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Investing on Oahu

Real estate rentals on Oahu do not pencil-in as well as they often do on the Mainland for two major reasons: (1) Rental rates do not tend to parallel prices; e.g., a $400,000 home doesn’t usually rent for twice the rent of a $200,000 home. Therefore, higher cost areas like Oahu do not tend to produce the same rent relative to the cost of the property as lower cost areas. And (2), our island location and attendant shipping costs make it more expensive to repair and maintain a property on Oahu than for a similar property on the Mainland.

Property taxes on Oahu tend to be lower than property taxes in many areas of the Mainland; however, some of the lower tax benefit is lost by the 4% General Excise Tax (GET) that is due the state on gross rents in Hawaii. Although numerous states have sales taxes, very few tax gross rental receipts in addition to taxing net rental profit.

A good rental on Oahu is one that carries itself; i.e., breaks-even without any negative cash flow. These are difficult to find in fee simple. When they do exist, they are usually either (1) poor quality, relatively inexpensive homes located in low cost areas with tenants that are subsidized by the city or state. Or (2), they are small studio/one-bedroom high-rise units often located in run-down complexes that attract short-term, transient tenants. Both types of properties can be a source of tenant problems for the owners.

Better investment properties from a cash flow analysis are often leasehold properties, as rent does not increase merely because a property is owned in fee simple vice leasehold. However, the cost to purchase a property will be less owning in leasehold. The problem with owning in leasehold is that it will impact upon the owner when it becomes time for them to sell or when the lease rent renegotiates, as both lease rent and fee prices tend to increase over time. Refer to the article in this section titled “Leasehold Land.”

Hawaii law requires that someone who lives on the island where the property is located represent an absentee owner. It does not need to be a real estate agent; i.e., it can be a friend or relative providing the individual does not represent more than one owner.

So, why do non-residents purchase investment properties on Oahu? There are two major reasons. (1) Our island environment makes us land-short and over a period of time, prices tend to rise on Oahu. Looking at the last ten years where there was both a lengthy booming period and a lengthy declining period, there were five years when average prices improved and five years when they declined. However, the price improvement during the booming years tended to be greater than the price loss during the declining years. Historically, there has been a period of soaring appreciation once per decade since statehood except for the 1990’s; i.e., the 1960’s, 1970’s, 1980’s and 2000’s each saw a year or more when Oahu prices soared. Therefore, if an investor holds their Oahu property long enough, eventually they should encounter one of these booming periods. And (2), some absentee owners like to own here, as it enables them to be able to visit Oahu periodically to inspect their rental(s) and be able to write off some of the expenses of their trip. Some owners even stay in their investment(s) when they visit Oahu, refer to the article in this section titled “Using Your Investment.”

Using Your Investment