Honolulu Condo - Buy now or wait?

Question

Hi everyone! I'm currently renting an apartment in Downtown Honolulu and have been looking to purchase a 2-3 BR condo in the Kaka'ako / Ala Moana / Waikiki area, somewhere in the range of $450k-600k (I'm already pre-approved up to $700k at ~2.75%). My plan is to house-hack it for a couple years then rent it out when I leave Oahu, holding onto it for at least 5 years (but potentially longer) before selling. I already made an offer on a 2BR in Kaka'ako last week, and the sellers dropped the price significantly in their counter-offer, but I ultimately walked away from the deal after they were unwilling to drop further.

I have heard that the Hawaii RE market is resilient, but I have to imagine that the economic uncertainty and impending recession due to Covid-19 will drive prices down to some extent in the short-term. How long will it take the new economic reality to be reflected in the Honolulu RE market? Any prediction on how much prices may drop? I am eager to buy, but also patient and willing to wait if doing so will mean lower prices. I'm reluctant to "grab a falling knife," but also know that perfectly timing any market is impossible.

My plan right now is to make low-ball (but not insanely low) offers on properties currently listed for sale and see who's panicking and eager to sell. I know it may take a while but I'm not in any rush because I think time is on my side (and my lease on my current apartment doesn't end until May 31 anyway). Any thoughts on that strategy? How low (relative to pre-covid market value) is low enough to reasonably protect myself against a short-term downturn in rents and resale values?

I'd love to hear any and all thoughts and advice! I'm brand new to real estate so I appreciate any help I can get. Thank you!

Isi Nau · Answer

Hey @Jimmy Joyce,

Strategies - house hacking and live in flips are a great way to get into the market here.

Timing - I'd recommend watching how many properties go into escrow each day.  A lot of the properties moving in the market right now were already in play prior to COVID-19 (very few new transactions happening right now), so watching the number of sales won't be very helpful in the short term.  Today there were nearly 3000 properties on the market on Oahu, only 11 went into escrow.  I believe this number will begin to increase (i.e. market is picking up again) about 30 days after the stay a home orders are lifted.

Prices - In the last recession most prices dropped 10-20% on Oahu, depending on the neighborhood and property type. I think it's too early to know now what prices will do in this environment. If the stay at home order is lifted within the next 1-3 months, I believe the economy could pick back up pretty quickly. Depending on how fast we can get tourists back here.

Protection - the three best ways to protect yourself here are time, remodels, and income.  First, you'll need to hold a property for at least 3 years in a good market and 7 years in a down market in order for the investment to make sense.  Second, purchasing a run down property that can be fixed up is another excellent way to protect yourself.  Lastly, purchasing a property that produces income.  It sounds like you have the last item incorporated in your plan.  If your time is limited to 3-5 years, and in light of the uncertain economic future, I would definitely recommend purchasing a unit that needs some work.  The 3-5 year timeline is a little tight, but buying a fixer upper will help to hedge against that.

Summary - Look at your target market every day.  Deals will come up.  When you find one, buy it.  If you follow the three strategies above, your chances of losing money are pretty low (outside of any major unforeseens).

Christian Cramer · Answer

I only do deals on Maui but you might find this historical oahu home price chart helpful

https://www.hicentral.com/oahu-historical-data.php

Nobody knows what will happen to prices, if anything does happen it will likely be 3-6+ months from now, sooner for people that bought vacation rentals with thin margins in the past few months. If you think the economic fallout will be similar to 2008, prices dropped 10% then. Personally, I had a off market multi unit negotiated here in Maui but pulled out, going to wait a few months.

Account Closed · Answer

@Jimmy Joyce if the deal makes sense go for it. Honolulu days on market may be a little higher right now but if you’re lowballing offers and never get a deal inked you could end up on the sideline when the market bounces back... in the grand scheme of things 20-30k off a 700k property isn’t much. If you’re shooting offers out lower than that as a starting point then you may want to talk to a different realtor. Someone who is more pragmatic.

Once the virus goes away tourism will come back. The tax benefits of owning a property may outweigh lowballing something to say you got 20-40k off the asking price.

also, Funding could dry up In The coming months or it couldn’t. If we hit a recession like in 08 funding requirements changed drastically and you could see something like that. I’m not saying it will happen but it could. 2.75 is a great rate. I would pull the trigger on something with a rate like that

I closed on a triplex today at 3.25 and thought about waiting to get a better rate but the numbers made sense on the house so I went with it.

Be cognizant of all of the residual fees that come along with condo ownership as well.

I lived on Oahu for some time and condo fees and property taxes climb over time. Special assessments suck too.

Also if you know you’re going to sell it in a few years you want to factor in all of the costs to sell it. A 5 percent listing fee which is standard there can be hefty.

Christian Cramer · Answer

I didn't say they wouldn't drop, I'm just not one to speculate. Prices will likely drop, and if they do it will be 3-6+ from now, maybe even longer than 1-2 years, since the foreclosure process in Hawaii is probably the longest in the usa. In this situation I don't see any cons to just waiting a few months.

If im going to speculate, I think it's going to really depend on the property/price segment. Vacation rentals will see drops, as will luxury single family/luxury condo/second homes. As for "affordable" single family/single family w ohana under $750k FHA limits, not too sure. I know if they do dip, i'll be buying.

Lane Kawaoka · Answer

@Jimmy Joyce assuming you have 100k downpayment ready to go...

I would recommend you live where you want (Hawaii or course & rent) and invest where the numbers make sense. I started buying turnkey rentals in the mainland for $100k that rent for 1000 a month. You could buy 3-4 of these properties that could create $250-350 of cashflow per property. Not including appreciation, mortgage paydown etc.

Rob King · Answer

@Isi Nau well said.

Rob King · Answer

@Jimmy Joyce great question and well articulated.   I have house hacked three condos in Makiki in the past 5 years and it's been great for me.  Honolulu has a very steep entry fee but theres a reason everyone wants to live here and I've never had a problem with vacancies.

I'm not a realtor but I've learned some lessons along the way, if you want to talk story please don't hesitate to reach out.

Rob

James Joyce · Answer

Hi everyone,

Thanks for all of your input! I just wanted to circle back to see if anyone has additional thoughts in light of developments over the past month. Also, the sellers of the 2BR Honolulu condo I'm interested in came back to me and knocked another $15k off the price, bringing the price to about 96% of recent sale comps. I already have a friend lined up to rent the second bedroom, which would cover almost half of total monthly expenses, so I'm optimistic about the house-hack for the next two years. However, I'm still planning on moving back to the mainland in a couple years, and it's really hard to gauge whole-unit rental comps (they're all over the place). As of now, it looks like I'd be anywhere from negative $500 per month to cash-flow neutral. I'm still pre-qualified for a 2.75% mortgage with a small lender credit.

Given all of that info, should I pull the trigger on this place? Or is the Honolulu RE market about to fall further in the coming months? Also, since I will likely be cash-flow negative (at least initially) when I start renting out the whole unit in a couple years, is this a wise investment? I expect to have the income to pay a few hundred dollars per month out of pocket and would be willing to do so if it's a good move over the long term. I know appreciation on Oahu is historically strong, but I'm wondering if it's wise to bet on that appreciation while bleeding some cash in the short term.

Thanks for all of the help! I'm new to real estate and really appreciate any guidance I can get.

Scott S. · Answer

I certainly wouldn't be buying now while prices are still high.  For those of you too young to remember the impact 9/11 had on air travel and tourism - it took 3 years for it too reach pre- 9/11 air travel passenger levels once again.  That event only stopped flights for 2 days.  I took one of the first flights out once planes were allowed to fly again.  I felt completely safe but there were almost no people flying during this time.  Now, we have an invisible enemy and no way would I fly today.  And you can bet there will be many that feel the same way.

I flew to Maui 8 months after 9/11 and tourism numbers were still very low and hotels were significantly affected.

Just like after the 9/11 event and the 2008-09 financial crisis, people are going to have immediate negative economic impacts and safety concerns.  Many people will not want to board a plane and fly into different destinations until a vaccine or some sort of therapeutic is proven effective.  And that could be at least a year according to many experts.

James Joyce · Answer

@Christian Cramer Thanks for that info! Why do you think prices wouldn’t drop for 3-6 months? It’s not exactly a secret that there’s a recession coming, so shouldn’t the market begin to reflect that expectation soon?

Honolulu Condo - Buy now or wait?

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