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Using Your Investment

Periodically, we’re asked about the feasibility of buying properties on Oahu that owners can use themselves when they visit. Such properties fall into one of four categories: (1) properties kept vacant; (2) properties rented on a long-term or month-to-month basis; (3) vacation rentals; and (4), hotel pool properties. Each of these has advantages as well as disadvantages.

There are hundreds of absentee owners on our newsletter mailing list that alternate between living on the Mainland and in Hawaii, often spending about six months a year in each of their two homes. There are many decided advantages to vacant properties. They are always available for immediate use, appreciation is enhanced by the lack of wear and tear by tenants, and with no tenants, the owner can install quality furniture and furnishings. Plus, a vacant property usually qualifies as a second home thereby enabling a better mortgage rate. Mary Lou and I own a vacant, one-bedroom high-rise unit in Waikiki with a great ocean view we use as a personal hideaway. We keep food, beverages, several sets of clothing, and toilet articles there, so we can use it on a moment’s notice. There are a number of excellent restaurants within walking distance of our unit. Usually, we only remain overnight; however, some part-time owner-occupants stay in the building for lengthy periods of time, alternating between living in Waikiki and in their homes on the Mainland. There is, of course, an obvious downside to keeping a unit vacant, as without any income flow from tenants, the cost of ownership will be far greater.

The second category, fixed rentals, applies to properties with either long-term or month-to-month tenants. Fixed rentals usually provide relatively stable income flow with tenants that are prequalified and subject to approval by the owners. The major disadvantage of a fixed rental is the property may not be available when the owner wants to use it. A long-term tenant’s lease has priority over the use of the property by the owner; i.e., a long-term tenant is entitled to remain in the property until the expiration of their lease even if it conflicts with the owner’s plans. This is not the case with a month-to-month tenant that can be given notice to vacate at any time. Better tenants, though, will usually insist upon a long-term lease vice renting on a month-to-month basis. If the property is a fixed rental, the owner either has to schedule their use of the property around a long-term tenant; i.e., plan their trips so as to be here when their tenant vacates. Or, the owner has to have a month-to-month tenant. Each type of tenancy creates potential inconvenience and/or lost rent to the owner. An additional problem may be created if the fixed rental is furnished. A furnished rental provides convenience to the owner when they use the property; however, if the furnished rental is larger than a one-bedroom unit, it may be difficult to rent to good tenants for any extended period of time. We have a number of property management accounts where the owners routinely schedule Hawaii vacations around their tenants. Most of the properties are unfurnished. The owners usually rent or use locally stored furniture and furnishings; however, some of them simply “camp out” in their homes.

Category (3), vacation rentals, are properties that are used as an alternative to a hotel. They usually tend to be houses near a good beach or high-rise units in Waikiki. Vacation rentals are fully furnished with extensive housekeeping required following each rental. The minimum rental period is often 30 days to avoid the need for the owner to obtain a special use permit and pay hotel (transient accommodation) taxes. A vacation rental would appear to be ideal for an owner who wants to use their property when they visit. Some recipients of our newsletter stay in their vacation rentals every year while maintaining the properties essentially fully occupied at relatively high rents the remainder of the time. If you are able to do this, the investment numbers may be very attractive. However, it is definitely not the norm. Much of the vacation rental business is repeat business from past clients. Therefore, it often takes a number of years for a non-beachfront property to be rented on a fairly consistent basis. Plus, peak rental periods often coincide with when an owner wants to use the property. Unfortunately, there is not a good centralized system on Oahu for handling requests for vacation rentals. Nor, is there a property management company with a sizable inventory of such properties. Vacation rentals are management intense. Most of the larger property management companies have decided (like we did) that it’s not time and cost effective to handle them. Companies with relatively small inventories, therefore, tend to handle vacation rentals.

Category (4), hotel pool properties, are high-rise units that are rented as if they were hotel rooms. Almost all of them are located in Waikiki. Hotel pool properties have to be furnished and maintained to standards established by the company that manages the hotel pool. The initial outfitting (and periodic replacement) costs, though, are usually quite reasonable in view of bulk purchases. Most of the properties provide a daily housekeeping service that becomes optional when the owner uses the property. The advantage of a hotel pool property compared to a vacation rental is the occupancy rates are likely to be considerably higher. Many of the buildings have established rental arrangements with tour companies. The major player on Oahu for managing hotel pool properties is Aston. Their system (for at least some of their buildings) is to pool and split the rental proceeds; i.e., the rental receipts are divided between those units that were available for rent regardless if they were actually rented. An owner wanting to use their property is required to provide advance notice (typically 90 days) and can remain in their unit as long as they want.

Summary
Vacant properties are in a separate category, as they are not really an investment property although the value of such homes is certainly likely to increase with time. In view of the time required to establish repeat business, I do not recommend purchasing a property with the intent of converting it into a vacation rental unless it is a home where there would be immediate high demand for it like a beachfront house. Hotel pool properties can be a relatively inexpensive method of getting involved in investment real estate on Oahu. If you plan to use the property extensively yourself; i.e., if that is the purpose behind the purchase, it would behoove you to calculate the cost to you of owning versus renting on your trips. The most common form of investment is fixed rentals. Their problem is that it is very difficult to keep them consistently rented with good tenants that will agree to rent for periods of less than a year. Therefore, you’ll probably need to adjust your own vacations around your tenants’ leases.

Investing on Oahu