Posted over 3 years ago

Buy a Hawaii Vacation Rental and have it pay for itself! Unicorn Alert

Good luck... If they exist, they go fast....

EXAMPLE: I have 500,000 and want to use to buy a property on Maui. My only criteria is that I can make money off of it through rentals and property value appreciation so in few years I can sell it and buy my dream home on Maui... I don't care where it is on the island or anything else about it... just want to make sure it is a "good investment"

EXAMPLE: I want to buy vacation rental properties as long as they "pay for themselves" so we can continue to come to Maui every year for a couple of weeks and can rent out the property when we're not here, and write off our vacations and profit from the investment. 

SHORT ANSWER: Good luck, if it was that easy, I will buy it,  or a ready investor in the wings waiting will.

REALISTIC: ROI potential is here if you buy smart, not emotional.

3 types of Condo Investment properties in Hawaii

  • Long Term - 30 Days ( 6 month tax option benefit) lease or more
  • Short Term Vacation Rental - lease less than 30 days
  • Condo-Tel - lease less than 30 days

Classes for Hawaii Condos

We have different classes for the condos in Hawaii. How a condo is classified will affect rental potential, financing and property taxes.

The three classes you need to be aware of are:

  • Long Term - Warrantable = Conventional 10% Down Payment Loans
  • Short Term - Non-Warrantable = Higher Down Payment Loans 20%-30%
  • Condo-Tel - Non-Warrantable = Highest Down Payment Loans 30% +

Warrantable condo simply means that the condominium project in question is eligible to be sold to Fannie Mae or Freddie Mac.

Non-Warrantable - Condos which are classified as non-warrantable are not eligible for the same Fannie Mae and Freddie Mac loan programs that warrantable condos are approved for.

Many Hawaii condos fall into this category because even though the condo complex may not possess any hotel like amenities outlined below under the condo-tel classification, it can still be non-warrantable for a variety of reasons, especially if the HOA allows vacation and short term rentals or the owner-occupancy ratio falls below 50%.

A Non-Warrantable condo is not eligible to be sold to Fannie Mae or Freddie Mac. Therefore most mortgage lenders will not lend on a Non Warrantable condo.

But because Fannie and Freddie will not purchase mortgages secured by Non Warrantable condos, they are considered to be more risky, and thus the interest rate and down payment are typically higher.

Condo-tel - A term used to describe a Condo-Hotel.

A condo-tel possesses some hotel like amenities such as a front desk for checking in and out, an activity or concierge desk, and daily or weekly maid service.

Due to Maui and Kailua Kona being a top destination resort community many condos for sale operate as a Condo-Tel. A complex that offers hotel like services or has less than a 30% owner-occupancy ratio will be considered a Condo-Tel.

Short Term / Condo-TelDown Payment Requirements

Non-Warrantable and Condo-tel (down payment/max loan amount/loan type):

  • 3% down to $790,000 (HomePath - primary, 2nd home, investment)
  • 25% down to $1,000,000 (Portfolio - primary residence)
  • 30% down to $1,000,000 (Portfolio - 2nd home)
  • 35% down to $1,000,000 (Portfolio - investment)
  • Loans over $1,000,000 (Portfolio - approved on case by case basis)

Private Mortgage Banking (only high-net-worth investors) 40% - 50% down to $40,000,000 loan amount.

There are potentials here, Kihei and Kona are more popular here for Vacation Rental, VR, and where more of my investors buy.

When doing a vacation rental I would suggest to look hard at the past P/L numbers for the ROI, and ready to move fast with an offer when the right one pops up, most VR's do not produce positive or the 1st year, those that do go fast, by investors waiting.

When looking at VR's consider the initial investment to purchase, the higher the investment, the higher the potential return ie. A 1 bedroom studio rents at lower cost percentage over initial investment and has lower VR value depending on Season, December to April is the highest season, more sought after are at least a 2bd, we see a lot of two couple vacationers or those traveling with children, and harder to find are units that will allow larger groups.

Highest potential return can be on larger units, 3bd and 4bd, or those with direct ocean view, example, I have one in escrow, it's a 4bd at 600k that I acquired for a ready to buy investor that we got one day on market, within hours of coming on market, that has netted in past 60k a year, with a 200k cash down and finance the 400k, and I gave him 50% of the buyers commission to help acquire,  bear in mind that units that allow short term rental most often do not qualify for a conventional or FHA warrantable loan and require a 20-30% down.

They are here, to get the best options you have to move fast when they arise and remember the higher the initial investment, the higher potential for ROI may exist if bought smart. Let the numbers guide, not emotion.

More to follow....

Comments (2)

  1. Do these condo buying guidelines also apply to residential condos in a buy and hold scenario?

    Where can I find more information on buying and holding condos in Hawaii?

    1. Micah,

      Mark is mostly talking about the condos that allow vacation rentals in this article. There are other projects that do not allow VR, I think that is what you're asking about. You may be able to get slightly better terms on residential condos, but the rental income won't be nearly as much. The main difference is the purchase price is usually slightly lower since the rental income is lower than VR. 

      I buy long term rental condos on Maui and the bank still requires 20-25% down (since they are investor loans). You could check out projects like Maui Gardens, Keonekai Village, Kihei Village, Southpoint, or Iao Parkside but producing cash flow with those long term units is getting harder now with the increasing purchase prices.