All Forum Posts by: Paul Winchell

Aloha @Aaron Wisch,

Please check with your realtor to make sure of the specifics for whatever property you choose. But in general, getting permits for HOSTED short term rentals is much easier than unhosted. I know some people here who are doing it with no problem. Just be careful of HOA's -- many properties in HOA's have more strict rules banning all forms of vacation rentals. HOA's tend to be less of an issue on Hilo side than Kona, but make sure you check before making any offers.

Also be warned that my understanding is that hosted rental truly means hosted -- you must be actively living at the residence.  Even if you go on vacation for a week to the mainland -- you cannot rent during that time.

Hilo side is a good place to start.  Much more reasonable entry prices.  Less tourist demand than Kona side, but significantly less competition.  Make sure you get a good agent if you don't know the area well.  Hilo area is very neighborhood dependent.  Big differences between good neighborhoods and bad.

Best of luck!  Feel free to shoot me a message next time you're on-island.

--Paul

Aloha @Mihail Iotov,

As @Christian Cramer and you have noted, each county has it's own rules.  Here on the Big Island, STVR's are possible only if the property is in a Resort zoned area (most condos fit this criteria, but only few houses) OR if the house was in use as an STVR before the law changed in 2018 and the owners applied for both a Non-conforming Use Certificate (to get an exemption to the zoning laws) AND a STVR permit (required regardless of zoning, but easy to get).  The NUC and STVR permits are renewed every year and are transferable with sale so your best option in Hawaii county is to look for a house with the permits in place.  Those properties tend to sell at a bit of a premium, but with COVID bringing tourism on the island to record low levels, I'm noticing that more of these properties are starting to hit the market as people without adequate reserves are feeling the pinch. 

As a side note, hosted STVRs are still allowed regardless of zoning.  In other words, if you live on the property, then you can rent out additional rooms, an ohana, etc. without the NUC (still requires the STVR permit though).

Hope this helps!

--Paul

@Micah Flamm my knowledge of the entire process is limited, so please make sure you speak with a professional before acting on anything we discuss here.  I am not an agent, lawyer, property manager, or any other sort of licensed professional and my comments are just based on my own research, which is incomplete on this subject since I have not attempted to do what you are doing.  I have some general knowledge of the new STVR rules just because I am involved in the real estate community here and of tiny houses because I looked into the idea of developing a tiny home community/park (for long term rental). But I am NOT an expert.

That said, what you are dealing with are several permitting processes run by different branches of the county and state.  The non-conforming use certificate is a zoning issue, which is handled by the planning department.  The STVR permit is primarily a tax document, but also ties into the planning and building departments as permits for the buildings are required (yet another set of permits to deal with).  The STVR permit application requires drawings showing the property, the buildings, and which areas are used for rentals, parking, access, etc.  There are ways to change those drawings and the details of your STVR permit, but I honestly don't know what restrictions there are as far as those changes go.  And again, you run into the grey-area problem of tiny homes since they cannot be permitted by the building department.  So as far as the county is concerned, it would be like renting out an RV on your land and I honestly don't know how they would handle that.

And by the way each of these permits also have yearly fees attached (I think 250 for the NUC and another 500 for the STVR permit) so be sure to add those into your calculations, along with Hawaii's Transient Accommodation Tax of 10.25% -- required for all rentals of less than 180 days, AND the general excise tax of 4.712%.

You can also get around a lot of these permitting requirements by doing hosted rentals -- where you make the property your primary residence and then offer rentals of other areas of the property while you live there (this is also strict though -- even going on vacation and renting a bedroom while you're gone can put you on the wrong side of the STVR laws). So if you would consider just picking up and relocating, then you may have some additional options for trying to make your plan work.

If you want to dive into the actual text of the laws, here's a link to them on the county website.

Best of luck.

--Paul

@Micah Flamm -- that is a pretty neat structure on Zillow.  Note that nowhere in the description does it mention a STVR license.  That to me is a red flag.  It may even be that the reason they are selling to begin with is that they were caught renting it illegally.  Having a STVR license is a major selling feature, and you can safely bet that if someone is not advertising it with a property, that they didn't get one.  When the new rules regarding STVRs on the island went into effect, there was a 180 day deadline to apply for the non-conforming use certificate for established STVRs and after that only properties that successfully received that certificate OR were in resort zoned areas, were allowed to continue operating their rentals.  A large number of properties either did not apply, or were not approved for the NUC and thus their rentals became illegal.  And as mentioned in previous posts, there has been increased effort to crack down on illegally operated STVRs over the past 6 months or so.  

I cannot confirm but I have heard news reports recently that Airbnb is now assisting the county and checking the zoning of listings in Hawaii and removing those that are operating illegally.

In general, buying a lot with a house already built will not help you get around the permitting issues. The exception to that is if you buy a house that has the STVR permit already -- either because it is resort zoned or successfully applied for a non-conforming use certificate. They are not uncommon to find. You can search for these by filtering MLS listings with the term STVR in the description. A 30 second search tuned up this property in Volcano that seems to meet your criteria.  Just remember that you will be paying a premium for that certificate vs. a house without it.

Tourism has really dried up on the islands right now thanks to COVID-19 and the state's mandatory 14 day quarantine, so now may in fact be a good time to find STVR properties for sale by owners who did not maintain enough reserves to pay their bills without regular renters.  But best to have reserves yourself because it is likely to be a while before tourism recovers fully here.

Best of luck,

--Paul

Right again @Ryan D. There are ways to permit multiple buildings on Ag lots and the most common is by permitting them as an additional farm dwelling.  You have to file paperwork (a farm plan showing a certain amount of agricultural activity based on the lot size and dwellings requested, plus a permit request proving that you reside on the farm and that the additional dwelling is used for either immediate family or farm workers) but once the permit is approved and the second house built, they historically do very little follow-up enforcement.

But for @Micah Flamm's plan for tiny houses -- it doesn't matter.  The county doesn't recognize them as dwellings anyways and they cannot be permitted.  There is a minimum square footage to build on foundations that is well above what is generally considered a "tiny house".  On wheels they are treated as trailers and subject to DMV regulation, not building code.  This is where the law gets a little fuzzy in terms of using them as dwellings, whether for you or for guests.

But the biggest problem will still be the new STVR restrictions.

--Paul

I just stumbled across this and your previous conversations about your scalable tiny house communities. 

I looked a little bit into doing something like this where I live on the Big Island of Hawaii.  Unfortunately at this point there are far too many hurdles to make it viable here. (It is nearly impossible to get approval for an RV park or mobile home park on the islands.  While they are permissible by zoning and building code, there has been a grand total of ZERO granted development permits).  It is frustrating, as it could provide another source of affordable housing, something that is in high demand and VERY short supply here in Hawaii.  There is some hope on the horizon, as at least a few people in prominent positions are starting to see the options.  The argument has always been one of aesthetics -- mobile home parks have an unfortunate reputation for being eyesores; and in a state that relies on it's natural beauty to fuel the number one industry of tourism, there is always much caution towards anything that even hints that it may detract from that beauty.

There are a few "unofficial" tiny house communities on the island.  Friends who share a lot and have built or moved their tiny houses to form small communities.  Un-permitted and illegal and typically off-grid.  Interesting and beautiful but unhelpful for those of us who want to do it legally and profitably as well.

And of course there's the issues with the tiny houses themselves.  Are they houses?  RVs?  Mobile homes? They don't perfectly fit into any of these categories and therefor are problematic for the people who have to deal with them.  How to finance them?  Insure them?  Inspect and permit them?  Tax them?

I don't think this is just a fad.  It is a trend that is gaining momentum to win over a respectable (and profitable) number of would-be homeowners/renters.  Is it going to replace houses or apartments? Of course not.  But I think it has developed enough momentum and staying power to provide a profitable market share for years to come.  They make wonderful transitional housing.  Young people entering the workforce, transplants moving to new areas, STVRs, millennials and gen-Zers who value mobility and experiences more than stability and accumulation, empty nest-ers and retirees looking to downsize.  And of course the quirky eccentrics who started the trend who love them for all the things they represent.

And I think that as a trend, businesses and governments will slowly get a better understanding of them and the opportunities they bring and start to streamline options for them.  There are already a banks that offer tiny house specific loans, insurers who have tiny house specific policies, etc.  As those markets mature and grow more profitable, we'll see more and more players.

I'm sorry that I can offer no real insight into the main query of your post -- how to get funding.  As with any development project, proof of concept and history of success are essential.  With so few successful communities to compare, and with most of them so new, not to mention all the issues discussed above, investors will undoubtedly see the concept as inherently risky.  Have you spoken with any of the developers behind the other tiny house communities you mentioned?  How did they secure funding?

In any event I wish you nothing but success and I will be following your progress with great interest.

--Paul

Aloha Micah,

I live on the big island and at one point looked into doing something like this so let me share some findings with you.

First, @Ryan D. is correct about both the land and STVR rules.  

While it is still possible to find land in the 15-30k range, there are only a few areas on the island that this is possible.  In the Puna area there are many jungle lots that can be had in that range.  For the sake of this discussion I will lump Volcano in with Puna as it will have many of the same problems, but is generally more visitor-friendly.  And in Ocean view near the southern tip of the island there are also many lots to be had with or without utility hookups.  They sit on a giant lava field and are a long ways from everywhere else, which is why the land is so cheap.  

You will generally have a harder time drawing visitors to these areas, as they are distant from the more developed parts of the island and the micro-climates in these areas are less desirable (either dense rain forest or windy and barren lava fields).

And as mentioned, those areas have a bit of a reputation for being less safe, particularly for visitors (higher levels of drug use, theft, intolerance of tourists, etc.)  There are safe neighborhoods in these areas though, so if you decide to move forward be sure to do your research.  A bit like investing in a place like Detroit -- make sure you talk to someone with inside knowledge to know which neighborhoods are safe, and which are not.

The link that he sent is a good overview on STVR permitting in Hawaii, but in short, on the big island the only way to legally run a STVR is to purchase a house that has been grandfathered in already with the non-conforming use permit or to buy land that is resort zoned (generally much more expensive and harder to find).  There are quite a few people who are still running unpermitted STVRs illegally on the island, but the county and state have been cracking down hard and you can expect to pay some hefty fines if caught. 

If after all this you still want to try your luck, then you should also consider that building materials and labor costs are much higher here than on the mainland.  And in order to be insurable (an absolute must if you are going to rent it out), the tiny house would need to be built on a foundation under county building codes (which are NOT friendly to tiny houses) or to be certified as an RV by the RVIA or NOAH.  Either way, you are going to be hard pressed to get a unit nice enough to draw in visitors for the price points you described above.

I hate to be a buzzkill but I want you to know just what you're getting into before spending your hard-earned money.

Best of luck!

--Paul

Aloha @David Gotsill,

Thank you for your reply.  Unfortunately it seems to be a more complicated scenario than I was hoping for and is taking a good bit of effort to sort out.  At least I am learning a good deal in the process about everything from trust law to the different ways that LLCs can be taxed.

In order to meet the terms of the 1031 exchange, the new property(s) will be at least initially be held my my father's trust.  The trust is the legal owner of the house in Hawaii and so must be the name on the title of the new purchases.

The suggestion of the trust lawyers is option (2) -- that after the purchases are complete, we transfer the properties into LLC-A that is in turn owned by the trust. This is just to provide a legal buffer between the rental properties and the rest of the assets held in the trust. That LLC serves no other purpose than to hold the properties. It still offers the same protection of the trust with an additional layer separating just the rental properties. Then the second LLC-B that they want to create for us is outside of the trust and serves as a manager for the investments. This LLC is owned by me, and allows me the ability to make management decisions and handle the operations of the rental business, as well as to take my share of the profits.

I will have ownership interest in the properties, but as I am the sole beneficiary of the trust, there is actually tax incentive to keep my name off the titles. The trick was to allow me to maximize my ability to manage the properties, up to and including sales and purchases, with the minimum amount of effort required by my father. This is fine for me in terms of profits as any equity gained from appreciation and mortgage pay-down when I sell I plan to reinvest in additional rentals. Cash-flow on the other hand, I will recieve a portion. Whether we do that as a wage by paying me as a manager or whether we still use an LLC in which I am an owner to filter the income through and allow me to take it as profit is still part of this overall question.

I think that we have found a solution to the first problem by adding me as a managing trustee for the trust.  I should now have the ability to sign documents in the trust's name.

So now the options as I see them are 4:

1) We set up 2 LLCs -- one within the trust to hold and one outside to manage.

2) We set up just one LLC inside the trust to hold and manage the property. That LLC pays me a wage to manage the assets.

3) We set up just one LLC outside the trust as a management company. I own that company and treat it for tax purposes as a sole-proprietorship.

4) We use no LLCs.  The trust saves those costs and relies on landlord insurance and umbrella policies to limit liabilities.  The trust pays me directly.

Of course, I'm open to other ideas as well.  And again, I am speaking with attorneys on this matter already to make sure that everything is done properly, but there a few ways to go that are all valid solutions and I'm just trying to get as much insight as I can before making a decision.  This is basically my first deal as a real estate investor, and I hope to turn this into a profitable career so I want as much as possible to start on the right track.

Thanks again for your time!

--Paul Winchell

My father and I are in the process of selling a house in Hawaii and using the proceeds to invest in one or more rental properties (likely in Michigan).  The house is currently owned entirely by my father's trust, and because it will be part of a 1031 exchange, that ownership will carry through.

I have a partial stake in the investment through an agreement between us, but to keep it's tax protection within the trust, on paper it has remained entirely owned by the trust.

While this is technically an investment property, my dad has used it part time as a second home and part time as a rental.  It never made any real money from an investment perspective, just helped offset some of the costs and qualified it for 1031 (this property is already subject to another 1031 from the sale of a condo in Hawaii).  

May dad has given me full control of handling all of the investment going forward and would just like to act as a silent partner, receiving some minimal returns on his portion of the investment but does not want to worry about the day to day operations or even purchasing or selling decisions.

So my question is -- what are some good options to structure the partnership that allows us to meet the terms of the 1031 exchange by keeping the purchased properties in the name of my dad's trust, allows me administrative control over activities regarding the property with minimal effort from my dad in terms of paperwork, etc. and that allows a good way to disperse and reinvest shares of the profits. Should I create an LLC as a "management" company to handle the operations. Should the rentals themselves be put in an LLC (as a holding for asset protection separate from or including the management side)? I've had one lawyer suggest two LLCs -- one just to hold the properties for asset protection and a second to handle operations. A CPA suggested just one for management with the property held by the trust. Another suggested that we immediately move the property to an LLC partnership and use that to both hold and manage the properties.

I'm now stuck in analysis paralysis and can't decide what to do.  So I'm hoping the community can help offer some insight if anyone has managed a similar situation or has some expertise.

Of course the usual caveats apply -- I understand that this is just a forum and no-one is offering legal advice.  I'm just trying to get some ideas so that when I talk to the CPA's and lawyers, I have a better sense of direction and the right set of questions to ask.

Many thanks in advance for everyone's time and knowledge!  

--Paul Winchell

@Joel Bongco Thanks for the insights. I have not been actively looking for off-market houses in Hawaii because that hasn't been my planned strategy to this point. From what I have seen of MLS listings (again, not currently digging for non-MLS options), the lower priced homes move fast and with little to no room to make a profit. However to my untrained eye, some of the mid-priced REOs and fixer homes (houses listed at $500-$700k) look like they could be fixed up for 100k-200k and sold immediately in the $1mil. range. But taking on such a project is both outside of my current budget and not where I have been focusing my knowledge/research.

And as you mention, I am also seeing the market start to react to COVID and I would be concerned about taking on any kind of flip right now.  

The only serious consideration I have given to doing a flip in Hawaii as of now is by treating it as a live-in flip.  But I'm always open to new ideas and maybe you can show me an angle that makes sense to me.

Looking forward to hearing your thoughts on Wednesday.