Does this investment make sense in today's market?

Question

I'd appreciate any advice from any BiggerPockets / investor veterans before taking the plunge on this investment.

Description:

Oahu, Hawaii fixer-upper, 1 block from beach3 rentable units on 1/4 acre lotPrice: $1.225MRehab cost: $200kAfter Repair Value: $1.59MFuture rents: $10,000/mo

The property is in the city where we live, so self-managing/GC'ing the rehab and rental (if we decide to hold) is possible.  For a buy/hold strategy, bigger pockets rental property calculator shows a CoC ROI of 8% with a 75% LTV at purchase ($306k downpayment, $200k rehab cost, monthly cash flow of $3520/month).  For a flip strategy, bigger pockets flip calculator shows a $86k profit (5.91% immediate return).

Any insight/advice would be greatly appreciated.

Thanks, Scott

Lane Kawaoka · Answer

You might make money on the flip (and pay at the highest tax rate for active income).

I live here in Hawaii but only invest where the numbers make sense or where properties rent for the 1% Rent-to-Value Ratio.

1% is needed to be able to cashflow after expenses.

I think with the whole COVID thing and the fact that our start is taking forever to open up that tourism will fall even more and prices for residential REI in Hawaii look glim. What better time to sell than buy IMHO.

If anyone wants help walking through the numbers on analyzing these deals let me know. 🤙

Mike Neubauer · Answer

Aloha @Scott King,

I'm bullish on properties like this normally. However, like many have pointed out the margins are slim here. There's not enough meat on the bone to make it worth the investment, in my opinion. Because there are so many particles in the air and no one knows where the dust will eventually settle, I'd want to see bigger potential gains than with the numbers you are estimating before I'd jump at it.

Edward Liu · Answer

Reality is no body knows what the environment will look like in 6 months or a year from now.   Only thing we can really do as investors is to manage risk.

Looking at your estimate, I would rule out your flip strategy as margin for error is so small.  Your $200k rehab likely will cost higher than your estimate - unless you really have a lot of experience in this;  Housing market has higher chance to lose 10% value vs. gain of 10% in the next 12 months due to the recession;  not sure if your profit included brokerage cost or other holding cost.

For units next to beach, I assume you plan to do STR.  Based on recent info from Airbnb, most new bookings in May and June are for people who travel within 200 miles of their home.  In addition, RV sales are up as new preferred method of vacationing.  Both of these trends are not good for Hawaii.  With all the travel restrictions both from Hawaii and internationally, there is high chance these units will NOT reach your goal of $10k per month.

Your numbers seems to be BEST scenarios in the current environment.  Have you thought about bad scenarios?  Hawaii has history of drastic real estate price swings.   I see more possible downsides to this deal, while upside are few.   Based on risks, I would not touch this investment at this time.   I would not even touch your flip strategy 12 months ago with such low margin.

Manaia Alalamua · Answer

@Scott King where is this at? Oahu, Maui, Big Island?

I agree with @Taylor L., be careful on short-term rentals. If your place is in Hawaii, might want to check out the short-term rental regulations. Hawaii is pretty strict on that stuff.

Taylor L. · Answer

Is this a long term or short term rental type property? Rents would seem to indicate it's possibly a short term rental. Since we're in a recession, what happens to this investment if vacationing is down this year and next year?

Julie McCoy · Answer

@Scott King Honestly I don't think the margins are fat enough.  $1.225 + $200k = $1.425 but does that include loan costs, holding costs, reserves in case the inevitable goes wrong with the rehab?  If you sell it after, have you factored in paying the agents?  If the answer to any of that is no, run away.  I don't know if you mean this to be an STR or LTR (I am not familiar with Oahu rents but >$3k/unit that close to the beach does not seem outrageous to me), but if an STR, I wouldn't do it at the current time - Hawaii is too likely to suffer from the Covid-induced hangover for air travel that could impact tourism there for months or even years.

If you haven't already, definitely go listen to the BP podcast #384.  A lot of that guest's experiences could be relevant to your situation.

Scott King · Answer

Thanks to all for your great insights/advice.  Being new to BiggerPockets, this is my first post, and it's great to see so many people take the time to offer their advice/experience - what a great community.

The strategy would actually be for a LTR, not STR.  STRs here on Oahu are limited to 30 days or more, and as Manaia points out, the state is cracking down on abusers.  The current LTR market actually supports the $10k figure for (3x) remodeled LTRs only steps to the beach, however as was pointed out, who knows what the future holds, especially given potential continued COVID impacts on our island/tourist-driven economy.  I appreciate the candid feedback from Julie and Edward regarding the thin margin / and risk here - this validates my concerns with the deal.

A little back-story: original list price on the property was $1.1M (less than tax value of the land), which made it a no-brainer in my mind to make an offer on the day it was listed.  I offered $1.115M, and was the first offeror.  Not surprisingly there were multiple offers, and the seller's agent came back to me the next day to see if I'd match the highest offer received to date of $1.225M (triggering my concern/question on this forum). Needless to say, and with the help of your advice, I passed.  I hope it works out for the ultimate buyer, but too much risk for me at that price.  Again, thanks BP community for your help.

Does this investment make sense in today's market?

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