @ $4,191.41/mo. ------- Once your taxes and insurance are added your PITI monthly payment is $4,391.41 ----- HOWEVER, I don't know if the $200/mo. for taxes AND insurance you have listed is accurate or if that is for each but $200/mo. for BOTH taxes and insurance together SEEMS EXTREMELY LOW... please double check.

Okay from there $4,392 (PITI) + $700 (HOA) + $200 (Elect/Inter) = @ $5,292 / monthly

Of special note: I noticed that you included electricity & internet (utilities) but nothing else i.e. gas, garbage, water, etc. -- I don't know if they are included in the HOA or if they were overlooked. Also, unless cashflow from your current SFH covers these utilities in full then you should not include them in your current condo calculations either if you want a true apples to apples comparison, if that makes sense.

I don't really like the numbers of using this new condo as a rental later down the road, it just depends how much later down the road since rents typically tend to increase and outpace your expenses but as it stands, at @ 3,500/mo. rent potential you would be Cash Flow negative by about $1,500 a month !!! You would be LOSING $1,500/mo. if the 2/2 condo was a rental today... not an investment... the likely scenario would be for you to sell the condo later unless you were able to get the rents to cover your expenses and ideally actually come out on the other side as positive CF.

Now considering a more affordable condo of say... $540K that equates to a PITI of @ $3,793+700 /mo. + $700 (tentative) + $200 = $4,693/mo............. Now assuming this $540K condo is a 2/2 and follows similar rent numbers and now excluding eletc./internet from expenses that means that you would have fixed expenses of @ $4,490/mo. --- you would receive @ $3,500 in rents which still equates to a loss of @ 900/mo. BUT I like these numbers much better than the first... projecting that you will try to turn it into a rental in the future when rents are higher and assuming you can push rents a bit higher, you may be able to decrease the $900 loss into a $0 loss and maybe even a CF positive. 

One major thing that concerns me is that we haven't even factored in other expenses such as vacancy, maintenance, CapEx, etc.

Personally, if you are set on buying a condo as a primary residence, I would buy in the more affordable range and would go in with the PRIMARY likely exit strategy to sell later down the road... my SECONDARY strategy which would hinge and be dependent on timing, rents, market, etc. etc. would be to rent... it's one of those scenarios where... it might make a great rental for you down the road but as of RIGHT NOW, it does not. 

I hope this helps. I'm a Veteran but I want to thank you for your service. I sent you a DM, I hope you can assist. 

[Didier Bizimungu]

I love how deeply you dove in Ricardo! 

To add to your message, I would reinforce re-evaluating that tax/insurance cost. Especially taking into consideration tax after closing with the new value of the condo. 

Most counties should have a tax estimation tool at this point that tells you, based on your price what you can expect your taxes to be after the county reassesses your property. 

In terms of renting out in the future, I would also consult your HOA's limitation on house hacking & renting out. Keeping in mind, maybe by talking to current residents, how this might change in the future.

[Paul K.]

Quote from @Ricardo R.:

@Paul K.  I'll try to assist using your numbers. 

Okay, when I run your $630K VA with 0% down and at 7% over 30 yrs the P&I (principal/interest) payment I get is @ $4,191.41/mo. ------- Once your taxes and insurance are added your PITI monthly payment is $4,391.41 ----- HOWEVER, I don't know if the $200/mo. for taxes AND insurance you have listed is accurate or if that is for each but $200/mo. for BOTH taxes and insurance together SEEMS EXTREMELY LOW... please double check.

Okay from there $4,392 (PITI) + $700 (HOA) + $200 (Elect/Inter) = @ $5,292 / monthly

Of special note: I noticed that you included electricity & internet (utilities) but nothing else i.e. gas, garbage, water, etc. -- I don't know if they are included in the HOA or if they were overlooked. Also, unless cashflow from your current SFH covers these utilities in full then you should not include them in your current condo calculations either if you want a true apples to apples comparison, if that makes sense.

I don't really like the numbers of using this new condo as a rental later down the road, it just depends how much later down the road since rents typically tend to increase and outpace your expenses but as it stands, at @ 3,500/mo. rent potential you would be Cash Flow negative by about $1,500 a month !!! You would be LOSING $1,500/mo. if the 2/2 condo was a rental today... not an investment... the likely scenario would be for you to sell the condo later unless you were able to get the rents to cover your expenses and ideally actually come out on the other side as positive CF.

Now considering a more affordable condo of say... $540K that equates to a PITI of @ $3,793+700 /mo. + $700 (tentative) + $200 = $4,693/mo............. Now assuming this $540K condo is a 2/2 and follows similar rent numbers and now excluding eletc./internet from expenses that means that you would have fixed expenses of @ $4,490/mo. --- you would receive @ $3,500 in rents which still equates to a loss of @ 900/mo. BUT I like these numbers much better than the first... projecting that you will try to turn it into a rental in the future when rents are higher and assuming you can push rents a bit higher, you may be able to decrease the $900 loss into a $0 loss and maybe even a CF positive. 

One major thing that concerns me is that we haven't even factored in other expenses such as vacancy, maintenance, CapEx, etc.

Personally, if you are set on buying a condo as a primary residence, I would buy in the more affordable range and would go in with the PRIMARY likely exit strategy to sell later down the road... my SECONDARY strategy which would hinge and be dependent on timing, rents, market, etc. etc. would be to rent... it's one of those scenarios where... it might make a great rental for you down the road but as of RIGHT NOW, it does not. 

I hope this helps. I'm a Veteran but I want to thank you for your service. I sent you a DM, I hope you can assist.

Thanks for the detailed response!

The taxes are around $150 and insurance is $50. I had both my lenders and insurance guy check, not to say that they won’t increase in the future.

HOA at that specific condo covers everything except electric and internet.

I calculated 3% for capex, vacancy, maintenance, and management which comes out to $400 a month. I didn’t include this initially while I am living there but yes I agree that would need to be factored in, which brings the CF to negative $1300-1900. 

I know it's not a guarantee but if I were to refinance in four years to let's say a 5% interest rate, mortgage would decrease to $3200 with new loan amount of $600k I am assuming rents increased to $3800. At this point I'm not paying for electric and internet but I increased HOA to $900. Also included the capex and other expenses. Cash flow is still negative $1000.

With the $540k condo, this would come out to a new mortgage of $2765 with a new loan amount of $515k. Rent increases to $3600 and with other assumptions from the above example, cash flow would be negative $680.

Thanks for the advice! Seems like selling once I leave or banking on appreciation is the play in Hawaii. 

[Ricardo R.]

@Paul K. looks like you're on it. The worry is the 'refinance' to a lower interest rate, which as you have mentioned there is no guarantee and that's definitely not a good way to go about it... trying to project tomorrow's numbers favorably so that today's numbers can pencil out... that is just a recipe for disaster BUT just as you mentioned even doing so in a favorable/risky way still doesn't seem to project positive cashflow and even at it's best you would still be loosing $600/mo. once it is rented. 

Even at its best the situation could compound itself into an even worse position for you in the future... For example: If you turned your 2/2 condo into a rental with a negative CF of $600/mo.... in this scenario you are moving somewhere else, so it would be the NEW mortgage/living expenses plus the -$600/mo. of this 2/2 condo that would be factored in to your new expenses.... so your new mortgage mo. debt + $600.... BUT that is even assuming a lender would be comfortable with your debt to income ratio taking into account your then -$600/mo. ----- Typically a lender would give you income credit of @ 75% on seasoned rental property, so they could 'wash away' some of your mortgage obligation on your rental, for example: Mortgage = $2,000 , Rent = $2,000 - the lender would only factor $500/mo. as a recurring debt to you the other 75% is washed away BUT on a negative cash flowing property they may not be able to do that and it may actually look more like a recurring debt of $2,600/mo. to you (using example) -- which may actually not allow you to qualify for a loan in the future. 

Yes, buying and selling seems like the likely scenario NOW, but again it all depends when in the future you want to rent it. Also, it wouldn't be a bad idea to consider: 1) a different property type such as a duplex, triplex, etc. and/or 2) a property with a larger bedroom count or one you can make so; higher bedrooms = higher rent = more options; the buying price may increase a  bit too but usually the bump in higher rent potential overshadows it or 3) a larger down payment on the 2/2 to get it closer to CF. Something to consider. 

[Doug Nordman]

Quote from @Paul K.:

Hey BP family! I'm in the process of moving to Oahu and would appreciate some advice. I'm military and will be moving there for a minimum 1 year assignment, likely will extend to 4+ years.

[...]

Is there anything I’m missing or other things/strategies I should be considering?

Thanks in advance!

Paul, we've lived on Oahu for 34 years, and prices are still at a pandemic peak.  

I'm a military retiree, and it used to be quite convenient to invest where you were stationed.  However with today's tools on the Web you can invest in real estate all over the country where it makes sense.  You don't have to sift through Oahu listings trying to find a place that *might* cash flow as a rental... *after* you get a refi... and *if* the HOA fees don't go up too much.  You're going to be a long-distance landlord on your Dallas SFH anyway, so why not buy more real estate there (or anywhere else) on the Mainland that'll have a higher cap rate from the very start?

If you're insistent on buying a place here, I'd suggest renting for 6-18 months while you network and personally dig into the local markets.  The rental market is also tight (and expensive) here, but you're probably getting the housing allowance (and COLA) to afford it.  During your lease (with or without a roommate) you can find the off-market listings or the desperate sellers to buy a live-in rehab that you can turn into a cash-flowing rental or a flip.

 
But I wouldn't buy here and count on historic appreciation bailing you out of an expensive carrying cost.

[Paul K.]

Quote from @Doug Nordman:

Quote from @Paul K.:

Hey BP family! I'm in the process of moving to Oahu and would appreciate some advice. I'm military and will be moving there for a minimum 1 year assignment, likely will extend to 4+ years.

[...]

Is there anything I’m missing or other things/strategies I should be considering?

Thanks in advance!

Paul, we've lived on Oahu for 34 years, and prices are still at a pandemic peak.  

I'm a military retiree, and it used to be quite convenient to invest where you were stationed.  However with today's tools on the Web you can invest in real estate all over the country where it makes sense.  You don't have to sift through Oahu listings trying to find a place that *might* cash flow as a rental... *after* you get a refi... and *if* the HOA fees don't go up too much.  You're going to be a long-distance landlord on your Dallas SFH anyway, so why not buy more real estate there (or anywhere else) on the Mainland that'll have a higher cap rate from the very start?

If you're insistent on buying a place here, I'd suggest renting for 6-18 months while you network and personally dig into the local markets.  The rental market is also tight (and expensive) here, but you're probably getting the housing allowance (and COLA) to afford it.  During your lease (with or without a roommate) you can find the off-market listings or the desperate sellers to buy a live-in rehab that you can turn into a cash-flowing rental or a flip.

 
But I wouldn't buy here and count on historic appreciation bailing you out of an expensive carrying cost.

Thanks Doug! That makes sense. My parents are out there now and I hope to retire there someday (the next Doug Nordman!) which is also going into my buying decision. Also, I would be able to use my VA loan one more time in a market like Hawaii and this would be my fifth property. Not sure how much hard financing will get after the fifth property but want to maximize it while I can.

I will take everyone’s advice and pass on the more expensive condo for now and look into something in the $450-550k range and/or spend some time renting before buying. 

Thanks again all!

[Bryan Vukelich]

Hi @Paul K.

It looks like you've thoroughly thought this out and that you are also getting some good advice from other BP members.  

Throwing my two cents in:

* I agree that if you decided to buy here, plan on selling the unit when you PCS off O'ahu as the most likely outcome unless you want to feed the property.  Depending on type of property, overall real estate historically appreciates on O'ahu from 4.3%-4.7% annually (can be higher in the more desirable neighborhoods) - but obviously no guarantee this will continue.  However. . . 

I'm amazed how strong the market is still on O'ahu despite the higher interest rates. I've had quite a few buyers postpone their goal of buying here because of the higher rates, but I still have many clients looking and I'm still seeing high demand for real estate and multiple offer situations are not uncommon. I just listed a nice 1 BR non-STR unit in the Ala Moana area - seller had multiple offers and is in escrow in under a week. If the deal closes, it will be the highest priced selling unit in the building in over 1 year.

So the market is still very strong despite the higher rates.  And with the lack of inventory, if rates do go down, and there is no major US or global down turn, it seems like demand for housing on Oahu will only increase - thus leading to higher home prices.  

* Also, please note it is very difficult (but not impossible) to find quality off-market opportunities on O'ahu.  I regularly solicit off-market properties hoping to find opportunities for clients but opportunities are few and far between and only very rarely are they "deals."  

* Lastly, if you think you'll likely be here 4+ years, and eventually want to retire here, personally I don't find it that risky to acquire a home here while you are based here.  Based on historical data, you could have a nice chunk of equity by the time you PCS off O'ahu.  

Wish you well and if I can provide you any information to help you with your decision, I am here to serve you.  Good luck 

[Paul K.]

Quote from @Bryan Vukelich:

Hi @Paul K.

It looks like you've thoroughly thought this out and that you are also getting some good advice from other BP members.  

Throwing my two cents in:

* I agree that if you decided to buy here, plan on selling the unit when you PCS off O'ahu as the most likely outcome unless you want to feed the property.  Depending on type of property, overall real estate historically appreciates on O'ahu from 4.3%-4.7% annually (can be higher in the more desirable neighborhoods) - but obviously no guarantee this will continue.  However. . . 

I'm amazed how strong the market is still on O'ahu despite the higher interest rates. I've had quite a few buyers postpone their goal of buying here because of the higher rates, but I still have many clients looking and I'm still seeing high demand for real estate and multiple offer situations are not uncommon. I just listed a nice 1 BR non-STR unit in the Ala Moana area - seller had multiple offers and is in escrow in under a week. If the deal closes, it will be the highest priced selling unit in the building in over 1 year.

So the market is still very strong despite the higher rates.  And with the lack of inventory, if rates do go down, and there is no major US or global down turn, it seems like demand for housing on Oahu will only increase - thus leading to higher home prices.  

* Also, please note it is very difficult (but not impossible) to find quality off-market opportunities on O'ahu.  I regularly solicit off-market properties hoping to find opportunities for clients but opportunities are few and far between and only very rarely are they "deals."  

* Lastly, if you think you'll likely be here 4+ years, and eventually want to retire here, personally I don't find it that risky to acquire a home here while you are based here.  Based on historical data, you could have a nice chunk of equity by the time you PCS off O'ahu.  

Wish you well and if I can provide you any information to help you with your decision, I am here to serve you.  Good luck 

Thanks Bryan! Any insight on VA assumable properties? I saw one a few weeks ago that seemed to be a good fit at a 3.0% rate. I know sellers typically inflate the price artificially because of the lower interest rate but it still seemed reasonable based on comps.