All Forum Posts by: Isi Nau

Hey @Robert Baltazar.  We are seeing a noticeable increase in new listings in specific buildings.  For example the Banyan has 18 listings, 12 came on the market since July 1.  The Sunset has 12 listings, 9 came on the market in the last 30 days.  I think this is the only wave of units we'll see hitting the market in large numbers.

I don't anticipate the law change leading to a noticeable effect on the market island-wide, or on specific buildings, that were heavy on STRs.  As for Waikiki overall, I don't think we'll see much impact on prices since a lot of buildings not zoned for STRs weren't allowing them to begin with.  So prices in those buildings will stay unchanged.  We may see price shifts in the buildings with a lot of illegal STRs, but even then the only price depreciation would be for the units without a NCU.  Those with a NCU will increase in value.

If we see a price decrease, I think it will be in a small sector of the market; Waikiki condos, in non-Resort zoned areas, without a NCU.

But not all such condos will be hitting the market.  For example we have clients that own these types of units.  These clients are financially secure and will try their luck at the 30-day rental market.  Even if the numbers end up being mediocre, they'll still hold onto the unit.  Looking at the number of sales with with large down payments or al cash purchases, I'd assume quite a few owners are in a similar financial position.

This would reduce the number of units hitting the market, and also spread them out over time which would reduce any significant downward pressure on prices.

If there are going to be opportunities to pick up discounted units, I think it will be within the next few months while owners are in a panic and trying to sell.

Hi @Luke Noll  There are quite a few areas in Hawaii that have operated (illegally) as resorts/STRs for decades and because there was no enforcement most people assumed they were legal, including the owners themselves..  Here is a map of the Resort zones at Turtle Bay.  Hope this helps.

@Kiley N. sorry for the late reply!  I don't have a list for Waikiki approved, but I have a map.  I'll add it here, but not sure how clear it will be.  I can email it to you if you need.  The large majority are South of Kuhio Ave and around Hilton Hawaiian Village.

loha!

Just a quick update.

Last week the lawyers for the Banyan, Sunset, and other AOAOs met with the DPP to discuss and request a variance for their buildings.  The DPP did not budge!

On Aug 1 and 2, lawsuits were filed by the Banyan and also the Hawaii Vacation Rental Association.  It is likely others will file as well.

If the law remains unchanged, the value of properties with NCUs will increase substantially.  Possibly by several hundred thousand dollars.

Hi @Joni Chin!

Thanks for the post.  The majority of Waikiki is Resort zoned.  Unfortunately some pockets, like where the Banyan is located, is actually zoned Apartment (X2).  These are the ones in Waikiki that will be hit.

Word on the street is that the lawyers for the Banyan (and possibly other buildings) will be meeting with the DPP very soon to seek a variance for the entire building.  If that falls through, I believe we'll see a wave of new listings.

You are correct that the Banyan and other buildings have openly advertised STRs in their building for decades.  That's the crazy part about it.  So many have openly advertised in spite of being illegal, and no one (or the DPP) ever did anything about it.  I guess it was seen as a necessary evil in meeting the visitor demand.

But with a 30% increase in STR listings in the last 18 months (state wide), it is pretty hard to ignore now.

Honolulu recently passed a bill that gives some pretty intimidating enforcement teeth to an existing law, which takes effect Aug. 1st.  The existing law states that STRs are only allowed in Resort zones or if the unit has a non-conforming certificate.  So what's changed?  A new law now allows enforcement officers to use online listings/ads as sufficient evidence to fine owners.

It is estimated that there are 8,000 illegal STRs on Oahu.  A drop in the bucket if evenly disbursed across the island, but they aren't.  For example, nearly 25% of all North Shore properties were illegally rented at one time or another.  No exact number is known now.  Then there is Waikiki.  Some buildings, like Waikiki Banyan, have half their units being illegally rented.  For those renting a room, no big deal.  For those renting an entire dwelling (which is the case for 93% of STRs), this will be a big financial hit.

Typically, a unit rented as a STR can generate 3.5 times as much income compared to it being rented as a long term rental. In other words, STR owners may see a 70% drop in rental income as they convert to long term renting. That's a big hit for owners to absorb and still hang on to the property.

Here's some interesting figures from July.

Banyan, new listings

Currently there are 12 active listings, 7 came on the market in the last 30 days (since the new law was passed). So about half came on the market once the paw passed.  Also, the Banyan typically sees 1-2 new listing a month.  July saw 7.

Waikiki, new listings

Currently there are 627 active listings (condos), 165 came on the market in the last 30 days. In previous months there are about 120 new listings per month. So that's a 30% increase in new listing for the month of July.

Banyan, prices

Most of the current listings are listed close to the median sale price for the building. So we aren't seeing too much desperation to sell, but that may change as/if they sit on the market for a while.

Waikiki, in escrow

In the last 30 days, 36 condos ($400k+) went into escrow (since the law was passed). Only a few of those units had a NCU. Apparently buyers are willing to go under contract even in light of the law. Typically there are about 40 condos that sell in Waikiki each month. So July is on track with previous months, which is good. We haven't seen a big drop in offers.

I don't see how this new law couldn't place downward pressure on prices in certain areas.  It's a little too early to tell.  I'm sure we'll see more shifting after Aug 1.

Major players in the STR property management sphere have begun shutting their doors or shifting their business model away from STRs. They have begun sending letters to their clients informing them of their operational changes.

What are you seeing on Oahu?

Any hints of this type of law coming to Maui or Kauai? Maui has an estimated 9,000 STR units, and only 200 are legal! Kauai is estimated to have 1 in 10 housing units being rented as STRs.

The financing side of things will be the biggest obstacle.  If you buy as an investor you'll need 20% down, but most will require 25%.  Which means your $20k could purchase a $100k property.  On Oahu that will limit you to condos in Waianae or storage closets in Waikiki.   ;)

The Waianae ones might get you $150 positive a month.  Not sure if that's what you're looking for, as far as asset class or cash flow.  If not, then doing a live in flip would be your best option.

Technically you could get into a place with 3% down, meaning you could purchase something for about $550k.  The hardest part would be qualifying for a $500k+ mortgage.

Hey @Sheldon Vic

Congrats on grad school!  No easy task with a young family.

Three things to consider; how long will you be in Hawaii, will you rent the property or sell it when you leave, will the refinance be a cash out refi?

1. How long will you be in Hawaii

I totally understand wanting to avoid rent.  You'll want to run the numbers in a buy vs rent scenario.  Often times the magic number seems to be 2.5-3+ years.  This is the point in which buying makes sense financially .  If you're only going to be here for a year or two, I would recommend continuing to rent.

This is assuming you sell the home when you leave Hawaii.  Local economists and experts are expecting little to no appreciation in the next few years.  Any significant appreciation will come from forced appreciation.  So if you sell when you leave, natural appreciation will likely not be sufficient to offset the closing costs, meaning you may end up losing money on the deal.

Above, you had mentioned worse case scenario being you break even.  I think worse case scenario is you lose money.  We are at a treacherous time in the market.  The market is fickle right now.  Neighborhood to neighborhood, property type to property type are all varying.  Some are up, some are down.  This is when people lose their shirt on short term holds.  You can still make money, but you or your team have to know what they are doing and be disciplined.  Anyone could make money the past eight years.  Now we'll start to see the market teaching some really tough lessons.

2. Will you rent or sell the property when you leave

Selling when you leave was addressed above, and will depend largely on how long you'll be in Hawaii.

If you are going to rent the home, you'll need to go into it (during the house hunting process) running those numbers.  One challenge will be finding a home you want to live in that will also make a good rental when you leave.  The majority of the time (in Hawaii) it's difficult to find a home that fits both bills.  Rentals that make financial sense often do not have the features an owner occupied home would have.  Similarly, homes attractive to owner occupants often do not make financial sense as a rental.  Live where you like, invest where you'll make money.

This is another reason why I might recommend not buying now.  Save the money and buy a rental in Oregon.

3. Will the refinance be a cash out refi

If you're here for a year, there won't be much equity to pull out.  Even after a few years, I wouldn't anticipate much equity.  At least not enough to offset the cost of a refi.  Not with where the market is going.  Also, if it's going to be a cash out refi, the numbers might not work from a cash flow stand point.  If you pull out the max amount, your higher mortgage payment will likely push you into negative cash flow.

If you are set on buying a property in Hawaii (which is a good idea if you think you might come back) then I would buy something strictly as an investment, and have your family keep renting until you leave.

Your realtor has their work cut out for them in running these scenarios and analyzing potential properties that fit your short and long term needs. If you end up buying a rental, do not buy a single family home! Realtors love having their clients invest in SFH. Not sure why, except a higher purchase price means a higher commission. SFH in Hawaii are a tough product for long term rentals.

Hey @Account Closed

To your main question, based solely on the numbers provided is this a positive investment? Yes. Your CoC would be awesome and your cap rate would be pretty good for Hawaii (typical for Waipahu). But I don't think the CoC would be 5000%. I came up with something closer to 38%, but I may have missed something.

I love them Waipahu castles!  A few gems come up every once in a while with some good numbers.  Just a few thoughts on the loan and rental income:

The numbers you provided would put you in the jumbo loan range.  An $837k mortgage is a huge loan for an owner occupied property.  I'm assuming you'd need the rental income to help you qualify for the loan?  Most people would!  Hahaha. Have you been prequalified already?

One issue you may run into is not being allowed to use the rental income to help qualify for the loan.  Owner occupant jumbo loans often don't allow rental income to be counted towards qualifying.  Also, since the home is nonconforming (none of the units are legal) banks won't let you use the rental income to qualify for the loan.  You may be able to get a portfolio loan to allow the rental income, but then you may run into the issue of needing a larger down payment.

I think the projected cash flow might be a little high.  I'm guessing the home has three units (based on the number of bedrooms, and these types of homes in Waipahu).  I'd estimate the annual gross rent at $72,000.  I'd estimate annual expenses (including debt service) at $65,000.  Leaving $7,000 annual cash flow.

I don't know if I'd hold it for 20 years, unless you do a cash out refi down the road and use the funds to purchase another property.  The return on investment starts to decline over the years, so you'll want to trade up or refi.  Unless you are planning on retiring in 20 years, then a paid off asset is probably desirable.

Overall I think you're looking at a good area and property type.  Waipahu produces some winners.

Hi @Joseph Getgen

If it's a single family home, I'd sell it. SFH in Hawaii aren't very good long term investments, unless they are nonconforming and have multiple units. I am certain you could take the equity and have significantly higher returns on a different type of property (condo, duplex, multifamily, etc.). If you do move your money into something else, make sure your realtor knows what they're doing when it comes to investing.

I'd estimate that only 10% of realtors in Hawaii own an investment property.  Of that 10% only a handful invest on purpose.  In other words they know what they are doing and have a plan.  But yet many realtors give advice to their clients about investing.  We meet too money people who have under performing properties and say they're realtor told them it was a good investment.

You are correct about the 2 out of 5 years.  As long as the gain is less than $500k.  It should be tax free, but consult a tax professional.