All Forum Posts by: Isi Nau

Hi Liz. All of our clients who have pursued STRs in Waikiki have done well. Managing yourself will make those numbers even better. It’s likely the unit will need some updating when you purchase, unless it’s in a newer building like the Trump. Fortunately updating a small condo isn’t too big of a cost, but it may take a little more time depending on the building’s schedule (ie water shut off, etc). Budgeting a remodel cost may be a good idea. You probably already know, but not all buildings in Waikiki allow STR. Some have very good guard dogs as resident managers on the lookout for STRs. Tourism has been on a record breaking pace here and is expected to grow slightly for the next 1-2 years. Waikiki pulls heavy from Asia, Canada, Australia, and the Western states. During the last recession we saw most visitor statistics drop about 12% for Waikiki. So as you run worst case scenarios in your models, you can factor that in. Who knows what the future holds, but it at least gives you a starting point.

The purpose of this post is to provide hope to those trying to make it in a high priced market such as Hawaii, California, New York, etc.

My wife and I made $600,000 doing live-in flips in Honolulu. It took us 11 years and three homes.

We purchased a 3 bedroom condo, sold it and purchased a 3 bedroom single family home, sold it and purchased a 5 bedroom single family home.

We have put in $80,000 along the way (down payment on Property #1, rehab of Property #1, and rehab of Property #2). That's roughly a 20% ROI per year ($80k invested, $600k return, 11 years).

Property #2 was purchased at the last peak of the market. Which is noteworthy because if you're doing it (REI) correctly, you can make money in any market.

Some take-aways:

1. Be ready to move

This plan will work best through multiple moves and trading up, but moving can be a pain. Unfortunately it is an unavoidable part of the plan. When a great deal comes up, you may have to be ready to move in a month.

2. Live below your means

This is where a lot of people slip up. It’s not fun or easy. It requires sacrifice and delayed gratification. Super unsexy, super unexciting, but super effective.

3. Lose sleep

Study your market, do some or most of the rehab yourself, talk to people in the industry, work two jobs (or one higher paying one). Everyone is busy and no one has the time, so how do people do it?  Delayed gratification.  You can always sleep (and watch Netflix) tomorrow.

4. Recognize a great deal

Know your market! Spend time each day (or at least 4-5 days a week) studying your market. What does a 3 bed/2 bath sell for, or a small house with a large lot, or the Eastside of town versus the Westside of town? You'll have to be an MLS junkie, but this will allow you to recognize a great deal within a few minutes of seeing it. When you see one, submit an offer that day.

5. Run the numbers

A lot. Know exactly what your home is worth at any given time. Know current terms and rates for financing. Run the numbers on 100s of homes. Again, this will help you to recognize a great deal instantly and determine if it will fit into your investment plan. It will also allow you to act quickly, which is essential in today’s market.

6. Get a realtor

One that’s doing it in your market. A lot. On Oahu, most realtors do not invest in real estate. If I had to guess, I think it would breakdown accordingly:

90% don’t invest

9% invest on the mainland or have one property on Oahu

1% are actually investing significantly on Oahu

Would you go to your dentist to get braces? She knows about teeth. Or maybe even your Uncle Louie? He has teeth. Or course not. You’d find a reputable orthodontist in your area who knows exactly how to do it. They can do most of the heavy lifting on Items 4 and 5 above.

You have to live somewhere, so why not make money while you’re at it. Live-in flips (and house hacking) can be tough with a spouse and/or children. Certain minimum quality of life standards have to be met. But a lot of money can still be made without inconveniencing the family too much.  My wife and I have five children, so we had fairly significant nonnegotiable life style criteria (schools, commute, good neighborhood, space, etc.), which limited how crazy we could get.  Others could, and have, seen much better results than ours.

To own a home in Hawaii is a blessing. If that home can earn you more money than your fulltime job, that’s the winning lotto ticket.

To those in Hawaii, find someone who is doing it! There are a ton of people who will tell you it’s not possible to make money in real estate here, let alone owning your own home. It is possible! It takes work and sacrifice, but it is possible.

Hi @Ben Cochran

I agree with cautions provided above.  Assuming these are addressed, here are some logistical items to consider.

Your friend's dilemma is fairly common for a business owner.  Be aggressive on your tax returns to limit your tax liability or be conservative on your taxes to allow easier qualification for lending?  Is the $500k pre or post tax?  If post tax, that's a sufficient amount of money no matter how creative their taxes are.  I'm surprised they can't qualify.  Unless they don't have two years of verified income yet.

Is this how the overall deal would look?

Downpayment - them

Loan - you

Mortgage payment - them

For this type of set up, you'll both have to be on the mortgage.  Them because of their down payment, you because of your income.  Most likely title will have to be held as Joint Tenants (most mortgages won't allow tenants in common in this situation).  So ownership will be in equal percentages.

If it is a residential property, you most likely will not be able to get financing in the name of a partnership or LLC. It will have to be in your personal names. So setting up an entity will definitely help in protecting everyone, but will make it hard for getting financing. If it is a commercial property, then an entity will work and is definitely recommended.

As for the concern of you not qualifying, there's only one way to find out.  Going through the prequalification process will also open the conversation with the lender as to what creative options you have.

Some things to consider (although you probably already have):

Who will select and vet the property in determining if it's a good investment (local expertise will be critical)?

Who will manage the property/project?

How will cash flow be distributed (assuming it's a rental and not a flip)?

How will the eventual sale be decided on (i.e. timing, price, etc.)?

All the best!

Originally posted by @Adam Christopher Zaleski:

Originally posted by @Isi Nau:

Originally posted by @Adam Christopher Zaleski:

Originally posted by @Steve B.:

Basing your option on the market from your view from Hawaii or San Francisco tends to be as reasonable extrapolating an opinion based on your experience in Detroit. Your suffering from your own confirmation bias. It may end up being correct, or not, but it's definitely suspect.

I agree that the original poster is making some of the same mistakes as he is criticizing. If someone buys a negative cash flow property and bets on appreciation it is not reckless.

 I apologize, I'm not sure I understand.  I can't find where the original post discussed negative cash flow?

Your post is below. Your argument is that a low cash flow house is better than a high cash flow house because the low cash flow house will have more appreciation. Based on this logic, a negative cash flow house would be a better investment than a low cash flow house. However, you state below that you agree with someone that negative cash flow is reckless. I don't think it makes any sense. However, this irrational thinking could be explained by humans tendency to be loss averse.

"Agreed. Investing in a high appreciation market with negative cash flow is reckless. Which I think @Llewelyn had a good point on; partner up. Find a way to invest and not go negative each month. There are ways to do it."

Thanks Adam.  Unfortunately, I still can't seem to find where my original argument compares any type of cash flow situations, or implies that one cash flow is better or worse than another, or even mentions cash flow at all.  But I don't want to take up too much of our time and get lost in the bottomless pit of online back-and-forth.

I wanted to thank everyone for participating in this discussion.  There has been a helpful array of perspectives branching out into various fringes of the topic.  Lots to learn here, thanks to your willingness to take the time to participate.  Aloha.

Originally posted by @Adam Christopher Zaleski:

Originally posted by @Steve B.:

Basing your option on the market from your view from Hawaii or San Francisco tends to be as reasonable extrapolating an opinion based on your experience in Detroit. Your suffering from your own confirmation bias. It may end up being correct, or not, but it's definitely suspect.

I agree that the original poster is making some of the same mistakes as he is criticizing. If someone buys a negative cash flow property and bets on appreciation it is not reckless.

 I apologize, I'm not sure I understand.  I can't find where the original post discussed negative cash flow?

Mahalo everyone for your input! It’s been fun reading each comment.

Some clarity. This is not another cash flow vs. appreciation debate (as mentioned in the bottom of the original post). That’s the problem. People hear cash flow or appreciation, role their eyes and think here we go again with THAT debate. A phenomenon I wasn’t familiar with before joining BP. It’s very interesting how the two have become mutually exclusive (on this platform).

My original post is simply a stance to not overlook appreciation. Also a stance to not over look cash flow, tax protection, or debt pay down. All are correct principles.  Don't tell anyone, but you can have them all!  Most likely not in equal proportions at given time, but you can have them all!

People have created this interesting, and false, friction between correct REI principles. Someone says cash flow and people hear speculation and negative cash flow. That's crazy. It's appreciation.

@Jay Hinrichs

Thank you for taking the time to share your experience. Always appreciated! The temptation of cash flow now is pretty strong. And yes, if you have little capital and want immediate results, then cash flow markets are the way to go. No shame in that.

@Llewelyn A.

My thoughts exactly! I was certain this thread would slip into obscurity. Thank you for sharing about one of your properties. I’ll have to look up that post.

@Steve B.

A skewed perspective and self-confirming bias are certainly detrimental. Thank goodness for data, both anecdotal (seasoned) and empirical.

@Matt R.

Definitely shocking. And sad. I am fine with any investment option someone chooses, but I am not okay with the deceitful presentations of appreciation (or any topic).

@Jay Patel

Agreed. Investing in a high appreciation market with negative cash flow is reckless. Which I think @Llewelyn had a good point on; partner up. Find a way to invest and not go negative each month. There are ways to do it.

@Justin B.

Definitely. Don’t go negative each month! That’s crazy. And don’t be afraid of high appreciation markets. People have and are doing it. Find out how!

@Llewelyn A.

(Second comment)

Exactly. There are four common ways to make money in real estate. For an investor to knock any one of them, prevents them from firing on all cylinders.

@Lesley Resnick

Definitely. If an investor needs to live off cash flow now, then that is a big factor in the type of investing they should pursue. I met with a client a year ago who wanted to invest in real estate and retire. Sounds good to me. How many more years until you’d like to retire? Nine months was the reply. (insert awkward smiling emoji) Unfortunately I couldn’t help them with that. Were they wrong in their goal? Nope. But it was definitely good to know, so that a specific strategy could be formulated.

@Thomas S.

Definitely! Don’t allow your financial teeth to get knocked in because of your pride/greed/emotions.

@Matt R. and @Llewelyn A.

Education is critical. And hopefully that education is coming from people who have been doing it since before 2009.

This seems to be a widely held mantra here.  If you buy in a high appreciation market, you're not investing, you are speculating.  That's not something I have ever heard here in Hawaii.  Probably because it's not true!  Hahahaha.  If you know anything about Hawaii, you know to buy as much real estate as you responsibly can.  This has been true since the late 1800s.  But what does history know?  I've been investing since 2002!   ;)

A closer look at Hawaii.  In 1950 the median price of a single family home was $12k.  The median price is now $760k.  So in 67 years Honolulu has averaged just over 6% appreciation per year.  I would image areas like Los Angeles and San Francisco would show similar data.

During the recent recession, most areas in Honolulu dropped around 15%.  Cumulative!  These seem to be pretty solid figures.  In 67 years annual average appreciation of 6%, and only a 15% cumulative drop during the worst financial crisis of our time.  Is 67 years not a large enough data set to have confidence replace speculation?

If 67 years of sales history can't be relied upon, then neither can rent history.  If calculating future appreciation is speculative, then so would calculating future rents, or any rents for that matter.  That's ridiculous.

In other words, just because we've seen something happen for 67 years, doesn't mean it will happen again?  Wow!  Then why even invest?  I mean speculate.   :)

(This is not about appreciation vs. cash flow.  Both are great.  This is about using data to make educated investments and to help dispel poor advice.)

Aloha Brian.  No need apologize.  Good job for putting your question out there.

Sounds like your initial research is correct.  Ditto to the points Royce made.  In order to give much more, I'd have to know some of the finer details, but I realize you may not want to post that info publicly.  I am happy to help if you ever want to talk.

Hey @Aaron Cayabyab.  I would absolutely recommend house hacking on Oahu.  It is one of the best ways to break into the market.  If you could do a four-plex, even better.  The one downfall is you'd then be a Townie.  Hahaha.  Just kidding.

Our office is in Mililani if you ever want to talk story.  Bouncing ideas around in person seems to be the most productive.  Emails and texts kill the flow.

No problem!  As you continue your research feel free to reach out any time.