July to September 2016 Quarterly Newsletter
Median sales prices on Oahu continue their steady climb, as the supply of available homes remains tight. The median price in September for single family homes was $750,000 (2.7% higher than September, 2015) and the median price for condos was $383,250 (4.7% higher than September, 2015). Affordability appears to be having an impact as the number of condo sales rose 6.7% higher than the year before while single family home sales were flat. Active listings of single family homes dropped 7.2% and of condos dropped 6.7%. Strong demand and weak supply have resulted in only 2.9 months of inventory for single family homes and 3.0 months of inventory for condos. There appears to be little relief in sight for aspiring home owners while the time is right for those looking to cash out.
The University of Hawaii Economic Research Organization (UHERO) predicts that one of the main drivers of the states recent economic growth, construction, is nearing the peak of its cycle. Deteriorating home affordability, rising construction costs, and expected monetary tightening (rising interest rates) will ultimately start the next construction industry downturn. UHERO predicts that construction activity will start falling in 2018 as the surge in condo and resort building wanes, rising home prices discourage more buyers, and global economics become more challenging.
Good news came out of the Hawaii Tourism Conference that recently ended. Despite some hotel operators’ fears that the next downturn is around the corner, a hotel industry researcher points to strong demand filling up the new hotels being built around the nation and in Hawaii. Hawaii is also home to the best performing group of timeshares in the nation and account for 9.4% of the visitors to the state. The visitor industry is on pace to set another record in 2016 and similar results are expected for 2017.
GEORGE WINFIELD STOTT JR.
Wednesday, July 20th, was a sad day for family, friends, current employees, and past employees. George Winfield Stott Jr. passed away two days after his 83rd birthday. Tracey read George a personal letter that Monday detailing the reasons why he was such a wonderful father and role model for her. Mike and Donna Stott called and sang happy birthday with George joining in at the end singing “happy birthday to me.”
Long before his distinguished naval and real estate career, George was born in San Diego to a military family. George lived on Oahu as a child and attended Punahou in the second grade. George graduated from the United States Naval Academy and received his commission in the U.S. Navy in 1955. A little known fact is that George and his roommates watched over a young plebe by the name of John McCain during their senior year. George and John were both boxers and he helped John through several scrapes.
George married Mary Lou Dempf upon graduation and the two blossomed during George’s military career that culminated in being the Captain of two nuclear powered submarines. George and Mary Lou ultimately settled on Oahu in 1970 where they raised three children on the Windward Side. George retired from the United States Navy in 1976, completed his MBA at the University of Hawaii, and opened Stott Real Estate, Inc. in 1978. During his distinguished 36-year real estate career, George trained and mentored many agents, several who opened their own thriving businesses. Under George’s tutelage, Mike and Donna Stott, Tim and Tracey Kelley, honed their skills. Mike and Donna moved to Atlanta, GA to open their own real estate company and real estate agent coaching business. Tim Kelley and Tracey Stott Kelley now own Stott Real Estate, Inc. as a second-generation family business.
George will be remembered as a loving husband, caring father, inspirational business leader, and a great friend. He leaves behind his wife of 60 years, three children, seven grandchildren, and two great-grandchildren. While his passing will be mourned, his life will be celebrated in the legacy he is leaving behind.
On Monday, August 8th, family and friends said their final farewell to George. A group of young Navy sailors conducted a tear wrenching ceremony, featuring “Taps” and a 21-gun salute, honoring a submarine commander that they never knew. One young man in the honor guard shed a tear and another fine gentleman presented Mary Lou with an American flag. Father Emmanuel, a new pastor from Zimbabwe, then held a beautiful mass that included a soaring a capella version of “Amazing Grace” by George’s past employee, Lokahi Valentine. Two outrigger canoes paddled out to spread George’s ashes and flowers in the ocean about a quarter mile off the shore from his home per his wishes. Several years ago, George told Tracey that he only wanted his ashes given to the sea. He later changed his mind and told Tracey “he wanted it all.” The celebration of life was a great farewell to a great man.
We appreciate all the words of support and comfort during the past ten weeks. George helped many people over his career and the caring response has helped his family find peace.
A MIXED PLATE OF TALK STORY
A recent study of the decade from 1996 through 2006 shows the impact of government regulations on Honolulu’s homebuilding. While home prices shot up 146% during the time period, the percentage change of housing units grew only 12.6%. Economist Carl Bonham contends that the regulatory burden that Hawaii puts on the developers is a major part of the problem. Multiple regulatory agencies, the city, the State Land Use Commission, and the Hawaii Community Development Authority tie up construction projects in multiple layers of red tape. Places that have really tight regulations have higher home prices and Honolulu comes out on top of the regulatory burden.
Tim sent an e-mail to Stott Property Management’s clients in April 2015 about seeing signs of a slowing rental market. Apartment website, Zumper, just confirmed that rents appear to have peaked for one and two bedroom condos in July and August of 2015. Stott Property Management has noticed that some tenants have reacted to the higher rents by finding roommates to help make ends meet. The trend is not unique to Hawaii. Zumper reports that median rents for one and two bedroom apartments fell nationwide.
The Hawaii Tourism Authority announced that visitor arrivals set a record in July. 835,417 people visited the state, which represents a 2.1 percent increase over the previous record recorded last July.
The Hawaii Tourism Authority launched a free app on August 8th named GoHawaii. The app offers travel and safety tips for Oahu, Maui, the Big Island, Kauai, Lanai, and Molokai. The free app can be downloaded in the Google Play Store and the Apple iTunes Store and is offered in a number of languages. The apps destination screens allow users to see various Hawaii sites, activities, and special events. One feature provides users with Hawaii-styled emojis that users can share with family and friends.
U.S. Representative, Mark Takai died on July 20th, nine months after being diagnosed with pancreatic cancer and two months after announcing that he would not seek re-election because the cancer had spread. A special election to fill Mark Takai’s seat will be held at the same time as the general election on November 8th. The winner of the special election will serve out the remaining two months of Mark Takai’s term. Eleven candidates have filed to run in the general election for the term starting in January 4, 2017.
The Hawaii Public Utilities Commission (PUC) ruled against the proposed $4.3 billion acquisition of Hawaiian Electric Company (HECO) by NextEra Energy, Inc. Even though PUC acknowledged that NextEra Energy is “fit, willing, and able to perform the service currently offered by the utility being acquired,” PUC stated that NextEra failed to demonstrate that the application is reasonable and in the public interest. While some say that NextEra failed to embrace Hawaii’s regulatory requirements, Paul Brewbaker, one of the leading economists on the island contends that the deal fell apart because the state wanted to consolidate its political power over the utility. Brewbaker states that Hawaii’s economy continues to suffer as politics drive changes instead of the consumers and businesses. Several ventures have been cancelled as a result of the PUC’s decision including HECO’s major liquefied natural gas (LNG) project, the Oahu-Maui interisland transmission cable, a proposed Lanai Wind Project, and power supply improvement plans on Oahu. Hawaiian Electric Company, spent $22.4 million on the merger, which will ultimately be passed on to Oahu consumers.
The city of Honolulu awarded Hawaii Gas a contract to supply the city with biogas from its Honoluliuli Wastewater Treatment plant in Ewa Beach. Biogas, or biomethane, is generated when biodegradable waste is broken down through chemical reactions and by microbes. The natural gas produced at the site is currently burned off and not utilized. Hawaii Gas is looking to replace most of its current fuel base with renewable natural gas has issued its own request for proposals. It also has a $200 million plan to ship LNG in bulk amounts to Hawaii starting in 2019.
The Honolulu StarAdvertiser and the state Division of Consumer Advocacy have documented concerns with the Hawaii Green Infrastructure Authority’s management of the GEMS funding. The funding, paid for by Hawaiian Electric customers to the tune of $1.30 per month, was intended to provide underserved customers loans to finance sustainable energy projects like photo-voltaic solar. As of June 30th, the Hawaii Green Infrastructure Authority has spent $1.7 million to approve a total of $388,800 in loans. Instead of recognizing that there really is not a need for this program as evidenced by the state’s rooftop solar penetration, the authority is looking to change the eligibility requirements to allow more loan approvals. A novel concept would be to recognize failure and return the money to Hawaiian Electric’s customer base. The program currently has collected $144.6 million from the monthly fees.
Hawaii Electric Light Company and Maui Electric Company announced that the arbitrary caps for the grid-supply program that services roof-top solar were reached. The program that replaced net metering, allowed customers to sell excess solar energy generated during the day back to the utilities at wholesale prices. Customers must now pay for battery storage systems due to the grid-supply caps. Oahu is 22% away from reaching Hawaiian Electric Company’s cap of 25-megawatts.
Dan Grabauskas, executive director and CEO of the Honolulu Authority for Rapid Transportation (HART) resigned on August 18, 2016. Grabauskas took much of the heat for being unable to meet unrealistic budget forecasts set by then Mayor Mufi Hanneman and current Mayor Kirk Caldwell. 2016 has been seen all of HART’s senior leadership turn over as fiscal reality struck and the city and state politicians starting looking for scapegoats. Grabaskaus gratiously stated, “It has been an honor and pleasure to have worked on this transformational project for nearly four-and-a-half years.” While Dan is moving on, Oahu residents will get to find out what transformation will mean to them in the years to come.
The Federal Transit Authority (FTA) shot down the delegation of Mayor Kirk Caldwell, City Council Chairman Ernie Martin, HART Chairperson Colleen Hanabusa, and acting HART Executive Director Michael Formby who flew to San Francisco to request additional federal dollars for the financially strapped rail project. They also made it clear that stopping at Middle Street was not an option and if the project stopped short, the $1.55 billion already committed would be in jeopardy. Caldwell and Martin plan on coming back to ask the legislator for an additional extension to the General Excise Tax surcharge beyond the additional five years granted by the legislature two years ago. State lawmakers are already getting geared up for a fight this winter claiming that the City and County of Honolulu administration and HART provided false information to the state legislature when the original extension to the GET surcharge was approved. HART has raised the total price tag of the project another $700 million to $8.6 billion and board chairwoman, Colleen Hanabusa cautioned that the numbers can still change.
The Environmental Protection Agency (EPA) provided the latest example of why 70% of Americans on both sides of the political spectrum think that the country is headed in the wrong direction. The EPA recently required HoyHoy Trap-A-Roach, a staple in Hawaii households for over 20 years, to destroy 190,000 traps because it deemed that the packaging labels “misleading.” Meanwhile, Hawaii consumers are having to suffer through the peak cockroach season without their go to pest control trap against the flying American roaches known as B-52 Bombers. Retailers are waiting for shipments to restock their shelves.
WalletHub ranked Honolulu #10 out of the 100 largest U.S. cities for recreation due to the abundance of hiking trails and water sports. The personal-finance website compared cities using 35 metrics ranging from the price of a movie ticket to the number of tennis courts per capita. Not surprising to Oahu residents, Honolulu ranked #1 in bike rental facilities, fishing sports, hiking trails, boat tours, and water tours.
Fatboy’s Restaurant Group Hawaii has opened a new Fatboy’s plate lunch restaurant in Haleiwa. The restaurant is a family favorite of the Stott family and oldest sibling, Mike Stott, insists on Fatboy’s garlic chicken for his first dinner when he comes to visit. Tim and Tracey were quite puzzled over Mike’s obsession with the dish until they tried it themselves. It quickly became a potluck staple for the Kelley family at various sporting and party events. The Kailua restaurant sports a framed note saying, “A cow has four stomachs … Lucky bastard.” We recommend trying it out the next time you are on Oahu and looking for an excellent plate lunch.
The Hawaii Department of Health has confirmed 252 confirmed cases of Hepatitis A since June and has traced the source of the outbreak to imported frozen scallops that were served raw at Genki Sushi. The Department of Health has ordered ten restaurants on Oahu and one restaurant on Kauai closed until further notice. The outbreak has spread to workers at a number of restaurants, Costco, and Hawaiian Airlines. Two individuals sickened are currently scheduled to have liver transplants. Genki Sushi received permission from the Hawaii State Department of Health to reopen on Oahu 24 days after it was shut down. The Kauai restaurant will remain closed to complete renovations that are already in progress. Tim & Tracey recently received their Hepatitis A vaccination from their healthcare provider, Kaiser Permanente, who has encouraged their members to get vaccinated.
A group of six volunteers recently emerged from a small dome on the slopes of Mauna Kea after living 365 days in isolation. The study was one of four completed by the NASA funded Hawaii Space Exploration Analog and Simulation (HI-SEAS). HI-SEAS has compiled data from four simulated missions to study food choices and its effect on morale, water usage, and crew cohesion. The latest study was the longest simulated mission that included 40-minute communication delays with the outside world to mimic the delays experienced with a manned expedition to Mars. The crew consisted of people of different nationalities and personalities with sharing one common trait, low drama. Astronauts tend to be positive and stoic and one goal of the study was to detect conflicts between easy-going people before they become real problems. The dome was equipped with composting toilets and showers and relied on solar power for electricity. The only fresh things to eat were what the crew could grow inside the dome.
Waikiki Brewing Company signed a lease to open a second location in Kakaako that will include a brewery, canning operation, and tasting room. Tim and Tracey recently dined and enjoyed brews at Kauai Beer Company while visiting a friend on Kauai in September and thoroughly enjoyed the experience. While in Kauai, Tim was wearing a Staycation shirt from Karbach Brewing Company in Houston and was stopped by a couple from Houston on the Napali Coast. Visiting microbreweries and buying their T-shirts has become a fun activity and conversation piece. Ironically, Tim and Tracey have not visited Lanikai Brewery and Waikiki Brewing Company yet. That will change.
ODDS & ENDS
A Great Starter Investment Property: Tracey and Tim have owned investment real estate for 17 years and Tim has lead Stott Property Management for the past ten years. During that time, they have learned that the only investment property worth holding onto is one that provides positive cash flow immediately and with reasonable management, for a lifetime. An investment property should provide the means to work less over time to generate the same personal income versus having to work harder to pay the bills and cover a money-losing venture.
As with all investments, due diligence should be done ahead of time to make sure that the investment supports your long-term goals. The largest impact on your financial return will be the price you pay for the property (both sales price and initial make ready repairs). Patience is required in order to be successful. The cyclical real estate market does not provide these opportunities all the time. In fact, with asset prices near their all-time highs, Tim and Tracey are not currently looking to expand their investment real estate portfolio. Their last duplex purchase occurred in late 2011, after the mortgage crisis lowered sale prices. They won’t likely buy again until after the next buyer’s market returns prices to levels that make investment sense. In the meantime, Tim and Tracey are positioning themselves financially to make the move when the time comes.
The following financial requirement worked well for Tim and Tracey early in their investing career. They would buy a long-term rental property (versus a vacation rental) if the projected fixed expenses (mortgage payment, monthly property taxes, monthly insurance premium, utility costs not paid by tenant) was less than or equal to 75% of the monthly market rent. Believe it or not, this actually occurs. Tim and Tracey purchased in 1997, 1999, 2001, and 2011. The only time a poor purchase was made occurred in 2006 when they were given poor market advice during a 1031 exchange and bought a money losing four-plex (over the short-term) using the sale proceeds of a profitable single family home. This formula will help provide a buffer to cover the approximately 5% in maintenance costs that is typical for an investment property and contribute to your personal bottom line. Tim and Tracey did have to manage the properties themselves initially to make the numbers work, but now have licensed property managers taking care of the daily operations.
Tim and Tracey also have concluded that the following physical characteristics worked best for them. Their best investments have been duplexes, with ceramic tile flooring throughout, and quality middle grade fixtures. The ceramic tile flooring was installed when the original flooring that came with the purchase wore out.
If you are looking to purchase your first investment property or expand your portfolio, then do it right the first time. Avoid turning a home into a rental property when you move. Buy the property with the intention of renting it out immediately and have the financials help make the decision.
“Rich Dad Poor Dad”, “The Total Money Makeover:” Tim and Tracey recommend these two books to anyone because they both offer excellent advice and simple to understand concepts that if followed, will make your life easier. They read “Rich Dad Poor Dad” years ago and just recently finished “Total Money Makeover”. The concepts discussed in these books gave them the motivation and tools to manage their personal finances and invest early in their adult careers and as often as possible. Some basic concepts that have helped them understand and succeed are summarized in the following paragraphs. However, you really should read the books to determine if there are other or different lessons that will work for you.
Defining a personal financial asset and a personal financial liability was an “aha moment.” A personal financial asset adds money to your bank account while a personal financial liability takes money out of your bank account. This concept differs from the traditional definition of assets and liabilities. Examples of assets include salaries, positive cash flow producing investment properties, dividend generating stocks, savings accounts, money market accounts, bonds, etc. Examples of liabilities include your car, the house you live in, cell phone, personal loans, and student loans. A person can’t sustain a living over the long-term if their assets don’t equal or exceed their liabilities.
Avoiding or paying off debt is another key concept. Both Tim and Tracey avoided the pitfall of accumulating excessive debt early on without reading these books. However, the concept reinforced their determination to save for major purchases, avoid personal debt, and pay off mortgages ahead of time. If you have a considerable amount of debt, then the debt snowball concept by Dave Ramsey could be extremely helpful.
Establish and maintain an emergency fund. The most common rule of thumb passed around is to have at least three months, up to six months of liquid cash on hand to pay for an actual emergency. The money must be held in an account that does not charge penalties for immediate withdrawals. Emergencies include car wrecks, illness, natural disasters, fires, flooding, etc. A furniture sale is not an emergency.
Investing as early as possible and as often as possible is critical to reaching financial independence. Put money into your IRA, 401k, mutual fund accounts, and buy investment real estate or dividend paying stocks. One concept Tim and Tracey picked up from both Robert Kiyosaki and Dave Ramsey involved researching and understanding the investments before proceeding. Research, put the odds in your favor, and control the fees and expenses paid on your investments.
Don’t confuse controlling your expenses with refusing to pay for services and expertise that will help you avoid more costly mistakes down the road. The best example that illustrates this point is the mistake some people make in asking a local friend to manage their investment property versus hiring a profesional property manager. Stott Property Management has cleaned up many expensive messes created by friend managing properties who failed to screen tenants, did not know how to evict deadbeat tenants, and failed to regularly inspect properties for necessary maintenance.
Tim and Tracey have talked and helped many clients whose finances have caused real and immediate stress. Reading these books and applying the concepts can help avoid or solve personal financial crisis.
Building A Rental Portfolio To Last: Investment Real Estate has been a major component of Tim and Tracey’s investment portfolio and has and continues to contribute to their bottom line. A major key to building this portfolio without causing undo stress on their budget has been following the simple rules outlined in the first two articles and taking one additional step.
After reading “Rich Dad Poor Dad” and sitting down to discuss the possibilities of owning investment real estate, Tim and Tracey decided that a significant portion of their retirement funds would come from rental property. Buying one duplex, would not even come close to providing the cash flow necessary to pay for their expenses after the mortgage was paid off. Therefore, they decided to dedicate the positive cash flow from their rental properties into paying off the mortgages on those same rental properties early. Additionally, they also used part of their sales bonuses to further accelerate those mortgage payments. In a span of six years, they paid off the mortgages on their first eight rental units. Following this strategy, they then paid off the loan on their latest duplex in two years.
The funds from these ten units currently help pay for their two children’s college tuition without taking on any student debt. Once the tuition is paid for, Tim & Tracey can continue to build their retirement portfolio.
Revocable Living Trusts: A revocable living trust is a popular estate-planning tool that defines who will receive your property when you pass away. There are rules of thumb, typically associated with your net worth, when you should consider creating a revocable living trust. Revocable means that you can change the property in the trust as your circumstances and desires change. Living means that you can make the changes while you are alive.
The trust document is written, signed by the trust maker and a notary public. The document lists the property in the trust, lists the trustee, and names who will get the property after the trust maker dies. The trustee is normally the trust maker while the trust maker is alive and then a successor trustee takes over when the trust maker dies or becomes incapacitated. The successor trustee can be an individual that the trust maker has confidence in handling the trust or can be a financial institution, like a bank.
The main advantages of a revocable living trust are that property in a trust avoids probate and it reduces the chances of a court dispute over your estate when you die. Many items can be simply listed with the trust document, however, titled property like real estate must be retitled in the name of the trust. If the titled property is not properly renamed, then it could end up in probate. Therefore, it is important that your real estate is properly recorded to avoid any problems. There can also be tax advantages if your property has been held in trust, however, those advantages can change since politicians can’t resist tinkering with the tax code.
While you can create a revocable living trust yourself, we recommend speaking with an attorney that specializes in estate planning. They keep current and the latest tax advantages, if any, and often ask questions, make suggestions, and point out possible pitfalls when creating and maintaining a trust. Since they bill for their time, a good estate attorney will periodically remind you that it is time to review your trust to make sure that it is still current. A well-executed will and revocable living trust can help ease some of the stress and pain of your loved ones when you die while assuring that your wishes are carried out.
Joint Bank Accounts and Online Banking: Aging people will often have a power of attorney identifying a trusted person, often a child, who can make decisions for them. In addition to the power of attorney, they may also add that individual to their joint checking and savings account to facilitate bill paying and money transfers.
One wrinkle occurs when the lead account holder dies. The bank, once notified of the death, may suspend all online banking activities until a new account holder is named as the primary.