NOOB IN HAWAII: Equity vs Cashflow??

Question

I'm in the Army and we've always been renters, so we decided that our next move would mark the beginning of our goal to collect properties to live in prior to renting out. Well, leave it to Uncle Sam to start our real estate journey in the ever affordable State of Hawaii! I'm well aware that cash flow in Hawaii is relatively negligible to equity so I wasn't too jaded when, after analyzing over 25 properties with the Rental Property calculator tool, I only found 2 that cash flowed within 5 years. I've done enough research to know that although Cashflow Is King, equity builds wealth and can be worth an acceptable deficit in cashflow.

Here are my questions:

1) What are some rules of thumb to follow when balancing the equity/cashflow dichotomy?

2) What is the difference between projecting PV increases, and speculation?

3) What is a minimum acceptable % of equity gain within a 3 year period in Hawaii?

Here are my questions:

1) What are some rules of thumb to follow when balancing the equity/cashflow dichotomy?

2) What is the difference between projecting PV increases, and speculation?

3) What is a minimum acceptable % of equity gain within a 3 year period in Hawaii?

Clifton Monte · Answer

I appreciate everybody's feedback - @Jaron Walling this is definitely like being thrust into a no man's land RPG facing level 5 opponents with no XP and no perks!

@Isi Nau live in flip, eh? Sounds like a home we force appreciation out of by the time we move out - I can dig it!  Btw, PV = Property Value, but you still answered my question!

@Joshua McMillion and @David Pere thanks for the double referral!  I'll let you know if my realtor starts slacking in any way!

Joshua McMillion · Answer

@Clifton Monte

A great person to reach out to for the Hawaii market is @David Pere. He is, at least from my perspective, a subject matter expert for this market.

Sincerely,

Josh

Isi Nau · Answer

Aloha @Clifton Monte

For most of our VA clients (active duty), we recommend a live in flip or house hack.  Cash flowing long term rentals are almost impossible to do here with $0 down.  So we typically recommend that our VA clients go into a purchase assuming they'll sell in three years.  Hawaii is a great place to build long term wealth, but it is typically best for those who will be living here long term.  Nonetheless, those stationed here can still achieve results that are better than renting.

To answer your questions:

1) I am not aware of any rules of thumb that would say "$X of cash flow is a good/bad balance when considering $X of appreciation."  This balance will vary from market to market, and your investment strategy and goals.

2) I apologize, I'm not sure what PV stands for in this context.  But as far as price projections, that is a long boring discussion about historical prices, unique economic factors in Hawaii, the government, builders, zoning, supply, demand, military, etc.  I believe Hawaii, specifically Oahu, has the most unique real estate environment in the country.  Appreciation may be seen as speculative in any other state/county, but Oahu has some significant parameters that make appreciation much less speculative.  Or at least not any more speculative than trying to project rental rates.

3) Over the next three years you can assume about 10% total equity gain (debt pay down and appreciation), with no forced appreciation (remodel).  A forced appreciation situation (fixer upper) will get you higher than 10%.  We always recommend a forced appreciation strategy to mitigate against unforeseen circumstances.

Aloha!  Isi

Clifton Monte · Answer

@Michael Borger sounds like some creative ninja investing to me! I'll look into it, thanks.

Michael Borger · Answer

You could also look at strategies like lease options or owner finance wraps. You still need some underlying seller motivation, but it provides another avenue for getting monthly cash flow while capturing some appreciation. You can work them in high or low equity situations, similar to a sub-2. I put together a deal in Maili not too long ago -- sub-2, cure the arrears, rent out, sell down the road.

Clifton Monte · Answer

@Paul Moore I agree. To your point, however, I'll contend that Hawaii satisfies the criteria for unusual market conditions, particularly it's resilience to the '08 recession.

Paul Moore · Answer

@Clifton Monte.  I've spoken to Kevin Bupp and Rod Khleif, two investors who were investing in FL for equity growth in the pre-2008 years. Both were counting on appreciation to make deals work. And both said it was a disaster. Unless you have reasons to believe you're in a market where prices won't drop in a downturn, which is unusual, I would be very careful of this type of investment.  Good luck!

Joshua McMillion · Answer

@Clifton Monte

No worries, brother, glad I could help!

Sincerely,

Josh

David Pere · Answer

@Clifton Monte One of the best real estate agents I know is on Oahu. She hosts two local meetups, and is a house flipper herself. She has helped a few of my friends find live-in flips, house hacks, or properties with equity at the close. Let me know if you would like an introduction!

Also, I love the house hacking strategy, but don't forget to factor in how much principle you will be paying down on these loans while you're living in them. that can be quite powerful too!

Jaron Walling · Answer

@Clifton Monte Imagine you're playing a new video game. It's FPS type with 10 levels. On the first day playing you're given the chance to skip to level 5. Sounds tempting but dangerous since you don't understand the game.

This is what I equate to REI in Hawaii (level 5). It's a tourism based market with an ever changing rate of return. It's NOT an easy market to start out in. It's possible but challenging. I don't know your financial situation but as new investor like my self I'm constantly limiting risk. Given the condition of most markets, high prices, and lack of supply I would tread carefully if buying in Hawaii. I would develop a strict investment criteria (house hack/duplex) and don't waiver.

Bottom line is if you can buy, build, or negotiate a deal that breaks even or cash-flows in Hawaii you could do it anywhere. I would try to develop your own spreadsheets and run the numbers in excel. The BP tools are great but lack in some detail. There is no minimum rate for equity gain. Example: I have an investor neighbor selling another property. He purchased in 2012 for $45K, cash-flowed for 9 years, and now it's for sale at $170K. It's a long term game. Look at the history of the properties in your target area. It simply goes in waves. Keep up the good work. You'll find a property that pencils out.

NOOB IN HAWAII: Equity vs Cashflow??

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