STR in Maui or Hawaii - anyone cash flow positive
portland · Member since 2019 · 7 posts · 2 votes
Anyone making money on vacation rentals in Kihei or Hawaii?
any tips? location? condo complex? is it possible to run 4 or 5 as a job?t
I would like to buy, rehab, furnish, and run enough to make a living?
so far I only read occupancy rates can be 70% or higher - rates a night $120 to $320 depending on season and unit
any advice or tips would be great
I don't know why people do STRs the numbers don't make sense. Especially how the laws can change at any moment.
I've spoken with many investors who saw short term rentals as a lucrative market opportunity. They bought property assuming that the same market conditions would persist over the long term. They neglected the possibility of regulation, and they neglected the possibility of an oversupply depressing prices. The barrier to entry for short term rentals has been low historically. Neither of these assumptions are good if you're making a highly leveraged purchase of an investment property. There are many property owners in Toronto who are staring financial difficulty in the face. The rules don't take effect for 6 months, but the message is clear.
Cities want their hotel tax revenue.
Cities don't want those big bad real estate investors to make too much money.
Cities don't want rental inventory disappearing from the market.
Don't make a highly leveraged 25 year financial commitment on the assumption that current market conditions will remain the same.
I stay away from things that the general public get into and it seems everyone wants to rent out an extra room or home. It will be a race to the bottom. I think you should stick to bread and butter class C and B rental property and stay away from these niches like student housing or military towns.
Here’s some more intro about the tricky tax situation:
Rented less than 15 days during the year with more than 14 days of personal use
For a vacation home in this category, the tax rules are really simple. You need not report any of the rental income on your Form 1040. However, you cannot deduct expenses directly attributable to the rental period (rental agency fees, cleaning, and so forth). If your vacation home happens to be located near a major event — like a PGA golf tournament or a big multi-day concert — you may be able to rent the place out for a short period even at high rates and pay zero federal income tax.
Tax-smart year-end strategy: The more rental days between now and year-end, the better — as long as they don’t exceed 14 days for the year.
Rented more than 14 days with substantial personal use
Your vacation home falls into this category if you rent it for more than 14 days during the year and your personal use exceeds the greater of:(1) 14 days or (2) 10% of the rental days. For example, a vacation home that’s rented for 180 days during the year and used by you and family member for 60 days falls into this slot.
Personal usage includes use by you, other family members (whether they pay fair market rent or not) or anyone else who pays less than market rent. Personal use also includes time spent at your place by another party under a reciprocal sharing arrangement (“I use your place in exchange for you using my place”) whether the other party pays market rent or not.
Days devoted principally to repairs and maintenance are considered days of vacancy and are disregarded, even if family members are present while you work away.
The tax drill
Vacation homes in this category are treated as personal residences for federal income tax purposes. Follow this six-step procedure to account for the property’s rental income and all the expenses.
Step 1: Report 100% of rental income on Schedule E of Form 1040.
Step 2: Deduct 100% of any direct rental expenses (such as rental agency fees and advertising) on Schedule E.
Step 3: Allocate mortgage interest and property taxes between rental and personal use. See below for how to do that.
Step 4: Deduct as Schedule E rental expenses the allocable mortgage interest and property taxes from Step 3.
Step 5: If there’s any net rental income left after Step 4, deduct as rental costs allocable indirect expenses — maintenance, utilities, association fees, insurance, depreciation and so forth on Schedule E — but only to the point where you zero out rental income. In allocating these indirect expenses, consider only actual rental and personal-use days during the year, and ignore days of vacancy. For example, if you rent your vacation home for 90 days during the year and use the property 60 days for personal purposes, allocate 60% of the maintenance, utilities, and so forth to rental usage and 40% to personal usage. The 40% is non-deductible. Even so, the bottom line on Schedule E will often be zero, because the rental income will often be fully offset by deductible expenses.
Step 6: Write off the personal-use percentage of mortgage interest and property taxes as itemized deductions on Schedule A of Form 1040, subject to the new Tax Cuts and Jobs Act of 2017 (TCJA) limits for 2018-2025 (see “TCJA changes affecting vacation-home owners” below).
You are allowed to carry over any disallowed allocable indirect expenses to future years when you can deduct them against rental profits (if you ever have any).
Controversy regarding how to allocate mortgage interest and property taxes
The IRS says you should use only actual days of personal and rental usage to allocate all non-direct vacation-home expenses, including mortgage interest and property taxes. However, two Appeals Court decisions say you can allocate mortgage interest and property taxes differently, by treating actual rental occupancy days as rental days and all other days — including days of vacancy — as personal days.
Before the TCJA, the Appeals Court method was often more beneficial because (1) it allocates more mortgage interest and property taxes to Schedule A (where you could usually fully write off these expenses as allowable itemized deductions under prior law) and (2) it allocates less mortgage interest and property taxes to Schedule E, which usually allowed you to currently deduct more of the other expenses allocable to rental usage (property insurance, utilities, etc.) on Schedule E when applying the rental income limitation.
But after the TCJA changes, some vacation-home owners may benefit from using the IRS-approved method instead of the Appeals Court method. That’s because you will never get any tax benefit from allocating more interest and taxes to Schedule A than you can currently deduct after the TCJA changes. Your tax pro can run the numbers at tax return time and figure out the best allocation method for interest and taxes.
Tax-smart year-end strategy: If your property fits solidly into this category for 2018 and your expenses will comfortably exceed rental income (the usual situation), you will probably come out ahead by renting it out for some additional days between now and year-end. That way, you’ll receive more rental income (good for cash flow), and you can probably still offset all the rental income with direct expenses, allocable mortgage interest and property taxes, and allocable indirect expenses. So you’ll have that much more tax-sheltered rental income, which is always a good thing.
The bottom line
As you can see, the tax rules for vacation homes are complicated.
If you have a vacation home that is rented for more than 14 days during the year and your personal use does not exceed the greater of (1) 14 days or (2) 10% of the rental days, the home is classified as a rental property for tax purposes. (I’ll cover the tax rules for vacation homes that are classified as rental properties in next week’s column. So please stay tuned.)
TCJA changes affecting vacation-home owners
New limit on property-tax deductions:Before the TCJA, you could claim itemized deductions for an unlimited amount of personal state and local property taxes. For 2018-2025, however, the TCJA limits itemized deductions for personal state and local property and income taxes to a combined total of only $10,000 ($5,000 for those who use married filing separate status). This limitation can affect your ability to claim itemized deductions for property taxes on a vacation home.
New limits on home-mortgage interest deductions: The TCJA also places new limits on the amount of home mortgage debt for which you can claim itemized qualified residence interest expense deductions. These limits can affect your ability to claim itemized deductions for mortgage interest on a vacation home.
For 2018-2025, the TCJA generally allows you treat interest on up to $750,000 of home acquisition debt (incurred to buy or improve a first or second personal residence) as deductible qualified residence interest. If you use married filing separate status, the limit is halved to $375,000. Thanks to a grandfather provision for pre-TCJA mortgages (explained below), this change will mainly affect new buyers (those with post 12/15/17 mortgages).
TCJA change for home-equity debt: For 2018-2025, the TCJA generally eliminates the prior-law provision that allowed you to treat interest on up to $100,000 of home-equity debt as deductible qualified residence interest ($50,000 if you used married filing separate status).
TCJA grandfather rules for up to $1 million of home-acquisition debt: Under one grandfather rule, the TCJA changes do not affect qualified residence interest deductions on up to $1 million of home-acquisition debt that you took out: (1) before 12/16/17 or (2) under a binding contract that was in effect before 12/16/17, as long as the home purchase closed before 4/1/18. If you use married filing separate status, the limit is halved to $500,000.
Under a second grandfather rule, the TCJA changes do not affect qualified residence interest deductions on up to $1 million/$500,000 of home-acquisition debt that you took out before 12/16/17 and then refinanced later — to the extent the initial principal balance of the new loan does not exceed the principal balance of the old loan at the time of the refinancing.
Home-equity debt treated as home-acquisition debt: Say you spent or spend the proceeds of a home-equity loan to build, buy, or improve your first or second personal residence. The loan counts as home-acquisition debt for which qualified residence interest deductions are allowed, as long as the applicable home acquisition debt limit ($750,000/$375,000 or $1 million/$500,000) is not exceeded.
Bigger standard deductions: For 2018-2025, the TCJA almost doubled the standard deduction amounts. For 2018, they are:
$24,000 for married joint-filing couples.
$18,000 for heads of households.
$12,000 for singles.
This seemingly benign change can adversely affect vacation-home owners, because their allowable itemized deductions (including those for vacation home mortgage interest and property taxes) may not exceed their standard deduction amount for 2018-2025.
And in Hawaii… Short term vacation rentals come with an additional tax burden of 10.25% in Hawaii, the Transient Accommodations Tax (TAT). There's also the 4% General Excise Tax (GET), which you will need to apply and register for a GE License. Additionally, since you're looking at Waikiki, there will be an additional 0.5% Oahu Surcharge Tax. The taxes are calculated on your gross income from the rents.
Either way if you do decide to do STRs I suggest you educate yourself with the basic education or formal training out there. I suggest this program for that - http://bit.ly/2LJGpU8
@Michael Sweet the market is tightening a lot on the Big Island due to short term rental zoning laws, can work well if you already own one, but the acquisition costs are rising quite a bit. DM me if you want more info
Anyone making money on vacation rentals in Kihei or Hawaii?
any tips? location? condo complex? is it possible to run 4 or 5 as a job?t
I would like to buy, rehab, furnish, and run enough to make a living?
so far I only read occupancy rates can be 70% or higher - rates a night $120 to $320 depending on season and unit
any advice or tips would be great
tip 1. it aint occupancy. its yield management.
Tips 2-4. Location, location, location.
I'm focused on Kihei Maui right now
a popular year round tourist destination.
anyone have any experience in Kihei - the acquisition is around 500,000 asking price
for the lower end here but these will be zoned vacation rental.
Aloha @Michael Sweet,
Yes, I'm cashflowing on vacation rental properties on Maui. Yes they are in Kihei. Yes you can live off of it, depending on how much you need to live on. PM me and I'll try to help you out. The market is tough and places go quickly, but there are a few spots that still make sone sense...
Doing it. PM me. And I can also help you buy it if you're not already working with a realtor.
I don't know why people do STRs the numbers don't make sense. Especially how the laws can change at any moment.
I've spoken with many investors who saw short term rentals as a lucrative market opportunity. They bought property assuming that the same market conditions would persist over the long term. They neglected the possibility of regulation, and they neglected the possibility of an oversupply depressing prices. The barrier to entry for short term rentals has been low historically. Neither of these assumptions are good if you're making a highly leveraged purchase of an investment property. There are many property owners in Toronto who are staring financial difficulty in the face. The rules don't take effect for 6 months, but the message is clear.
Cities want their hotel tax revenue.
Cities don't want those big bad real estate investors to make too much money.
Cities don't want rental inventory disappearing from the market.
Don't make a highly leveraged 25 year financial commitment on the assumption that current market conditions will remain the same.
I stay away from things that the general public get into and it seems everyone wants to rent out an extra room or home. It will be a race to the bottom. I think you should stick to bread and butter class C and B rental property and stay away from these niches like student housing or military towns.
Here’s some more intro about the tricky tax situation:
Rented less than 15 days during the year with more than 14 days of personal use
For a vacation home in this category, the tax rules are really simple. You need not report any of the rental income on your Form 1040. However, you cannot deduct expenses directly attributable to the rental period (rental agency fees, cleaning, and so forth). If your vacation home happens to be located near a major event — like a PGA golf tournament or a big multi-day concert — you may be able to rent the place out for a short period even at high rates and pay zero federal income tax.
Tax-smart year-end strategy: The more rental days between now and year-end, the better — as long as they don’t exceed 14 days for the year.
Rented more than 14 days with substantial personal use
Your vacation home falls into this category if you rent it for more than 14 days during the year and your personal use exceeds the greater of:(1) 14 days or (2) 10% of the rental days. For example, a vacation home that’s rented for 180 days during the year and used by you and family member for 60 days falls into this slot.
Personal usage includes use by you, other family members (whether they pay fair market rent or not) or anyone else who pays less than market rent. Personal use also includes time spent at your place by another party under a reciprocal sharing arrangement (“I use your place in exchange for you using my place”) whether the other party pays market rent or not.
Days devoted principally to repairs and maintenance are considered days of vacancy and are disregarded, even if family members are present while you work away.
The tax drill
Vacation homes in this category are treated as personal residences for federal income tax purposes. Follow this six-step procedure to account for the property’s rental income and all the expenses.
Step 1: Report 100% of rental income on Schedule E of Form 1040.
Step 2: Deduct 100% of any direct rental expenses (such as rental agency fees and advertising) on Schedule E.
Step 3: Allocate mortgage interest and property taxes between rental and personal use. See below for how to do that.
Step 4: Deduct as Schedule E rental expenses the allocable mortgage interest and property taxes from Step 3.
Step 5: If there’s any net rental income left after Step 4, deduct as rental costs allocable indirect expenses — maintenance, utilities, association fees, insurance, depreciation and so forth on Schedule E — but only to the point where you zero out rental income. In allocating these indirect expenses, consider only actual rental and personal-use days during the year, and ignore days of vacancy. For example, if you rent your vacation home for 90 days during the year and use the property 60 days for personal purposes, allocate 60% of the maintenance, utilities, and so forth to rental usage and 40% to personal usage. The 40% is non-deductible. Even so, the bottom line on Schedule E will often be zero, because the rental income will often be fully offset by deductible expenses.
Step 6: Write off the personal-use percentage of mortgage interest and property taxes as itemized deductions on Schedule A of Form 1040, subject to the new Tax Cuts and Jobs Act of 2017 (TCJA) limits for 2018-2025 (see “TCJA changes affecting vacation-home owners” below).
You are allowed to carry over any disallowed allocable indirect expenses to future years when you can deduct them against rental profits (if you ever have any).
Controversy regarding how to allocate mortgage interest and property taxes
The IRS says you should use only actual days of personal and rental usage to allocate all non-direct vacation-home expenses, including mortgage interest and property taxes. However, two Appeals Court decisions say you can allocate mortgage interest and property taxes differently, by treating actual rental occupancy days as rental days and all other days — including days of vacancy — as personal days.
Before the TCJA, the Appeals Court method was often more beneficial because (1) it allocates more mortgage interest and property taxes to Schedule A (where you could usually fully write off these expenses as allowable itemized deductions under prior law) and (2) it allocates less mortgage interest and property taxes to Schedule E, which usually allowed you to currently deduct more of the other expenses allocable to rental usage (property insurance, utilities, etc.) on Schedule E when applying the rental income limitation.
But after the TCJA changes, some vacation-home owners may benefit from using the IRS-approved method instead of the Appeals Court method. That’s because you will never get any tax benefit from allocating more interest and taxes to Schedule A than you can currently deduct after the TCJA changes. Your tax pro can run the numbers at tax return time and figure out the best allocation method for interest and taxes.
Tax-smart year-end strategy: If your property fits solidly into this category for 2018 and your expenses will comfortably exceed rental income (the usual situation), you will probably come out ahead by renting it out for some additional days between now and year-end. That way, you’ll receive more rental income (good for cash flow), and you can probably still offset all the rental income with direct expenses, allocable mortgage interest and property taxes, and allocable indirect expenses. So you’ll have that much more tax-sheltered rental income, which is always a good thing.
The bottom line
As you can see, the tax rules for vacation homes are complicated.
If you have a vacation home that is rented for more than 14 days during the year and your personal use does not exceed the greater of (1) 14 days or (2) 10% of the rental days, the home is classified as a rental property for tax purposes. (I’ll cover the tax rules for vacation homes that are classified as rental properties in next week’s column. So please stay tuned.)
TCJA changes affecting vacation-home owners
New limit on property-tax deductions:Before the TCJA, you could claim itemized deductions for an unlimited amount of personal state and local property taxes. For 2018-2025, however, the TCJA limits itemized deductions for personal state and local property and income taxes to a combined total of only $10,000 ($5,000 for those who use married filing separate status). This limitation can affect your ability to claim itemized deductions for property taxes on a vacation home.
New limits on home-mortgage interest deductions: The TCJA also places new limits on the amount of home mortgage debt for which you can claim itemized qualified residence interest expense deductions. These limits can affect your ability to claim itemized deductions for mortgage interest on a vacation home.
For 2018-2025, the TCJA generally allows you treat interest on up to $750,000 of home acquisition debt (incurred to buy or improve a first or second personal residence) as deductible qualified residence interest. If you use married filing separate status, the limit is halved to $375,000. Thanks to a grandfather provision for pre-TCJA mortgages (explained below), this change will mainly affect new buyers (those with post 12/15/17 mortgages).
TCJA change for home-equity debt: For 2018-2025, the TCJA generally eliminates the prior-law provision that allowed you to treat interest on up to $100,000 of home-equity debt as deductible qualified residence interest ($50,000 if you used married filing separate status).
TCJA grandfather rules for up to $1 million of home-acquisition debt: Under one grandfather rule, the TCJA changes do not affect qualified residence interest deductions on up to $1 million of home-acquisition debt that you took out: (1) before 12/16/17 or (2) under a binding contract that was in effect before 12/16/17, as long as the home purchase closed before 4/1/18. If you use married filing separate status, the limit is halved to $500,000.
Under a second grandfather rule, the TCJA changes do not affect qualified residence interest deductions on up to $1 million/$500,000 of home-acquisition debt that you took out before 12/16/17 and then refinanced later — to the extent the initial principal balance of the new loan does not exceed the principal balance of the old loan at the time of the refinancing.
Home-equity debt treated as home-acquisition debt: Say you spent or spend the proceeds of a home-equity loan to build, buy, or improve your first or second personal residence. The loan counts as home-acquisition debt for which qualified residence interest deductions are allowed, as long as the applicable home acquisition debt limit ($750,000/$375,000 or $1 million/$500,000) is not exceeded.
Bigger standard deductions: For 2018-2025, the TCJA almost doubled the standard deduction amounts. For 2018, they are:
$24,000 for married joint-filing couples.
$18,000 for heads of households.
$12,000 for singles.
This seemingly benign change can adversely affect vacation-home owners, because their allowable itemized deductions (including those for vacation home mortgage interest and property taxes) may not exceed their standard deduction amount for 2018-2025.
And in Hawaii… Short term vacation rentals come with an additional tax burden of 10.25% in Hawaii, the Transient Accommodations Tax (TAT). There's also the 4% General Excise Tax (GET), which you will need to apply and register for a GE License. Additionally, since you're looking at Waikiki, there will be an additional 0.5% Oahu Surcharge Tax. The taxes are calculated on your gross income from the rents.
Either way if you do decide to do STRs I suggest you educate yourself with the basic education or formal training out there. I suggest this program for that - http://bit.ly/2LJGpU8
@Michael Sweet
What @Lane Kawaoka wrote is very insightful. The STR in Hawaii is cracking down recently especially in Honolulu, so far Maui regulation hasn't gotten there yet. I have few Airbnb property in Kihei and I highly suggest that when you buy a property that it is zoned for vacation rental. I also use airdna.com to get some info with Airbnb/HomeAway/VRBO price comparison. Goodluck on your search! We love Kihei and have been a part-time resident since we first visited last year.
thanks everyone
I am looking at zoned vacation rental condo's - like condolels
There are many near the hotels that are long standing vacation rentals - zoned as such.
I'm not looking at any residential airbnb type properties where special permits may be needed.
This is strictly investment - no stays or visits by me or friends.
they are often called condotel's here as there is a front desk and check in - cleaning services somethings if you want.
High taxes are a given - the main downside I see besides running them;) is if tourism slows dramatically - in this case they can legally be rented long term for a bit less.
I'm still looking and interested in anyone with experience in this area. thanks to everyone's help so far!
Good info @Lane Kawaoka however my 40% ROI in the Smoky Mountains of Tennessee shows it can be done! :)
@Lane Kawaoka I admittedly stopped reading after the 5th paragraph, so my answer might be a little off subject. I agree with you in part, and I'll preface my answer with the fact that I own 5 short term rentals (Smokies), 2 B class long term rentals, and about 15 C class long term rentals, so I keep my portfolio diversified.
Yes, the short term rental bandwagon in major metro areas has many potential market condition pitfalls. I think we have all read about these in any number of news articles over the past few years.
However, the true vacation rental markets, where individually-owned single families and condos have been rented by tourists on an overnight basis for decades, are a safe investment for short term rentals. These markets' local governments, such as mine and @Tim Schroeder's, figured out how to tax and monetize these rentals well before I was born, and any sort of regulation against these types of rentals would be so detrimental to the local economy that there is very very little chance it would ever happen.
True vacation rentals can actually be a really lucrative and safe piece of anyone's investment portfolio as long as they choose the market carefully. The income from my vacation rentals was the single largest contributor to scaling my portfolio to the size it is today (and continuing to grow, 3 more under contract currently!). Research, research, research, and not just the income potential, but the historical market health for STR as well.
We took a trip to Maui this past summer and I also became interested in the condotels there. I think we would probably try to stay once a year but it would primarily be an investment. I did some searching but I had trouble figuring out how much money these typically bring in per month. It looks like it is mostly managed there and the condotel finds renters and does house cleaning. I would love to find someone who actually owns one and can tell me how much it brings in per year.
I own two, in escrow on a third. PM me
Here on the Big Island the opportunity is huge because its the last place in Hawaii where there are cheap homes. Just looked at a nice 2 bdrm house for 185k - that would be around $800 a month mortgage payment and similar short term vacation rentals in the area pull in at least $2400 a month with huge room for increasing that.