Investing in STR in Maui

19 Replies

We are purchasing a STR in Maui. I had wanted to start small, a 1 bed/1 bath, but the analysis showed they didn't cash flow very well at the purchase price. We put in a low ball offer on a 2 bed/2 bath, and it was accepted! It will cash flow nicely, and I am excited to self manage.

On a whim, I did an analysis on a 1.9M house on Maui that is in the STR zone. Using average numbers from VRBO, this would start cash flowing after renting it for just 7 days. For the first investment, I didn't want to risk that big of a purchase. My question is: is it a rule of thumb that the bigger the place, the higher the cash flow? I'm including the mortgage costs, which are higher with the higher purchase price, but I wanted to get other perspectives for a future purchase down the road.

@Jennifer Creager   First off, congrats!  That's awesome your deal was accepted and you are starting off with a great buy!  What do you mean exactly when you say it will start 'cash flowing' after renting for 7 days, just out of curiosity? 

Bigger houses generally mean more bedroomss and more beds means higher ADR (in general).  Since bedrooms increase a property's value somewhat linearly and since you can get 2 or more guests in each bedroom, you could theoretically have more exponential growth on ADR vs the linear property value as the property size increases (hypothetically speaking of course).  

Obviously, properties on the water or with other luxury amenities command their own premium as well when it comes to ADR. Properties in Hawaii seem to do well on the occupancy rate side of things which allows even lower ADRs to have a chance to cash flow. So long as you are not stuck with a $900 HOA which will destroy most leveraged cashflow models.

Just my 2 cents on the subject without really knowing much more about the properties you are talking about of course.  :)

Cheers!  Or Aloha I should say!  

@Jennifer Creager Congrats on getting your offer accepted! Getting a low offer accepted in this market is great!

As for houses, as @Jon Crosby mentions, in theory you could (emphasis on could) expect to charge a higher ADR. I have clients who have a permitted SFR, 3br/2ba, in central Kihei and their ADR is about $360/night.

Two operative words in my last comment - could and permitted. Maui Country requires any owner who intends to rent a residential property out for any period of less than 180 days to obtain a permit. Failure to do so could end up in a $20,000 fine as a first time offense. However, one cannot just apply for the permit. As of last September, they changed the holding period to five years before you can apply for the permit. All in an effort to control the proliferation of illegal vacation rental properties.

Sorry if I come across as negative. Just want you to be aware of the facts.  Best of luck with your new purchase!

Mark

@Mark Waite   Do you have a link to that particular new 5 year law?  From what I read that applies to only new construction, not existing homes?   Let me know if I'm missing something there as I have a colleague who just purchased a condo in Kaanapali and want to be sure he's safe on that.  

Thanks! 

@Jon Crosby The new law applies only to residential properties (single family residence). Condos are not considered residential when it comes to zoning and are handled completely different. 

When it comes to condos, it is dictated by the zoning of the property and the condo association by-laws (there are a few minor exceptions). The beauty is that it is easy to find out if a particular condo complex allows for short term rentals. You're not at the mercy of the county planning department.

Thanks everyone for the responses. For the 2 bed/2 bath, its in a condo complex that is zoned for STR in Kihei, and many units can be found on AirBnB and VRBO.

For the house that I was dreaming about, that is a very good point about the zoning rules being different. I found a very similar house on VRBO in the same neighborhood for the comps. What I meant about only needing to rent for 7 days means that based on the high ADR that I found on VRBO, the expenses would be completely covered by the time you had rented it for 7 days, and after that it would be pure cashflow. It makes sense that larger units have bigger ADR, but the VRBO unit was renting for an average daily rate of $1700 a day, which is insane revenue!

Maybe after a year or two of experience with managing this unit in Maui, and learning more about Maui neighborhoods, we will go for a bigger ocean view unit with even higher cash flow. Thanks everyone for the good wishes, I am very excited!

Aloha @Jennifer Creager !

Congratulations on the condo!  We have several rentals in Kihei both 1/1s and 2/2s as well as a couple studios. We find the 1/1s to actually be the sweet spot. They rent best and keep higher roi rates generally speaking. Also with our 2/2s we get more families and more kids which is great but more stuff that needs repairing more often too. 

As for bigger properties and bigger returns, not really. If you look at the cash flow numbers you’ll probably find the 1/1 and 2/2s in Kihei will have better cap rates than higher priced units in Wailea. 

Single family homes are an anomaly and are cash cows IF you get a permit and have it in a good location and dialed in with the managing of it. @Mark Waite is right about the five year wait on them to even apply for the transient accommodation permit. And that is just to apply. Then there is a list of other things that need to fall in place in order to get that permit. 

Good luck with your condo.  It sounds like you got a great deal!

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%.

Originally posted by @Lane Kawaoka :

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%.

I slightly disagree. Not like you are wrong. Just that what you are saying is not a universal rule for all investors.

Sophisticated investors do invest in high-value markets. They just are investors who are less concerned about growing their wealth compared to protecting their wealth. They have a different time horizon. They may be investing with very low LTV on no debt at all. Cash on cash return is not the focus. When there is no debt, the cash flow will be fine for keeping things ticking over.

I used to work for Swiss Bank Corp. What private clients want and what the BP community wants can be very different. The very wealthy do buy in all the markets you listed. I have investments in London UK. They are not the highest yielding property. They are very liquid (easy to sell), have grown in value for decades and make most of the cities you shared as inexpensive by comparison. Sort of similar for HI property.

It is hard to argue with the 1% rule. Unless you have more cash than you have time to invest. In that case, the 1% is less of a target than deploying large sums into stable assets which will respond well to inflation.

As the British will say, horses for courses. Different assets appeal to different people because they have different criteria.

Agree with most of what was said. Except I have to challenge Lane's comment about cash flow in primary markets. Yes, it's definitely less and harder to find, but you can usually find a niche... At least I was able to. My low end rentals on Maui produce an average of 25% COC returns, plus appreciation. I may have gotten lucky (combined with working my a-- off to find deals), but I'm happy with them. It's a little harder to get those returns now because prices have continued to rise, but you can still buy on the MLS at Harbor Lights on Maui for 130k and make around $400/month cash flow.

Regarding the 1% rule, again, places like Harbor Lights still produce more than 1% with prices around 130-150k and rents around 1700 (gotta factor in the HOA fees, but that's basically your capex and part of your maintenance costs).

Some are scared because it's a lower class, but that's security to me because if the economy shifts there will be a higher demand for lower end rentals as people downgrade. Still a good buy in my book, and in my mentor who owns 10 there, is still buying there, and has been a full time investor since the 90s - I'll trust him! 

Thanks everyone for your replies. Now that we are 3 months into this adventure, we are 80% rented for the year (Aug 2019 to July 2020), and will net 7K for the year. This is after: mortgage payment, transient taxes, HOA, electric bill, cleaners, resort fee, insurance, on island agent, etc. So, our goal was to have it break even, as we are looking more for wealth preservation than cash flow (as noted in some of the conversations above). Any more reservations for the year will be additional profit. It has been a side job, taking a couple hours a week of my time to manage it, but I have learned a ton and it has been interesting and fun.

My leveraged rentals in Hawaii (30 year fixed loans + prop taxes + $1000 hoa fees + electricity + capex etc) all cash flow at a minimum of 20% CoC per year self managing.

They range from 650k - 1.2M and they all cash flow.

7 days doesn’t seem right. Mine typically turn positive around day 12-14 occupied.

If you can’t cash flow well in Hawaii you shouldn’t bother trying to do short term rentals. All deals found on mls.

Mike, thanks for your input. I didn't say 7 days, I said 7K meaning $7,000 cash flow for the entire year. And yes, that isn't much, but given that we have listed this STR for only 2 months, being cash flow positive and 80% occupied is a tremendous win. Also, we discounted our rates significantly for the first 10 bookings so that we would get positive reviews, so Aug and Sept were cash flow negative. I have gradually increased the nightly rate in line with other properties, so any additional bookings will be pure profit.

So in summary, I will continue to do STR in Hawaii, but thanks again for your vote of confidence /s.

@Haythem Abid we purchased in South Kihei, which is just north of Wailea. I searched for months, ran the numbers on many properties, and none were cash flow positive. Our realtor found this listing that had been on the market for 8 months, which was larger than I was looking at, we put in a lowball offer, and it was accepted. 

In my research, 2 bed/2 bath penciled out better than 1 bed/1 bath, but I was concerned about the larger purchase price/larger risk.  It worked out great so far. I can private message you the realtor if you're interested.

Jennifer

Maui County is really cracking down on illegal STRs in order to help with affordable housing.  All STRs need a permit, condo, residential, etc.  I believe that they are only  authorizing 400.  Condos need the approval of their association but ALSO need to be grandfathered in (on the Minatoya list) or each condo unit needs its own permit from the county.  To get a permit you have to have owned the unit for 5 years prior and meet other criteria like having an on island manager.  Also, the http://www.thehawaiistatecondo... is an ok resource but not totally accurate.  I found out the hard way.  Just because this private company says a condo is vacation rentable does not make it so.  The only way to know for sure is to contact the county planning department.  Here is the Minatoya list. https://www.mauicounty.gov/Doc....   Here is a good article:  https://mauinow.com/2018/06/26....    Another good overview of Minatoya is here:  https://www.ramaui.com/UserFil.... So before you buy confirm that your condo community on Maui is on the Minatoya list and the condo board has approved STRs.  Just because you see other units advertised on VRBO, etc.,m does not make it legal.  I heard of a $100,000 fine.