All Forum Posts by: Isi Nau

Welcome @Jason Dixon! 

@John D. as @Jason Dixon mentioned, buying in a good school district is a plus.  The windward side is great area, right behind Mililani.  :)

We have a few clients who have purchased using a VA loan and have rented out the rooms. There are several factors to consider in making this work. Two big ones would be target market/tenants and location (since one effects the other). Also, number of rooms to purchase price.

Another factor is how long he'll be in Hawaii, which will effect when he has to sell the property. If not purchased right, he could end up selling for a loss. Or he could choose to rent out the home after he leaves Hawaii, but it seems like that doesn't usually work out well since military members want to purchase with a VA loan in their next location. So his exit strategy will need to be focused.

Overall it can be done, but with the right strategy and guidance.

@Nick Frostbutter

Correct. If you buy a LH property you will be responsible for paying the HOA fees as well as property tax. So you pay all expenses as if the property were fee simple, plus the lease rent. That's why LH properties are a little tricky as far finding one that the numbers work out right.

Correct, when the lease expires the landowner takes full control and the property is theirs.

You can convert a FS (fee simple) property to LH, but I am not too familiar with that process.  I believe it is pretty rare now days.  Most LH landowners are huge players like Kamehameha schools, DHHL, Campbell, etc. and they have had these LH properties for decades.

You determine the rent you'll charge, but in order to be competitive, you'll want to charge a market rate.  So see what others are charging. 

You also set your own expiration date.  Again, making it attractive to a buyer, you'll want more than 30 years.

Both of these (rate and years) are only important in getting the first person to buy the LH land.  After that, someone will always own the land and in turn be paying you your lease.  That is the one benefit of owning a LH property.  You will always have a tenant (owner) paying you rent.  It's not like a rental property where you have to find a new tenant every few years.

Overall, owning one LH property (that you converted to LH from FS) is tough to make money on. Let's say you buy a SFH (condos aren't feasible unless your first own a whole apartment building and convert it) for $500k and convert it to LH. You then sell it to someone for $400k (LH properties typically sell for less than FS properties). You still owe the bank $100k or about $500 a month. Your lease would have to be $500 a month to break even. That is pretty high since very few SFH are LH and those that are, are leased at $1 a year as Hawaiian Homelands.

Even if it were a condo, $500 a month is pretty high.  There are some LH condos that recently sold between $700k and $1mil, and their lease rents were only around $800 a month.

So, LH property investment really is a long term play and only makes sense in prime locations and with lots of LH properties. Even then, I think there are better ways to make money in REI. I don't personally know anyone in Hawaii who has really made money on a LH property from any angle, unless it was a short term play (flip, rent and flip, or live in flip). But I wouldn't be surprised if there are some who have.

@Zhenyu Han

Gotcha.  I am impressed by your hustle!

Maybe being by the airport might be tough for short term rentals, as far as being a desirable location for visitors.  Maybe there is a niche there though, like advertising to airline employees.

All the best!

@Zhenyu Han

Interesting situation.  Are you renting them on a short term basis (since you mentioned Airbnb)?  Are you renting out each room or the whole unit?

There are several components to dissecting this.  Short or long term, by the room or by the unit, and Craigslist or Airbnb/VRBO/Homeaway.

I think these components will naturally fit together as such (based on being in Honolulu):

Short term, by the unit, and Airbnb/VRBO/Homeaway - I believe short term rentals are best rented by the unit (not by the room) and are best marketed on VR-type websites.

Long term, by the room (or unit), and Craigslist - long term rentals could be by the unit or room and are best marketed on Craigslist.

In Hawaii, Craigslist is pretty comprehensive when it comes to long term rentals.  It should generate you enough leads to find good tenants.

If there is an issue with not finding enough tenants, it might be due to some of the above key components not lining up effectively (what you're offering is conflicting with the website you're using).

I am intrigued by your situation.  If I am understanding correctly (there's a good chance I might not be); you are renting three units and are now wanting to rent out each room in each unit.  Fascinating!  I have never heard of someone doing it on that level (multiple units).  I always enjoy a new puzzle to think about.  This is definitely one.

Hey @Nick Frostbutter

You've been busy!  Good job searching for various opportunities in the market.

Available resources on LH properties are definitely limited.  Like you mentioned, it is not a very common practice outside of Hawaii.

You have a pretty good idea of how it works.  LH is between renting and owning fee simple.  You own the property, but not forever.  In the meantime, you pay a monthly fee to the landowner.  There are some properties where you can purchase the landowner's interest in the land.  But that option is less common.

The renegotiation date is when the monthly lease will be adjusted (inevitably higher).  So if you pay the landowner $300 a month now, at the renegotiation date it may be set at $450 a month (those are just generic numbers to illustrate the concept).  As the renegotiation date approaches, some landowners will inform the occupants how much the lease will be bumped up to.  So if you're looking to buy a LH property and the renegotiation date is close, you can ask if they know what it will be adjusted to.

The expiration date (not renegotiation date) for the lease is a critical component to your strategy for the property.  If the expiration date is less than 30 years away (so 2047 or sooner) it will be challenging to get a loan for the purchase.  It will likely have to be cash.

The expiration date will also effect your exit strategy.  Once that date is less than 30 years away, the value of the property will begin to drop fairly significantly.  So if you are planning to sell it in 10 years, you'll want to make sure there are at least 40 years (or more to give your self a cushion for unforeseeable situations) left on the lease when you purchase.

I have seen some people invest in LH condos with less than 30 years left, but they would have to make enough on cash flow to recoup their investment plus more, since there will be no equity in the property when the lease expires.  The toughest part about this is finding the right property at the right price.  They are rare.  I haven't seen someone complete this strategy from start to finish yet, but I know a few who have gotten into it.

Here's an overly simplified and unverified example of how this strategy would work: purchase a LH condo in Waikiki and use it as a vacation rental.  Purchase price of $200k with 10 years left on the lease.  Positive cash flow is $3k a month.  In 10 years you would positive cash flow $360k (3*12*10).  Minus your initial $200k gives you a net of $160k.  Some people feel they can do much better than this example.  *This is NOT a strategy I would do or recommend to my clients.*  The risk is too high.

Overall, from an investment standpoint I would only consider LH properties with a significant number (50+) years left on the lease, and with multiple, verified exit strategies.

Hey @Justin Young

Form an investing stand point, this is a no brainer.  Stay where you are, save, work overtime and save more, then buy a home.

But there is a life-style aspect to your situation that is significant.  There is a lot of value in owning your own place.  Value that doesn't show up on a spreadsheet.  For example, how much is it worth to you to make the rules of the home, or how much is it worth to you to allow your kids freedom to be kids (run around and make noise) without getting scoldings, etc. etc.  Those are big pluses to homeownership.  That doesn't mean you go nuts, but just something you can call your own.

There will always be opportunities to make money and invest, but your kids will only be little once and only in your home for a short period of time.  Making money is easy.  Building a solid family, not so much.  Some things truly are priceless (cue the cheesy music).  I'm only in my 30s so I don't actually know yet if these statements are true, but some very wise people I know have told me they are.

Hopefully you guys can settle down in Mililani, the best neighborhood on Oahu.   :)

@David L. @Andrey Y.

Honolulu is tough as far as finding reliable data on rents.  As we know, all of Oahu is considered Honolulu.  Some reports only state "Honolulu", but at least this report breaks it down to Urban Honolulu, but I wonder what areas that encompasses?  I know where I would draw the boundaries, but who knows where this report does.

PTR ratios are often used for determining whether to buy or rent.  From that angle, it doesn't really matter which areas of Honolulu are included in the report.  It's going to be one of the highest in the country.  So wether it's 35 or 45, it's a tough pill to swallow.

If someone really wanted to find the PTR for a particular area, I'd recommend using Craigslist and Oahu RE.  Between the two, you should be able to find the numbers you need to run the ratios.  It's just a little cumbersome to do it for multiple areas.  But I'd imagine they'll all be fairly close to each other, and they'd all be among the 15 worst in the U.S.

Aloha @Nick Frostbutter  Welcome.

Your timeline sounds right, as far as waiting a year before getting into your next property as an owner occupant.

Sounds like a great plan.  As far as what's the best option, it'll depend on a few things.  If you end up renting your current unit as a vacation rental, you'll need to look at a number of details, as there is pretty wide variance across Waikiki properties.  For example which building, floor, view, association, etc.

A far as your next property, you'll want to consider how long you'll be in Hawaii, what type of house hack (multi units, multi rooms, etc.), exit strategies, neighborhood, etc.

Overall, you'll want to run various scenarios for each property, to see how the numbers play out cumulatively.

Feel free to message me any questions you may have.

Aloha

Aloha @Melissa U.

Just a few thoughts on your original post (plus a few assumptions):

-I think $92 a month for the vacancy rate is a little high.  If managed right, you won't see a vacancy for 1-3 year.  If you do, it'll be filled in 2 weeks.  When the market adjusts it may take 4 weeks to fill.

-If the property is a condo, you may not have any additional insurance costs, depending on the building's policy coverage.

-Removing those two doesn't make a big difference in your bottom line, but it does help.

-With $60k, you should be able to find a unit that will at least break even each month.

A few general thoughts:

-A 20 year timeline/commitment to the Hawaii market can work out well for you.  The key will be moving into bigger properties over the years, at key times, and into properties that meet specific criteria that fit your long-term strategic plan.  It is completely possible to start with a condo and end up with a small (<10 units) apartment building in 20 years, or even less.  It is possible to turn your $60k into close to $500k in that 20 years.

-Tax records are a good start at analyzing appreciation on Oahu, but are slightly lacking in accuracy and recency. But through MLS, it would be fairly easy to get exact appreciation rates for a specific building.

-I believe Oahu has 2 more years of steady price appreciation (about 10% cumulative).  Beyond that, it's unclear.  But historically, the market will likely adjust two years from now.  For reference, in the last recession, prices declined 10%-20% depending on the area and property type.  That's not annual, but cumulative.  A price decrease is a price decrease, but compared to most of the country, that is pretty amazing.

-Who wins, cash flow or appreciation?  I don't know.  But what I do know, very very well, is how to make money in Hawaii's market.  From a management and strategic perspective, turning $60k into $500k in Hawaii is not easy, but it's also not hard, with the right guidance.

Hey @Laine Furukawa  That's an interesting interpretation of the law that I have never heard before.  I read the article/post.  Thanks for sharing!  It's like a riddle.  I'll have to read it again and keep thinking about it.  It is definitely a unique angle.

Just a few thoughts:

-I believe the article is providing some pretty loose interpretations on some of the key terms; residential use, actual use, transient accommodation, and transient vacation unit.  But it is tough to put much of a spin on these terms, because in the HRS and associated Acts, definitions are already provided for these terms, leaving little room for interpretation. 

-Would this strategy require the property owner to sign a 30+ day lease with the tenant, but some how only have them stay for a shorter period of time (rhetorical question)?

-First sentence, fourth paragraph talks about a "30-day window".  I don't know everything, but I have never heard or read that before.  Maybe it is another creative interpretation.

-For this strategy, would a property owner be limited to only one tenant every 30 days, in order to allow for the rest period of 15 before and 15 after (rhetorical question)?

-First sentence last paragraph is interesting, "if you would like to profit once in awhile by renting out your personal residence...", makes me think the answer to my previous question is yes.  Which makes the strategy a whole lot less attractive.

I'll say it again, a very interesting spin on the law.  

Thanks again Laine.  I like real estate riddles.  :)