High rise condos as a long term investment

[Fernando E.]

Hi all,

My sister recently sold a property in Sacramento and planning to invest a very small portion of her profits in Hawaii. I plan to help her by joining in the venture.  I'm doing some research, I see some 1Bed 1Bath for about $125K+ and I ran some numbers  using BP Calculator, your comments & feed back is much appreciated

Purchase price: $125K

Down payment: 20%

Closing cost: $5K * 

Interest: 5.5% for 30 years

Rent: $2K / month * 

Property tax & insurance: $100

Repairs: 5% | CapEx: 5%. | Vacancy: 5% | Property Mgt: 8%

Net Cash flow: about $160   Cash On Cash: 6%

Total cash out is about $30K

*Not sure about closing cost and rent may vary

Purpose of the deal is to buy a property in a fairly good location walking distance from Waikiki beach, potentially grow some value for the next few years, having a property outside the US in Hawaii as a potential vacation home, if we don't rent out the mortage can be absorb w/o breaking the bank. 

Thanks all!

[Fernando E.]

@Lane Kawaoka hope you are well bro, I think this is your territory, feed back is much appreciated. 

[Chris Seveney]

@Fernando Enrile

Did you include condo fees? High rise buildings tend to have higher condo fees especially in tropical areas because of the weather / salt. Also buildings have more complex systems and repairs are more costly

[Fernando E.]

Quote from @Chris Seveney:

@Fernando Enrile

Did you include condo fees? High rise buildings tend to have higher condo fees especially in tropical areas because of the weather / salt. Also buildings have more complex systems and repairs are more costly

 Thanks @Chris Seveney, no I didn't. Thank you. This seems like a not so good deal already :) I appreciate the input. 

[Royce Talbo]

@Fernando E. $125k in waikiki for a 1bed is most likely a leasehold with with less than 30 years left. lenders wont lend to properties with leaseholds less than 25 years if i remember correctly. if it is leasehold then you need to add in lease rent. also dont assume capex is 5%, the association takes care of capex(everything from inside the walls to exterior), so find out what the maint and association costs are.  8% pm is too low.  if its not leasehold you found a diamond in the rough. its almost impossible to find something like this on oahu. nothing cashflows off the bat unless you put a large down.  for hawaii in the long run everything appreciates and with true appreciation comes rent growth. 

[Fernando E.]

Thanks @Royce Talbo thanks for bringing this up. I just learned about leasehold, the property I'm looking has leasehold so definitely won't work with the numbers. I have to go back to the drawing board. From your experience investing in Hawaii, what seems to be working there? Single Family homes run in the $1M+ so that's out of the question for us. Thanks bro.  

[Lane Aakhus]

Quote from @Royce Talbo:

@Fernando E. $125k in waikiki for a 1bed is most likely a leasehold with with less than 30 years left. lenders wont lend to properties with leaseholds less than 25 years if i remember correctly. if it is leasehold then you need to add in lease rent. also dont assume capex is 5%, the association takes care of capex(everything from inside the walls to exterior), so find out what the maint and association costs are.  8% pm is too low.  if its not leasehold you found a diamond in the rough. its almost impossible to find something like this on oahu. nothing cashflows off the bat unless you put a large down.  for hawaii in the long run everything appreciates and with true appreciation comes rent growth. 

I agree with Royce.  Be careful when you are looking at listings in Hawaii.  Often the listing won't say whether the property is a leasehold or fee simple but with a little experience looking at regional prices, it will usually become obvious.  I actually called on a two bedroom townhome last weekend around aloha stadium that was priced attractively but not so obvious that I should have known that it was a leasehold.  It was.  I have never tried but I also don't think you can get traditional lending on a leasehold property.

[Royce Talbo]

Quote from @Fernando E.:

Thanks @Royce Talbo thanks for bringing this up. I just learned about leasehold, the property I'm looking has leasehold so definitely won't work with the numbers. I have to go back to the drawing board. From your experience investing in Hawaii, what seems to be working there? Single Family homes run in the $1M+ so that's out of the question for us. Thanks bro.  

best bet here is appreciation plays. look for single family homes that you can easily build an ADU. probably wont cashflow at first but again with appreciation comes rent growth and it will eventually cashflow very well. you can still find a bunch under 1mil. if you can get into the hoopili neighborhoods. its a master community that is being built out in ewa/kapolei. has a rail station, a mall near by, a college, will have other schools and has some businesses. look at the flex units in the townhouses(extremely hard to get) but they are allowed to run a business out of the bottom and they have 4 parking. depending on the model the layout can easily be split into 2 units. also rents are pretty high since its new builds, the demand and amenities are there.

something i forgot to mention hawaii also has a GE tax so you need to account for that as well. Oahu is 4.5% of gross rent, outer islands are 4%. good luck.

[Lane Kawaoka]

A condo or anything less than 200k is like a 10k house in Detroit... it does not exist without huge issues. Dude every one who comes to Hawaii has this idea but you are like 50 years too late... you are better off finding something in LA or inland empire if you want to stick to a tier 1 primary market.

San Francisco, Hawaii, Los Angeles, Seattle, Boston are examples of primary markets which are NOT ideal for cashflow investing. It could appreciate but I consider that gambling. Sophisticated investors invest on cashflow where the rents exceed the mortgage plus expenses (and enough money to pay for professional property manage to do our dirty work). A lot of this concept is explained in the Keynesian Beauty Contest theory where only the top competitors get the most notoriety but the best picks are hidden in the field. So part of the game is staying away from the "dumb" amateur money.

Sophisticated investors look at the Rent-to-Value Ratio and look for at least 1% or more to be able to cashflow after expenses. You find the Rent-to-Value Ratio by taking the monthly rent dividing by the purchase price. For example a $100,000 home that rents for 1,000 a month would have a Rent-to-Value Ratio of 1%. Most people I work with live in primary markets (as opposed to Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock, Jacksonville, Ohio, or other secondary or tertiary markets) where the Rent-to-Value Ratios are under 1%. Plus we invest in red states so we have good landlord laws on our side too.

[Carlos Ptriawan]

These are leaseholds my friend who most likely will be gone in 5 years.
The equivalent of a 125k Leasehold condo is $1.5 Fee simple condo in Waikiki.

You can CASH FLOW in the leasehold only if you also live there, I knew few bay area retirees that's purposedly buy $125k waikiki condo because he's also living there and then Airbnb-it at the same time (AFAIK you 'may' not need to apply for STR permit if you live there as long as you pay GE tax--but please double check).

You MAY get lucky if the leasehold owner decides to sell the right of leasehold (so you can convert it to FS type).

[Carlos Ptriawan]

This is where it makes sense to buy a leasehold condo. Assuming the condo/building condition is good of course.
Leasehold $125K. 20 years left. This is equivalent of renting for $520/month paid upfront to the building owner.
Let's say HOA is $1K. So your cost is $1,500/mo not including repair,insurance,etc.

Your 1BR condo has $160 night rate. occupancy rate is 70%. Gross is $3,300/mo. These are fixed variables, before tax (there're two tax there , GE and TAT). So suddenly you can still cashflow,pre-tax.

BUT the key is you need to live there to cash flow. So back to basic, the key is how long the leasehold remains and ... in reality .....if there's edge like this, local folks already buy it before it's open to the market.

[Daniel A Lee Kim]

Quote from @Fernando E.:

Hi all,

My sister recently sold a property in Sacramento and planning to invest a very small portion of her profits in Hawaii. I plan to help her by joining in the venture.  I'm doing some research, I see some 1Bed 1Bath for about $125K+ and I ran some numbers  using BP Calculator, your comments & feed back is much appreciated

Purchase price: $125K

Down payment: 20%

Closing cost: $5K * 

Interest: 5.5% for 30 years

Rent: $2K / month * 

Property tax & insurance: $100

Repairs: 5% | CapEx: 5%. | Vacancy: 5% | Property Mgt: 8%

Net Cash flow: about $160   Cash On Cash: 6%

Total cash out is about $30K

*Not sure about closing cost and rent may vary

Purpose of the deal is to buy a property in a fairly good location walking distance from Waikiki beach, potentially grow some value for the next few years, having a property outside the US in Hawaii as a potential vacation home, if we don't rent out the mortage can be absorb w/o breaking the bank. 

Thanks all!

 @Fernando E. First and foremost, congratulations on selling the property AND making the decision to invest it to continue to build wealth!  With your price point of 125K in Waikiki you are either looking at a cheaper studio condo hotel such as Ala Moana Hotel Condo or a leasehold condo which tends to depreciate.  Additionally, with a leasehold there are certain requirements for the lenders which make financing a bit more challenging.  One key thing you did not include on your calculation is the maintenance fee which can range anywhere from 600-1200 per month.  Newer development tend to have lower maintenance fee.