 Periodically, we’re asked about the feasibility of buying
properties on Oahu that owners can use themselves when they
visit. Such properties fall into one of four categories: (1)
properties kept vacant; (2) properties rented on a long-term
or month-to-month basis; (3) vacation rentals; and (4), hotel
pool properties. Each of these has advantages as well as disadvantages.
There are hundreds of absentee owners on our newsletter mailing
list that alternate between living on the Mainland and in
Hawaii, often spending about six months a year in each of
their two homes. There are many decided advantages to vacant
properties. They are always available for immediate use, appreciation
is enhanced by the lack of wear and tear by tenants, and with
no tenants, the owner can install quality furniture and furnishings.
Plus, a vacant property usually qualifies as a second home
thereby enabling a better mortgage rate. Mary Lou and I own
a vacant, one-bedroom high-rise unit in Waikiki with a great
ocean view we use as a personal hideaway. We keep food, beverages,
several sets of clothing, and toilet articles there, so we
can use it on a moment’s notice. There are a number of excellent
restaurants within walking distance of our unit. Usually,
we only remain overnight; however, some part-time owner-occupants
stay in the building for lengthy periods of time, alternating
between living in Waikiki and in their homes on the Mainland.
There is, of course, an obvious downside to keeping a unit
vacant, as without any income flow from tenants, the cost
of ownership will be far greater.
The second category, fixed rentals, applies to properties
with either long-term or month-to-month tenants. Fixed rentals
usually provide relatively stable income flow with tenants
that are prequalified and subject to approval by the owners.
The major disadvantage of a fixed rental is the property may
not be available when the owner wants to use it. A long-term
tenant’s lease has priority over the use of the property by
the owner; i.e., a long-term tenant is entitled to remain
in the property until the expiration of their lease even if
it conflicts with the owner’s plans. This is not the case
with a month-to-month tenant that can be given notice to vacate
at any time. Better tenants, though, will usually insist upon
a long-term lease vice renting on a month-to-month basis.
If the property is a fixed rental, the owner either has to
schedule their use of the property around a long-term tenant;
i.e., plan their trips so as to be here when their tenant
vacates. Or, the owner has to have a month-to-month tenant.
Each type of tenancy creates potential inconvenience and/or
lost rent to the owner. An additional problem may be created
if the fixed rental is furnished. A furnished rental provides
convenience to the owner when they use the property; however,
if the furnished rental is larger than a one-bedroom unit,
it may be difficult to rent to good tenants for any extended
period of time. We have a number of property management accounts
where the owners routinely schedule Hawaii vacations around
their tenants. Most of the properties are unfurnished. The
owners usually rent or use locally stored furniture and furnishings;
however, some of them simply “camp out” in their homes.
Category (3), vacation rentals, are properties that are used
as an alternative to a hotel. They usually tend to be houses
near a good beach or high-rise units in Waikiki. Vacation
rentals are fully furnished with extensive housekeeping required
following each rental. The minimum rental period is often
30 days to avoid the need for the owner to obtain a special
use permit and pay hotel (transient accommodation) taxes.
A vacation rental would appear to be ideal for an owner who
wants to use their property when they visit. Some recipients
of our newsletter stay in their vacation rentals every year
while maintaining the properties essentially fully occupied
at relatively high rents the remainder of the time. If you
are able to do this, the investment numbers may be very attractive.
However, it is definitely not the norm. Much of the vacation
rental business is repeat business from past clients. Therefore,
it often takes a number of years for a non-beachfront property
to be rented on a fairly consistent basis. Plus, peak rental
periods often coincide with when an owner wants to use the
property. Unfortunately, there is not a good centralized system
on Oahu for handling requests for vacation rentals. Nor, is
there a property management company with a sizable inventory
of such properties. Vacation rentals are management intense.
Most of the larger property management companies have decided
(like we did) that it’s not time and cost effective to handle
them. Companies with relatively small inventories, therefore,
tend to handle vacation rentals.
 Category (4), hotel pool properties, are high-rise units that
are rented as if they were hotel rooms. Almost all of them
are located in Waikiki. Hotel pool properties have to be furnished
and maintained to standards established by the company that
manages the hotel pool. The initial outfitting (and periodic
replacement) costs, though, are usually quite reasonable in
view of bulk purchases. Most of the properties provide a daily
housekeeping service that becomes optional when the owner
uses the property. The advantage of a hotel pool property
compared to a vacation rental is the occupancy rates are likely
to be considerably higher. Many of the buildings have established
rental arrangements with tour companies. The major player
on Oahu for managing hotel pool properties is Aston. Their
system (for at least some of their buildings) is to pool and
split the rental proceeds; i.e., the rental receipts are divided
between those units that were available for rent regardless
if they were actually rented. An owner wanting to use their
property is required to provide advance notice (typically
90 days) and can remain in their unit as long as they want.
Summary
Vacant properties are in a separate category, as they are
not really an investment property although the value of such
homes is certainly likely to increase with time. In view of
the time required to establish repeat business, I do not recommend
purchasing a property with the intent of converting it into
a vacation rental unless it is a home where there would be
immediate high demand for it like a beachfront house. Hotel
pool properties can be a relatively inexpensive method of
getting involved in investment real estate on Oahu. If you
plan to use the property extensively yourself; i.e., if that
is the purpose behind the purchase, it would behoove you to
calculate the cost to you of owning versus renting on your
trips. The most common form of investment is fixed rentals.
Their problem is that it is very difficult to keep them consistently
rented with good tenants that will agree to rent for periods
of less than a year. Therefore, you’ll probably need to adjust
your own vacations around your tenants’ leases.
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