Can anyone comment on the short term rental market in Maui?

[Robert Silvernagel]

Hey guys, 

My wife and I are under contract on a condo in Kihei that is vacation rental approved. It took a lot of research and contemplation before I was able to convince myself that paying a 30-40% premium for a condo in a complex with vacation rental capabilities was worth the investment. I ran all of the numbers and it seems to be pretty safe from a cashflow perspective. I pulled data from VRBO for similar 2br/2ba  units in the complex and by my calculations the nightly rate on average would come to $208. Based on $450 a month for electricity, cable, internet, and on-site agent (required by law) the numbers look good to me. Is there anything else I should know? I plan to pass the cleaning fees on to the guests, as well as the 14.5% in resort taxes. 

I do worry a bit that the market could shift downwards, but I think I justified it to myself by saying 'in an economic recession, people will still travel, they just won't want to pay $800 a night to stay at the Grand Wailea.'  Should there be a recession I'm estimating that I'll drop from 75-80% occupancy down to around 40-50%. It does feel like there is likely a major market correction coming, but due to limited inventory of vacation-rentable units in Maui I feel like I should be somewhat more protected from the effects of said recession. What does everyone else think? I am all for taking risks in life, but we also have a 1 year old son now and I don't want to jeopardize the life we've built so far. I know  @Brandon Turner now lives in Maui and I was hoping you might be able to weigh in on this. I have lost a lot of sleep over it, and am actually about to board a plane to head to Maui to stay in the unit for a few days. I plan to make the call after seeing it in person.

Thanks guys for the advice.

Mahalo!

Rob

[Patrick Franta]

That $450 a month seems low. Electricity alone on a 2 bed is usually around $200-250. You also need to account for taxes, insurance, HOA dues and management fees. If you are self managing the numbers will work very well. If you are using a full service PM they take 25% off the top. I wouldn't worry too much about a market shift dramatically affecting your occupancy. Your ADR will go down but occupancy should always stay above 60%, especially if you are priced right.

Typically in Kihei the 1 beds offer a better cash on cash return but if you need a 2 bed for personal use that would make sense .  Your agent should be able to provide all off this for you and more, this is just my .02.    

[Mike Neubauer]

Aloha @Robert Silvernagel

I agree with what @Patrick Franta said. I have a few rental units in Kihei and self manage all of them, and the one bedroom units do seem to rent better than the twos. I also wouldn't worry too much about a market downturn. It will happen, but it might not be that drastic.

How do you plan to pass down the 14.4% onto the guests? Are you planning on using Airbnb? In that case you will have to charge them in addition to the fees that are collected with Airbnb. Guests don't like that and it's a big headache. You'd be better off factoring the 14.4% into your rates. Property taxes on investment properties are also much higher than on personal residences. You can expect to pay about $5k per year or so, depending on where your unit is and how much you pay for it.

I can give you more accurate details and help run numbers on your unit with you, if you like. Just message me directly if you want to go over anything or if you have any other questions. 

[Luke Carl]

@Mike V.

[Alanna Schroeder]

Congrats on your new investment.  

I own a condo in Princeville, Hawaii.  3bedroom/3bathroom.

I would just figure out what my break even is each month.  For me that is booking 15 nights.  My monthly fees are as follows (handyman inspection $125, Cleaning $270 a turn (I collect this from guest), TAT&GET (collected from guest) Property Taxes, Insurance (I highly recommend you price this out, with hazard I pay $1,200 a year), internet/cable $100, Electricity $300 a month, AOAO dues $900 (association fees are increasing minimum 5% a year).  If you have a management company be sure to underwrite their fees as well.  Managers can take a big cut.

I addition I would like to share a few realities with you.  I am in the market for replacing my carpet and the cost for carpeting 1,100 SF is $8,000.  Repairs and Maintenance are not cheap and shipping carpet/furniture/etc to Hawaii calls for huge price premium so I would be sure keep a reserve for replacements.  

As for a downward shift you can always lower your rate (underwrite a worst, middle and best case scenario), Make sure your rental stands out from the crowd (easy to do in Hawaii since most owners don't reinvest in their property).  Consider how your property would do as a LTR and underwrite those numbers (worst, middle and best case).

I am very happy with my investment but it has been a lot of work and many challenges managing it from California. I bought in 2013 and I plan to double down on the market when there is a shift.

[David Varvaro]

Aloha @Robert Silvernagel,

I own and manage vacation rentals in Kihei and have had no problem renting 2 bedrooms units as long as they have 2 bathrooms as well. I agree with @Patrick Franta and @Mike Neubauer that a 1 bedroom will give you a better ROI though because you can still find relatively decent deals on 1 BRs compared to 2 Brs.

As far as the 14.41% in TAT&GET taxes, Mike is right that guests do not like you requesting the additional tax separately so it is better to roll it into the price. This is the primary reason I prefer VRBO over Airbnb. VRBO collects the tax for you as a separate line item on top of your rate. Guests on VRBO never question this because everyone on VRBO does it.

And I think @Alanna Schroeder advice is definitely something most off island owners don't think about. You are going to pay much more for any type of work done (not including all the headaches associated with it) so in my opinion it's better to buy something that's already turnkey. 

I also think that if there is any downturn, entry level vacation rentals in places like Kihei will feel it much less than high end luxury vacation rentals and hotels.  People will still want to go on vacation but they will just budget a little tighter. At the very worst case, as Alanna mentioned you could convert it to a LTR. There is a huge shortage of long term housing on Maui and rents are definitely not going down so at worst case you would still have this option. 

[Loren Clive]

The only thing that no one else has mentioned is that required by law on site agent? You are required by law to have an on island property manager, but it does not have to be an on-site agent. Could be your housekeeper.

I've found that condos that employ an on-site agent who lives at the complex typically have higher dues because it is not cost effective to do so. Then you end up getting harassed by some jackass who acts like he owns the place and you have to cover his paycheck.

[Robert Silvernagel]

Thanks for the replies everyone! As always, the bigger pockets community is awesome!! @Patrick Franta yeah I'm tracking the taxes and HOA fees separately in the worksheet I provided. I'll be self-managing so I added $100-$200 a month for my on-island agent fee. As for the 14.5% TAT/GET, if I use VRBO for my bookings they will collect that from the guest directly. As far as I can tell Airbnb does not yet offer that capability in Hawaii.

I met with a few agents and cleaners while on island and their feedback was that it should be cash flowing nicely without any major repairs or upgrades. We do plan to make another trip out to redecorate and move a few things around after closing -- little things to increase appeal. 

It sounds like inventory is pretty fixed in the Maui short term rental market, but I'm not sure if that's a safe working assumption for the long term. I guess tourism is an important enough industry there that while they need to limit the short term rentals for local residents, they also need them to provide lower price points for visitors. Is there any concern that the local government would ever ban short term rentals altogether?

Of course there are always 'what-ifs' so you can't get hung up on those. We're planning to moved forward with the purchase and appreciate all the feedback and suggestions. 

@Loren Clive yes we are looking at several options for an on-island agent. At this point in time it seems like it will be most economical and convenient if we use the same provider for cleaning and on-island agent. We plan to go the most cost-effective route initially, and then adjust later as we build more experience/reserves.

Thanks again for all the great feedback!

-Rob

[David Varvaro]

@Robert Silvernagel Just wanted to give you my 2 cents on using your housecleaner as your On Island Agent. I would strongly advise you to use the service of a property manager who provides On Island Agent service over your cleaner.

Your On Island Agent needs to be available when an emergency happens. Most cleaners are busy cleaning and can't respond right away. They also probably won't be available 24/7. Most emergencies need to be handled immediately. What happens if the emergency is at 2 am and your cleaner doesn't respond? 

Also, most cleaners here aren't the greatest dealing with your guests. If you ever have a situation where your On Island Agent has to have interaction with your guests, you have to keep in mind this person is representing you. 

In addition the cost is roughly the same whether you are using your cleaner or a professional management company. Message me if you would like some referrals of property managers that provide On Island Agent service.

[Neil L.]

@Robert Silvernagel  - Congrats! I'm curious, what complex did you buy at?

I've got 2 condos, a 2 bed at Maui Banyan and a 1 bed next door at Kihei Akahi.

I'd definitely agree with @Patrick Franta - from my experience as well, the 1 bed unit has performed better.

Also props to @Mike Neubauer for sharing his knowledge and experience with me - I'd definitely recommend you take him up on his offer if you have questions etc.

I recently heard that the County of Maui is considering a ~50% increase in property tax for short term rentals from the current $9.37 rate to $15.41, equal to what time share units pay. If true this could take a significant bite out of STR income streams.

I'm wondering if any locals have heard this or know more?

[Bob Dreher]

Just bear in mind that trips to Maui involve 'discretionary' funds...

A few more things to think about during your due diligence. 

1. Fuel prices---cost of jet fuel can have a HUGE impact on airfares. While some don't care, think about the family of four who is trying to budget for a family vacation. Even if they can rent your place for $250/nt all-in, can they afford the extra $2 grand+ to get there and back?

2. Much of the travel to Maui is international. In addition to the US economy, there are other things to consider.

A. How is the Japanese economy doing? How about Canada? 

B. How about the currency exchange rate? Yen vs the Dollar...or Canadian Dollar vs the Dollar. 

[Robert Silvernagel]

@Neil L. oh man I hadn't heard about that potential tax increase, and those sort of things are exactly what I was hoping to find out from the more seasoned investors on this forum. I guess it's probably not enough to dissuade me from going through with the purchase, but certainly something I should account for in my forecasts. 

We stayed at Maui Banyan the last time we visited Maui and that's actually what got us interested in the Kihei market. Great place! Our unit is a little further north in the Maui Vista complex. We found that its still as walkable as Banyan but at a little more reasonable price point. The lock off doors at Banyan probably play a big factor in the pricing of those units as they offer the ability to rent the units separately. 

For our family's needs the 2BR was worth the extra bump in cost. We're planning to market to small families like ours so we're hoping that angle works out for us. In the worst case scenario that demand is low for a 2/2 we'll have to drop prices to attract people away from the 1BR places. I hope it doesn't come to that, but I guess you have the hard data on that owning one of each. What are your average vacancy rates between the two, if you don't mind me asking?

[Robert Silvernagel]

It's worth noting that we plan to put a little money into the unit to make sure that it shows well and doesn't have that 'dated' look. It seems like a lot of short term rentals don't get updated and that's a key differentiator that we're hoping to take advantage of.

[Robert Silvernagel]

@David Varvaro yeah man I know that's probably a good idea, it just seems to me that it adds another touch point when it comes to communicating between on-island contacts. It's probably not that much additional overhead, but since we're new to managing remotely I figured it might be best to follow the KISS method as we get started. We will likely evolve our strategy once we start to see the numbers play out. If we're consistently profitable and find that the cleaner is not effective in responding to guest needs, then we will not hesitate to go the dedicated on-island agent route. But for the first few months it seems like it will be easier to manage from our side. When we get to that point though I'll be sure to reach out to you!