Good morning everyone!
I sat down and calculated ROE on 3 properties I own in Oahu, Hawaii. I used exact mortgage balance and used in-building comps to calculate market value (all 3 are condos). I included all expenses, maintenance fees, and a healthy repairs reserve (which I have never came close to using in 4 years) to calculate net cash flow.
Numbers are below:
Property #1: Equity = $202,815 Net Cash Flow = $10,270 ROE = ~5.1% {~56% LTV}
Property #2: Equity = $103,284 Net Cash Flow = $6,109 ROE = ~5.9% {~57% LTV}
Property #3: Equity = $90,588 Net Cash Flow = $2,475 ROE = ~2.7% {~61% LTV}
What do you guys think of these ROE numbers? To me they seem quite low (especially the 3rd property). Do you recommend selling, maybe 1031 into an apartment building somewhere else? 1031 into several SFH rentals, geographically diversified? Stay put?
I am open to selling the second and third properties. The first, probably I will never sell because its in a desirable area on the beach. Would you refinance any of them?
I listed the LTVs above. I actually realized, I am under-leveraged for my level of risk (I think?). I would probably like less $ in each property. I appreciate your thoughts!
Aloha @Andrey Y.
Interesting discussion, mahalo.
If you compare your numbers to other condos on Oahu with 50% down, your numbers seem pretty good for the first two properties. Property #3 is closer to the average (~3%). I have seen a rare few that would reach 8%.
Obviously there are multiple ways to analyze an investment property, the best one depends on what one's goals are. Based solely on a Return on Equity:
-Properties #2 and #3 are pretty close to their max if you keep the money in condos in Hawaii. You may be able to reach a higher percentage in a different building, but it probably wouldn't be worth the costs and hassle of moving your money.
-Both properties have equity at around $100k, which would limit you to a purchase price of $500k (20% down) if you did a 1031 exchange. You may be able to find a duplex for that amount (although they are getting harder to find), but your ROE would be about 2.5%.
-$200k is the point where things can start to improve noticeably. At this point you can look at multi families at or under $1m. Some could provide a ROE between 10% and 12%. But your only property at this time that would work in this plan is Property #1. Or you could sell Properties #2 and #3 at the same time, but that would be tough if they're not in the same building and if you wanted to do a 1031.
Overall I am bullish on Hawaii. The market will definitely take a breather, as will all markets, but in the long run I think Hawaii will continue to do well. Overall it seems like you're doing as well as everybody else here, with the ability to improve starting at the $200k range.
Aloha @Andrey Y.
Interesting discussion, mahalo.
If you compare your numbers to other condos on Oahu with 50% down, your numbers seem pretty good for the first two properties. Property #3 is closer to the average (~3%). I have seen a rare few that would reach 8%.
Obviously there are multiple ways to analyze an investment property, the best one depends on what one's goals are. Based solely on a Return on Equity:
-Properties #2 and #3 are pretty close to their max if you keep the money in condos in Hawaii. You may be able to reach a higher percentage in a different building, but it probably wouldn't be worth the costs and hassle of moving your money.
-Both properties have equity at around $100k, which would limit you to a purchase price of $500k (20% down) if you did a 1031 exchange. You may be able to find a duplex for that amount (although they are getting harder to find), but your ROE would be about 2.5%.
-$200k is the point where things can start to improve noticeably. At this point you can look at multi families at or under $1m. Some could provide a ROE between 10% and 12%. But your only property at this time that would work in this plan is Property #1. Or you could sell Properties #2 and #3 at the same time, but that would be tough if they're not in the same building and if you wanted to do a 1031.
Overall I am bullish on Hawaii. The market will definitely take a breather, as will all markets, but in the long run I think Hawaii will continue to do well. Overall it seems like you're doing as well as everybody else here, with the ability to improve starting at the $200k range.
Mahalo for your comments!
I had no idea that the average ROE is 3%, is that for SFH or condos, Honolulu or all of Hawaii?
I think the 3rd condo is in need of some light updating, which should improve the rents. Its a 2/1/2 about 800 sq. ft., with relatively original kitchen, linoleum in the kitchen, and outdated carpets.
How much would you spend on a renovation to make sure to optimize rental ROI, but not spend too much where it won't be worth it given the rents will have a limit? The property is actually in Mililani :)
I am leaning towards not selling anything in Hawaii, but I would consider refi once the equity gets too high for my comfort.
I'm not sure if 3% is an actual average, but it is an average for what we and our clients are seeing with current properties and potential properties. This is for condos on Oahu. Unfortunately my knowledge regarding other islands or states outside of Hawaii is minimal.
Mililani is a great neighborhood with a range of building qualities and thus renter expectations. I'm assuming Property #3 is valued at about $150k, based on the numbers you provided. I'm also assuming the property is in the valley (which provides the best cash flow opportunities in Mililani). If the property is in the valley, you may be able to get away with the unit's current condition. Dated, but clean materials are fine for most of the units in the valley. For the items you mentioned, I'd recommend changing out the carpets if there are stains, holes, burns, etc. (even if it's just a few). An original kitchen with linoleum is fine, again, as long as it is clean. If there are holes. dings, stains, burn marks, broken cabinets, etc., then repairs or replacement will likely be needed to get maximum rent.
I think keeping your Hawaii properties is a good idea. As for doing a refi, that could also be a good idea, but you probably wouldn't know for sure until you viewed that decision in relation to your overall investment plan and portfolio, along with your goals. Taking a bird's eye view of your portfolio through the lens of your goals, will help you determine if a refi is the best option.
But this step would require specifics, which may not be ideal for a forum post. Feel free to message me if you'd like to discuss further and bounce some ideas/options around.
Aloha
I'm confused. What are you actually trying to accomplish? Do you need cash for deals?
With the low inventory in Hawaii, I would never sell unless you needed the cash. You could just as easily refi and get cash out, continue owning.
Another question: why do you like condos? The monthly maintenance and continual harrassment seems like a good deal?? Curious
Good numbers. Congrats!
I'm confused. What are you actually trying to accomplish? Do you need cash for deals?
With the low inventory in Hawaii, I would never sell unless you needed the cash. You could just as easily refi and get cash out, continue owning.
Another question: why do you like condos? The monthly maintenance and continual harrassment seems like a good deal?? Curious
Good numbers. Congrats!
I don't necessarily "need' the cash, as I earn a good living. But it would be nice to have the capital to deploy into more apartment syndications. Condos are amazing! Don't believe the old adage on BP that condos are terrible. In Hawaii, rental income growth has far outpaced maintenance fees on most buildings. ie. if 10 years ago maintenance fees were $300, rents were $1000. Now, rents would be ~$1900-2000 and maintenance fees maybe $450-500 at the most.