Is Honolulu a good market for buy and hold right now?

Question

Just saw some properties in Honolulu 96815, condos that are around $50k to $90k, 1 bed condos, that typically rent for $1400 to $1600. That’s awesome cash flow! Even with HOA fees as $600 you can potentially cash flow $500 a month! What’s the catch?? Why is it so cheap? My only properties are in Memphis, TN so I’m used to that price point, but not in Hawaii! Is this a good market to enter? Any Honolulu investors please enlighten me. What’s typical vacancy rates, cash flows, Cap rates? Thanks!!

Lane Kawaoka · Answer

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).

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 Hawaii is a very blue state with strong laws favoring laws. Call me crazy but I think if people don't pay rent they should be kicked out

Isi Nau · Answer

Hey @Benigno Cunanan

Cash flow is possible in Hawaii.  The best I've seen for long term rentals are condos, $30k-40k down payment, giving about $250 a month in cash flow.  Then there's the appreciation.   ;)   I can't wrap my mind around how it is considered speculative.  Maybe in other parts of the country, but in Hawaii there's the historical data (annual housing reports, etc.) and  also anecdotal data (multi-generational family portfolios) that make it difficult to argue against.  Before joining BP I had never heard of appreciation being described as speculative, especially not in Hawaii.  Anyways, on to your other questions.   :)

As for cap rates on multifamily, you're looking at 4-5%, maybe 6-7% on the Westside.  This is for legal mutlifamilies.  Nonconforming homes can get 7% pretty regularly.

Vacancy rates can be kept pretty low without much sacrifice on rent rates.  The housing shortage on Oahu is unfortunately at a critical level.  Our units are vacant on average for a week.  On average our tenants stay in place for at least 2 years.

Hawaii is a solid place to invest.  Even though it's expensive, it's definitely possible.

Greg Gaudet · Answer

Lane and I tend to have different opinions on this. While I agree generally that cash flow is hard to find in Hawaii, I believe in just being creative. Someone already bashed on Harbor Lights on this thread (someone that admittedly doesn't own there); but I can argue that sophisticated investors, like one of my mentors who has been a REI since the 1980s, owns over 10 units at harbor lights.. and he just bought 2 more! I personally own 5 there, and my average cash on cash return is 25%. I might regret bringing in more competition at HL.. but I have to say that it has performed very well for me.

Buying low end rentals is one of my favorite strategies for creating solid cash flow in a market that's too expensive for cash flow or strictly a speculative market. My main rule is that I screen my tenants thoroughly, am very stern, tell them on day 1 that I'm a great landlord but I file eviction on day 6, and I come down on them hard if they mess around.

Greg Gaudet · Answer

I should've read the entire thread before responding! There's my boy Isi backing me up!

Yes, it's harder to achieve cash flow in Hawaii.. but 15, 20 and even 25% COC ROI is still fully attainable. I just wholesaled a house to Brandon Turner here on Maui that makes just under 15% COC returns.. should've bought that one myself!

Hope all is well on oahu Isi. I mentioned in my other post, I have a lead for a LH STR in Waikiki and one for a water front 3 bedroom in Hawaii Kai. Not sure if they fit what you're currently focused on, but Email or text me if you want the details.

Jeb Brilliant · Answer

@Isi Nau I’d love to connect next week if u have some time. I have several rentals in the Midwest and have always dreamed of owning in Hawaii.

Thanks.

Colton Fairchild · Answer

Are they fee simple or leasehold condos?

Nathan Gesner · Answer

Leasehold is pretty common in Hawaii so you may think it's not a big deal. However, government is always growing and looking at new ways to increase tax revenue. In a liberal state like Hawaii, it wouldn't take much for those leasehold properties to be taken back, taxed, or heavily regulated by the state. I would try to avoid it.

Colton Fairchild · Answer

Sounds like leasehold properties, they are common in Hawaii. You can find this info on any of the listings you are looking at. I would not recommend them though.

Here's a breakdown of fee simple vs. leasehold in Hawaii: Leasehold vs. fee simple

Nathan Gesner · Answer

I think you're confused. I just zoomed in on a single block of Waikiki to look at condos for sale and for rent using Zillow. The ones renting for $2,400 a month cost $700,000. The ones selling for under $100,000 are renting for $500 - $600.

Scott Johnson · Answer

@Isi Nau

Do you mind if I PM you for more information on investing in Oahu?

Is Honolulu a good market for buy and hold right now?

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