Vacation Rental in Hawaii?

Question

Aloha,

I’m currently refinancing my primary residence to fund my second investment property. (First is a long term rental). I have found a permitted vacation rental on the beach that I like, but I fear that there will not be a high enough return in the immediate future. It’s a hard to come by condo of which I have been given early access to. I have lots of experience staying in vacation rentals and live within one mile of the unit. If I can rent the unit for at least half the month, the mortgage and fees will be covered. At this point in time most units in the building are already reserved 75-100% for the next few months. It’s going to be some work to get the down payment secured because my refi will take longer than the purchase. Needless to say, I’m a little freaked out because I need to see some return on my investment relatively quickly as I am the only one working (teacher) in a family of five. Am I crazy? If the unit is rented full time, I could stand to profit $2000-$4000 per month depending on the room rate I charge.
Mahalo for your thoughts,

Shanna

Shanna Arthur · Answer

@William Beck Yes, taxes and property values are high.  Hawaii now adds 10% to any short term vacation rental.  I think the least I will stand to profit is about $1000 per month.  When I initially organized my goals it was to purchase a multi family unit with a profit of $1000 per month, so at minimum, these two paths are the same, but the short term has ability to profit much more if it’s attractive enough for vacationers.

Shanna Arthur · Answer

Aloha Everyone,

Wow. What a rollercoaster!  My realtor (and two other realtors) confirmed that this particular complex was zoned “resort” therefore all the condos were automatically able to be short term rentals. Well, I called the county permitting department and they said that in fact there were only 20 units in the building that were permitted to be short term rentals and the unit that I was looking to purchase, was not one of them and could never be one of them. I am so glad I called because I would have been stuck with a great condo, but very little room for profit. Interestingly, this experience has given me more insight into what I want.  I really would like to give  a short term rental (my friends and I call them vacation rentals) a try as an investment for a while and see how that fares for my family. Thanks for your help everyone!  Malama Pono,

Shanna

Lake Lutes · Answer

Hi Shanna! Sounds like a great investment opportunity. If your numbers are right, it sounds like a worth while risk. I live in Hawaii full time and will say we've had an insane spike in tourism again - lots of visitors and demand for rental cars, dinner reservations, room rentals, tourist activities, etc. I will say, however, that Hawaii's economy is very frail. If COVID rates spike again due to the Delta variant, the Hawaiian government is one of the most liberal in the country, and its possible there are additional shutdowns/mask mandates/etc. As it stands, we're one of the few states with a continued mask mandate and continued COVID restrictions. This could derail a short term investment property and leave a huge hole in your pocket. Last thing to consider would be the ever changing short term rental regulations. Late 2019 they banned so many short term rentals and retracted their permitting for such rentals, and I could see them becoming even more restrictive to stimulate money back into the hotel industry - this could also force you to go to a long term rental plan and slash your margins. Just food for thought - everything in real estate is a weighing between risk and profit - decide which is more prevalent here and jump!

William Beck · Answer

The biggest hurdle for Hawaii is zoning/permitting restrictions, so if you've gotten past that and your numbers work out that sounds like a really awesome investment!

William Beck · Answer

Having worked with lots of prospective buyers in Hawaii - it's a challenge. Taxes are pretty high, property values are high. After running #'s it's usually break even or offsetting some costs. It's too bad because you cannot beat the Occupancy rates month over month anywhere domestically in the US. A place that gets rented 300+ days a year in Hawaii is doable, but with cost of acquisition so high it's still a tough place for investment.

Bruce Woodruff · Answer

Have you searched AIR or VRBO to find similar places? That will tell you what the average rate is and also how much they are booked out...

Teresa Nelle · Answer

Aloha Shanna,

Is the condo on Maui? If so, I'm happy to secure a proforma for you. I am an Island Sotheby's Realtor, assisting plenty of Buyers in this crazy market.  Also, I've lived here 30 years so probably also know a little back story on the complex. Feel free to reach out to me.

Mahalo,

Teresa

Bleys Wright · Answer

@Shanna Arthur Aloha,

Biggest problem is permitting can change with the whims of government. Really hard to find legal STR homes in Hawaii. Most HOA don't allow it even if zoned properly. Let me know how that goes. I'm in Hawaii too

Bruce Woodruff · Answer

Well, at an average of $195 a night, and an average 87.5% occupancy, you are looking at an average monthly income of $5118.75

IF your numbers are correct, this appears to be a no-brainer...... :-)

Shanna Arthur · Answer

@Bruce Woodruff Yes. 2 bedroom units in the building are renting for anywhere from $150-$260 per night. They are 75-100% full for the next 3 months.

Vacation Rental in Hawaii?

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