ROI for Kihei short term rental/ occupancy rates/electric bills?

Question

Hi there,

my husband and I have family that live in Maui, and we are considering purchasing a short term rental in the next few years to offset the cost of going to visit.

We are probably shopping in the 2 bed/2 bath w/o ocean view market. From what I could tell after spending time on forums and VRBO-type sites, it doesn't seem unreasonable to assume we could charge $120 a night (more during peak season) and keep a 60% occupancy rate (year round average).

What I'm trying to determine is what kind of down-payment we need to break even. I know it has to be at least 30% to get a loan, and I don't think we could really do much more than that.

What I'm hoping is that someone who has rentals in Maui (w/o ocean views) will tell us it is reasonable to charge closer to $150 during slow times (more at peak) and expect an 80% occupancy rate, but I'm guessing that's not the case. (I'm specifying non-ocean views because I believe those will be the only ones in our budget). My husband remodels homes, so we can do the work to update a unit and make it look appealing if the ones in our price point need some spiffing up.

Also, what's your experience with electric bills for 2 bed 2 bath units?

Have you found reasonable rental agency fees? I've heard that low-high is 20-40% (OUCH), does this seem accurate? We definitely would want to hire out an agency rather than try to book things ourselves. I realize this is a big drain on income.

Most importantly, do any of ya'll break even without a massive (over 30%) down payment?

Do any of you notice a difference in occupancy rates between 1 bed and 2 bed units? We would prefer a 2 bed unit so more of us can visit at the same time, but if 1 bedroom units are easier to rent we would consider that option. I noticed HOA fees are significantly less when you reduce square footage?

Any other tid-bits you think a newbie ought to know?Thanks you guys, I really appreciate any insight!

Loren Clive · Answer

You're welcome, Kaylea.

There's only one window A/C in the living room. I don't have a timer on it. There are ceiling fans too.

Very few vacation rental condos have central A/C unless you want to spend $1M+ at Wailea Beach Villas. Or put in a splitter system for like $10k. Not worth it, in my opinion.

I'm not sure on the AA Oceanfront billing but Valkyrie over there can answer all your questions. http://www.aaoceanfront.com/

I much prefer handing everything myself, but I only have one vacation rental and 12 rental properties. If I were to have a larger portfolio, I might consider a management company.

The biggest difference is when you're shopping for anything. I don't like letting other people spend my money because they're not motivated to get the best prices. Or they spend it impractically. Also, due to liability reasons, most management companies will not hire unlicensed people, which of course increases costs.

I pay $469 a year for insurance, which is a bit less than your estimate.

Property taxes are based upon the usage and County assessed value of the property. It's roughly 1% of the purchase price for vacation rentals. So, on your typical $350k condo it would run closer to $3500/year=$300/mo.

The way they report it on the MLS may not be accurate depending on usage, for example if the owner doesn't rent it or lives in it, which has a much lower tax rate.

Glad to help! I'd suggest looking where you normally stay when you visit. People can get too caught up in ROI, when just as important is enjoying your property when you are here.

Kaylea H. · Answer

@Loren Clive,

This is exactly the type of information I was looking for! It's good to get feed back on a no-view 1 bedroom. Thanks for sharing! Great location, by the way. We stayed across the street from there at the Kamaole Beach Royal last time we were there, and we loved how centrally located it was. Does your electric bill include A/C (unit or central)? I've heard a lot of owners use timers to help costs; but I've also heard a lot of guests don't like the timer function (I get where each side is coming from!).Wow, 15% is the best rate I've heard of. That's awesome. Do you know if they pay bills too, or just manage guests? Do you prefer having a management company, or handling guest bookings yourself?I've been looking at different 1 bedrooms for sale, and it seems like around 70 a month for home owners insurance and 50-60 a month for property taxes is about average, does this seem correct to you? I had estimated property taxes and insurance being much higher, but I would love to be wrong!

Thanks again for the information; it is so helpful to hear from someone who has actually done this!Kaylea

Kaylea H. · Answer

@Patrick Franta,

Thanks for the reply! We are probably about two years out from making  a purchase, and the biggest factor will be how much our down payment will need to be in order to break even (or ideally, make enough profit to put back money for future upgrades and emergencies). We would rather end up with a place that has a view for rent appeal, but I don't think a two bedroom with this feature will be in our budget. We could probably swing a one bedroom with a view, the issue is that it will limit how many of us can visit at a time. Pros and cons, am I right?It's good to hear about the occupancy rate likely being higher than 60%! I'm trying to create an expense sheet that will dictate what our shopping price range will be, and occupancy rate is the key factor that I don't feel comfortable making an assumption about. For the price point and occupancy factor, we may have to give preference to a one bedroom that we can put a sleeper sofa in. Thanks for your input and advice, it's greatly appreciated!Kaylea

Loren Clive · Answer

Kaylea, I charge $130/night including taxes for my 1 br vacation rental at Kihei Alii Kai with no view and have at least 70% occupancy year-round. You should be able to get more than that for a 2br. There are high and low season rates, and of course you make most of your money in the high winter season.

Remodel your condo really nicely, and you will get bookings regardless of view. That's what people care about the most. So many vacation rentals in Kihei look totally 1980s, so a upgrades go a long way.

If you're interested in a particular complex, you can go on VRBO and see what people are charging, even call some owners and ask them how they're doing with the rentals.

1brs rent better than 2 brs due to lower price point. If you have to have a 2br, you might consider a 2br lockoff, which can be rented as either 2br or two 1brs, to maximize your bookings. I really like the Island Surf building that offers this feature, but other choices are Maui Banyan and the Mana Kai.

Aa Oceanfront in Kihei will manage for 15% of gross bookings. My advice, however, would be to retain a competent housekeeper, have him/her as your on-island contact and rent on AirBnb who only takes a 3% fee per booking. Particularly if you do a good remodel, nothing major is going to break and your housekeeper can handle any emergencies. The law states you need an on island contact, not necessarily a management company.

Our electric bills range $200-300/mo. Yes, I am operating at a profit, but this is mostly due to the extremely low purchase price on this condo. Most people even paying full market will break even, depending on how often they use the condo.

PM if you have further questions. I got started in real estate managing vacation rentals although I now focus on my personal investments and real estate sales.

Patrick Franta · Answer

Aloha Kaylea,

You present a lot of great questions in your post.  Rather than focusing on nightly rates I would recommend focusing on a potential ROI.  The first thing to determine the price point in which you are qualified for.  From there, with the help of a real estate professional, you can determine the better performing complexes in your price range.  Some of the variables are HOA fees, Utility costs & obviously desirability.  I have a spreadsheet that I offer my clients to help analyze potential returns that I would be more than happy to share with you.  Then you can identify some of the better deals available in these complexes that fit your criteria.

In short it is absolutely possible to break even or even make a return if you buy right and manage properly.  Here are some key factors to focus on:

25% will be the minimum down payment required for most of these complexes

Occupancy rates of 75-80% or higher are very achievable with effective management

There are plenty of great managers in the market that will charge 20-25%, my wife's company being one of them.  There are even options to book the condo yourself and pay a manager 10-15% to handle everything else.  Deciding on which management style and fee works for you will be a big factor in your return

Depeding on the price point are you set on a 2 Bed w/o ocean view?  Most view units out perform non-view units and a lot of 1 Beds out perform 2 Beds.

This is just an overview but I hope this helps a little.  If you would like me to send over that spreadsheet or any additional info just pm me.  Mahalo.