Owning & Operating Vacation Rentals in Hawaii : what a newbie should know?

Question

Hi BP!

I have a strong interest in owning & operating vacation rental property(ies) in Hawaii... in Kailua-Kona / Hawai'i County, to be more specific. I have a few question to other BP members who have experience with VRs. In addition to sharing your competent opinions and experiences, it would be awesome to add also some links to useful information available online on the given topic.

1) What are the good and bad aspects of owning a vacation rental in Hawaii? Anything you would like to warn me about?

2) I reside in Texas, so I will be an absentee VR owner. Are you aware of the specific requirements for absentee owners? For example, I can think of... hiring a local property manager? Business license or tax related documents? Etc?

3) Would you recommend registering a company for this type of real estate property? Should I purchase the VR under an LLC? Or as a private person? Which is better, and why- what are the differences in the two approaches?

4) Any other tips and links that you would like to share on the topic? For example, some tax-related info / tips can be very useful. Many thanks in advance for your time and thorough responses!

Best regards, M.

Jeremy Baker · Answer

Aloha @Miki M.!

We live in CO and own a vacation rental condo in Kihei, Maui and will use our experiences to answer your questions.

1)  The only negatives about owning a VR in Hawaii are the higher costs of goods (furniture, building materials, etc...since everything has to be shipped in).  Also the utilities are much higher there so be prepared for some large electric bills.  Because of this, your HOAs will be higher too (ours is $500/mth, but does include everything except phone and electric).

Some will say housing prices are a negative, but I guess it depends where you live.  Maui condo prices are very similar to condos in the CO mountains/ ski areas and even downtown Denver, but a condo in Maui is much easier to keep full!

Positives:  there's no real off season and you should have no trouble keeping your unit full (85% - 95% occupancy rate is easily attainable).  You can use your property and save $$$ on hotel/ condo rental fees when you visit.  HI has the 2nd lowest property tax in the nation.  I could go on and on about the positives!

2)  Hawaii recently passed a new law stating anyone that rents their property short term must register and get a tax ID, have an on-island representative (a property manager, lawyer, real estate agent but not a maid/ housekeeper) and any online advertisement for your rental must include in the description the tax ID and your on-island representative.  You will charge guests 13.42% tax (excise and transient accommodations) which you will collect and pay the state quarterly.  Very easy to do as HI has an online portal that allows you to submit the two tax forms and make the two payments.

3)  You can find many threads (or arguments?) on why or why you shouldn't put your property(s) in an LLC.  We have not done this with our Kihei property, but may do so as we add more properties to our portfolio.

4)  My advice is to check out the VRBO listings for rentals in the Kailua-Kona area.  VRBO/Homeaway/ AirBnB is the best resource for vacation rentals as you will be able to see live rental rates and occupancy rates by checking the listings availability calendars. When you narrow your search down to a condo complex or two, go through those VRBO listings and use the inquiry function to email the owners and ask them if you can call or email them with some questions about their experiences owning and renting within that condo complex.  Most owners will be happy to share a wealth of information with you.

Best of luck and PM me if you have any more questions you would like to ask me directly!

Steven Kimmey · Answer

Hi Miki,

I am a new VR property owner on Hawaii. You may have seen my post asking about insurance. I just spent the last year searching property beginning in Kona and Captain Cook areas and branching out to the East side around Hilo. Visiting the island 4 times and touring more than 50 properties. As I am a Realtor, I soaked in as much of the market as possible and watched prices around Kona skyrocket over 2017. Being more interested in a SF than a condo, the Hilo area seems to have more of a VR market with really only 3 hotels, versus the Kona area's numerous huge hotel resorts. So I finally settled in October on a property just north of Hilo and am now getting setup to rent.

There are some things you definitely need to consider regarding purchasing property on the Big Island. The points already made about things generally costing more, needing a tax license for the GE tax you'll collect, etc. are all true. I also found the following things to be quite limiting regarding insuring and financing, (if you're not paying cash) a property in Hawaii. Lava zones, flood zones, hurricane insurance, whether there is public water or a property uses rainwater catchment, leasehold Property, etc.

Some of those things are specific to buying a SFR on a lot, of course. But, there are also some considerations when looking at condos as well. I found some very reasonably priced ocean front VR condos in downtown Kona and then found the complex and management (or lack thereof) to be the reason for the price; or as in the case of 3 units in one complex in Hilo, the entire complex was up for sale to new management owners and not disclosed by the seller.

So my best advice is do lots of homework and visit many times. I can tell you that I basically interrogated all the owners of VRs and B&Bs where I stayed and the recurring theme was they wish they had done more research before jumping. But there is no substitute for being there in person experiencing each specific area. Remember that of the 9 climatic zones on Earth, ther are 7 existing right on the Big Island. Each area is completely different in climate. It was 80 on the beach the other day and there was 4 inches of snow on top of the volcano...oh yeah don't forget...it's a volcano.

I wish you good luck and would love to hear your story as it progresses.

Mike Neubauer · Answer

Aloha @Miki M.

I just saw this posting. Sorry its so late, I see the thread is quite old as well. All the points made are good ones, and we are in the process of obtaining our first VR on Maui. I've lived on island for 16 years and have long term rentals, but this will be the first VR for us.

Amongst all the good feedback on this posting, you'll also want to note that property management is much higher for vacation rentals as it is for long term. Typically out here (at least on Maui, though I'm sure it is statewide about the same), property management fees are between 25%-50% of your gross rents. This makes it very difficult to see any kind of real cash flow unless you are putting down a sizable down payment.

Personally, it took me a long time to even put an offer in on anything because with HOA fees alone, a $500k condo puts you close to the same monthly payment as a $900k house.

There's a lot of things to think about and to be honest, you really need to do your numbers before buying in Hawaii if you aren't going to be able to manage it yourself. The fees you'll incur will be steep and your returns and cashflow could probably be much higher in other markets. But, do the numbers, you might find some properties that really work out well for you! They're out there...

Good luck!

Simone Koga · Answer

Jumping into this newly revived thread.  Aloha!  I'm also in the process of buying a first VR property on Maui.  We've found a really great property manager for 20% but I'm also  contemplating doing my own management.  I've found a small number of companies that offer 'on-island contact' services for a flat monthly fee.  Some offer a few other add on services as well that I think could end up covering all my bases but still saving me a significant part of my profits.  We'll see if I'm able to cobble together a good team that will make it all work, and if not, I can just go with the management group I've found and still cash-flow with thinner margins.  I'd love to chat and bounce ideas about what everyone's trying and what has or has not worked.

Thanks!

Kate J. · Answer

I am also interested in Kona's condos. I wonder if anyone can share their breakdown of costs and profits. Does anyone has a cash flowing property in that area?

Donna Valdetero · Answer

Looking to purchase first vacation rental in or near kona and have a few questions.

What percentage of the year do you keep it rented?

Do you think people would be more interested in condo rather than home?

Do you think people are willing to drive an hour from airport to condo? (Near black sands?

TIA

Rich Bravo · Answer

Anything new on this post?

Steven Kimmey · Answer

So I just realized your initial posting was 2 years ago! So now I must ask if you had a similar experience as I described and how did things turn out?

Miki M. · Answer

@Mark Nolan, thanks for the welcome note - appreciate it. I am honored to be part of this smart community of investors. If you have some input with regards to the Vacation Rentals topic, please kindly share.

Thanks-Miki

Mark Nolan · Answer

@Miki Mi.

Welcome to the BP community. You will find a lot of good information here. Make sure to view the BP blogs under "Learn."

Owning & Operating Vacation Rentals in Hawaii : what a newbie should know?

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