 Real estate rentals on Oahu do not pencil-in as well as they
often do on the Mainland for two major reasons: (1) Rental
rates do not tend to parallel prices; e.g., a $400,000 home
doesn’t usually rent for twice the rent of a $200,000 home.
Therefore, higher cost areas like Oahu do not tend to produce
the same rent relative to the cost of the property as lower
cost areas. And (2), our island location and attendant shipping
costs make it more expensive to repair and maintain a property
on Oahu than for a similar property on the Mainland.
Property taxes on Oahu tend to be lower than property taxes
in many areas of the Mainland; however, some of the lower
tax benefit is lost by the 4% General Excise Tax (GET) that
is due the state on gross rents in Hawaii. Although numerous
states have sales taxes, very few tax gross rental receipts
in addition to taxing net rental profit.
 A good rental on Oahu is one that carries itself; i.e., breaks-even
without any negative cash flow. These are difficult to find
in fee simple. When they do exist, they are usually either
(1) poor quality, relatively inexpensive homes located in
low cost areas with tenants that are subsidized by the city
or state. Or (2), they are small studio/one-bedroom high-rise
units often located in run-down complexes that attract short-term,
transient tenants. Both types of properties can be a source
of tenant problems for the owners.
Better investment properties from a cash flow analysis are
often leasehold properties, as rent does not increase merely
because a property is owned in fee simple vice leasehold.
However, the cost to purchase a property will be less owning
in leasehold. The problem with owning in leasehold is that
it will impact upon the owner when it becomes time for them
to sell or when the lease rent renegotiates, as both lease
rent and fee prices tend to increase over time. Refer to the
article in this section titled “Leasehold Land.”
Hawaii law requires that someone who lives on the island where
the property is located represent an absentee owner. It does
not need to be a real estate agent; i.e., it can be a friend
or relative providing the individual does not represent more
than one owner.
 So, why do non-residents purchase investment properties on
Oahu? There are two major reasons. (1) Our island environment
makes us land-short and over a period of time, prices tend
to rise on Oahu. Looking at the last ten years where there
was both a lengthy booming period and a lengthy declining
period, there were five years when average prices improved
and five years when they declined. However, the price improvement
during the booming years tended to be greater than the price
loss during the declining years. Historically, there has been
a period of soaring appreciation once per decade since statehood
except for the 1990’s; i.e., the 1960’s, 1970’s, 1980’s and
2000’s each saw a year or more when Oahu prices soared. Therefore,
if an investor holds their Oahu property long enough, eventually
they should encounter one of these booming periods. And (2),
some absentee owners like to own here, as it enables them
to be able to visit Oahu periodically to inspect their rental(s)
and be able to write off some of the expenses of their trip.
Some owners even stay in their investment(s) when they visit
Oahu, refer to the article in this section titled “Using Your
Investment.”
|
|
