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Quarterly Newsletter January - March 2024

[PRINT REPLICA] The March median sales price for single-family homes was $1,100,000 (1.5% higher than March 2023) and for condos was $500,000 (6.7% lower than March 2023). Demand slowed after showing signs of improvement in the first two months of the year. The number of sales of single-family homes in March dropped 2.5% compared to March 2023 and the number of condo sales dropped 22.5%. The supply of single-family homes continues to creep upwards with 7.4% more available and the supply of condos jumped 29.6% higher compared to March 2023. There are 2.7 months of single-family home inventory and 4.0 months of condo inventory.

We noticed it has recently been more difficult to sell Honolulu condos, particularly Waikiki, than other parts of Oahu.  Taking a quick look at active inventory and sales was revealing.  The months of supply of condos was significantly different as shown below.

  • Waikiki:                                       6.4 months
  • Moiliili, Makiki, Punchbowl:         5.7 months
  • Kailua, Kaneohe                         2.6 months
  • Pearl City                                    2.2 months

In general, sellers in the suburbs still have the upper hand in negotiations due to lower supply levels than Waikiki and urban Honolulu.  As a result, sellers in urban Honolulu will have to be more competitive on price and offer more concessions during the inspection period when first accepting a contract.

A Mixed Plate of Talk Story

Another 11,193 residents moved from Hawaii last year making total outmigration over the past five years 36,789 residents. The Honolulu Star-Advertiser reported on the loss of tax revenue due to population loss, and the state legislature is contemplating minor tax breaks for “affordable housing,” yet no one is talking about reducing the amount of red tape involved with building a home. The article also neglected a subtle, hard to quantify effect. People leaving Hawaii are taking their skills with them, leading to a shrinking supply of services people rely on. Hawaii will likely continue to lose people in search of better opportunities until lawmakers ease housing regulation or Hawaii loses enough residents that the current housing inventory becomes sufficient.

A new tenant screening law passed in the 2023 legislative session will go into effect May 1, 2024. The law requires landlords to limit the application fee to only cover costs associated with credit checks, criminal background checks, and obtaining information through personal reference checks. If requested, a landlord must provide the applicant a breakdown of the costs covered by the fee and return any excess charges. The web address below provides Frequently Asked Questions (FAQs) for the new law.

https://cca.hawaii.gov/ocp/TenantScreeningFeeFAQ/

The state Department of Land and Natural Resources (DLNR) fined two North Shore homeowners almost $1 million each for repeated unauthorized beach erosion mitigation structures in front of their Sunset Beach homes.  The state will waive the fines if the owners remove residences from their shoreline properties and remove the erosion control structures from state land.  Three other homeowners on the same street have been fined over the past year and all have filed contested case hearings over the fines including the two homeowners who received notice of their fines in January.  One homeowner has already lost his contested case and has been ordered to submit plans to remove the structures from his property.

The state opened Ka Malu Koolau kauhale on February 9th in Kaneohe as part of Josh Green’s attempts to reduce homelessness. Kauhale means tiny home village. A nonprofit planned and constructed the $1.3 million facility, reducing the cost by about $700,000 using pro bono construction labor and donated building supplies. The kauhale will provide housing for 34 people, 24/7 security, restroom facilities, shower trailers, laundry area, access to daily meals, and provide peer support. A local practitioner blessed Ho’okahi Leo, Hawaii’s third kauhale in Governor Josh Green’s term on February 15th and will house 50 homeless people on middle street. The state established the first kauhale of Green’s term off Punchbowl. Josh Green’s goal is to reduce homelessness 50% by the time his first term ends on 12/7/2026. He has a long way to go considering the 2023 Point in Time Homeless Count totaled 6,223 homeless people in Hawaii.

January saw a 3.6% drop in visitors compared to January 2022 and a 4.5% drop in total spending, equal to a $1.8 billion reduction. Industry experts point to a “halo effect” from government officials and celebrities after the Maui wildfires and increased competition from other tourist destinations now that most countries have dropped the pandemic related restrictions. Media images of Lahaina Strong camped out at Kaanapali Beach to protest housing shortages and state legislators looking at raising the transient accommodations tax and implementing a $25 environmental fee create headwinds for the visitor industry. One businessperson who caters to tourists commented on the impression of visitors by stating, “that’s the kind of messaging coming out. If the intent is to limit visitors to Hawaii, it’s working.”

Governor Josh Green announced he did not need to implement a short-term rental ban on Maui because enough vacation rental owners agreed to house victims of the wildfire destroying Lahaina. Out of state landlords, particularly on Maui, should take note that the Governor still has an issue with them. In his press conference, he continues to blame out of state landlords for Hawaii’s affordable housing crisis. He has instructed the attorney general to create a task force to go after illegal rentals starting in West Maui. He wants the attorney general to target owners on the mainland, in particular. In his press conference, Green stated: “Tax amnesty would be the carrot, and the stick would be that if you are violating the laws, ultimately you lose your property. That’s the severest consequences.” Green continues to blame landlords who rent to visitors as the reason for island residents moving to more affordable states. “We don’t support mainland folks making a ton of money while our people are trying to find housing after a fire. I promise not to swear today in the press conference, but I am still thinking it, OK? I’m going to swear after the press conference.”

Hawaiian Electric Company (HECO) implemented rolling blackouts on Oahu on January 8th when two large generating units went offline from flooding during a major storm resulting in a lack of baseline power.  Fortunately, HECO did not have to initiate rolling blackouts the following day as initially forecast.  The incident has many people questioning HECO’s priorities to generate more power from unreliable renewable sources like solar and wind over providing reliable electricity to their customers.  The power outages occurred even though the state’s largest battery storage facility started providing backup power a few weeks before.  HECO was clearly defensive of their increased reliance on renewable energy and less reliable electric grid when it claimed that rolling blackouts occurred while the 180-megawatt coal fired plant was in operation.  Prior to its closure, the plant provided 15% of Oahu’s peak electricity usage.  HECO decided to close the plant at the end of 2022 even though it had failed to bring enough renewable projects online to replace the lost capacity.  Regulators critical of HECO’s delays concerning new projects in 2021 had merit, yet they too failed to force HECO to delay the closure of the coal-fired plant.

The U.S. Navy announced it completed removing the residual fuel in the Red Hill storage facility. The Navy started defueling in October and successfully removed 104,703,574 gallons of fuel over the past five months. The Environmental Protection Agency (EPA) and the Hawaii Department of Health (DOH) started the Regulatory Interim Defueling Inspection to verify and document the actions required by the EPA Consent Order and DOH Emergency Order are complete. The Red Hill defueling task force officially turned over authority to a new Navy task force created to permanently close the storage facility.

The Environmental Protection Agency (EPA) is urging the Community Representation Initiative (CRI) to mediate with the Navy as the CRI meetings have become more contentious. Residents, activists, and people directly impacted by the Red Hill water crisis make up the CRI. A federal consent order created the CRI out of requests by the community to provide input into the defueling and shutdown process. Members of the CRI frequently accuse the Navy of withholding information and dodging questions. The EPA acknowledges the Navy is limited in what they are able and required to share in the forum hosted by the CRI. Many residents are skeptical of the Navy’s transparency and competence. The EPA tested four homes and released a report in December documenting drinking water in three of the homes contained traces of petroleum after previous testing by the Navy showed no traces.

The last known Pearl Harbor attack survivor living in Hawaii was buried next to his late wife at the Hawaii State Veterans Cemetery in Kaneohe on March 7th. He died on January 10th at the age of 102 in his Aiea home overlooking Pearl Harbor’s battleship row.

The last survivor of the USS Arizona, Lou Conter, died on April 1st surrounded by his family at the age of 102. Conter helped rescue fellow sailors escape the Arizona and was one of 335 crewmembers who survived. Japan killed 2,390 Americans in the Pearl Harbor attack and 1,177 were members of the Arizona. After the attack, Conter became a pilot, flew the VP-11 bomber, and survived the enemy shooting him down twice. After World War II, he became an intelligence officer and flew combat missions in Korea. He was known for helping create the Navy’s first survival, evasion, resistance, and escape program known as SERE. He then advised Presidents Eisenhower, Kennedy, and Johnson. He was a true patriot.

Maui started the monumental task of clearing debris from the Lahaina wildfires, a process that took workers in the destroyed town of Paradise, CA a year to remove ash, metal, and concrete.  In addition to the sensitive environmental issues of being next the ocean, and cultural issues, workers must contend with operating on a remote island with only one access highway.  Water, dump trucks, bins, and dumpsters had to be shipped in and Maui County created a temporary landfill so trucks would not have to travel too far during the cleanup efforts.  The U.S. Environmental Protection Agency already removed thirteen containers of toxins from paints, solvents, and batteries to disposal sites off the island in November.  A permanent site must be determined since Native Hawaiian activists have stated the temporary site is too close to the ocean and sits on sacred ground.

Lahaina’s banyan tree is fighting a twig borer infestation but is still generating new growth. Certified arborists have removed about one-third of the dead wood infested by the insect. The lead arborist likened the 150-year-old tree to a patient with a weakened immune system. About one-third of the tree’s greenery has returned and the main trunk is healthy. Arborists apply organic compost tea around the tree every two or three months and have harvested fledgling trees to grow larger in pots for future planting around the historic banyan and in other county and state parks.

The U.S. Mint released a new quarter featuring the late U.S. Congresswoman, Patsy Takemoto Mink. Mink authored the Title IX law outlawing sexual discrimination in education and revolutionizing college athletic opportunities for women. The recently played LSU-Iowa women’s basketball contest was the most watched NCAA tournament game (men’s or women’s) since 2012.

Kona coffee farmers received a $41 million settlement from coffee sellers that the farmer claimed falsely advertised their coffee beans as Kona Coffee.  The Kona farm belt consists of 600 to 1,000 farms of five acres or less.  The farmers offered lab testing evidence by a University of Utah biologist showing the relative concentrations of rare inorganic materials that don’t change during the drying and roasting process.  Some defendants contested the testing by stating the test results have not been repeated by other labs.  The case was settled before a judge could rule on that motion.

The Council for Native Hawaiian Advancement (CNHA) announced the debut of the Kilohana Hula Show February 15th.  The free show is modeled after the old Kodak Hula Show that ran for 60 years before ending in 2002.  The show will have some modern twists and aims to return authentic Hawaiian dance, song, and culture to the Waikiki Shell.  The show will run Sundays through Thursdays at 9:30 am.

Two Waikiki attractions achieved notable milestones recently. USA Today named the Honolulu Zoo one of the nation’s ten best for its displays of Hawaii’s biodiversity in addition to attractions showing the Sumatran tiger and African wild dog. The Waikiki Aquarium celebrated its 120th anniversary on March 16th. It is the second oldest aquarium in the country.

Marine Corps Base Hawaii and the Honolulu Department of Parks and Recreation will close Bellows Field Beach Park to overnight camping from May 1st through August 29th to protect nesting green sea turtles. Community, military, and park officials have documented past human nighttime activity like illegal offroad vehicles on the beach, campfires, dogs off leash, trash dumping, and the use of artificial lights which threaten the safety of the nesting turtles, the nests, and hatchlings. Weekend and daytime use of the park will remain open during the nesting season.

 

Odds & Ends

 

Rental Related Hawaii Tax Filings:  Tim and Tracey speak to several clients of investment property each year who have not filed all the tax forms required by the state of Hawaii and who owe back taxes as a result.  The state of Hawaii requires investment property owners to file and pay General Excise Tax (GET) on rent collected on long-term rentals, Transient Accommodations Tax (TAT) and GET on transient rentals, and to file an Individual Income Tax Return.  Hawaii residents file Form N-11 and non-residents and part-time residents file Form N-15.  There are owners, particularly out-of-state owners, for one reason or another are unaware of these requirements or simply neglect to file and pay the required taxes.  In some cases, the state will not be unaware of an individual’s failure to file and pay.

 

The Hawaii Real Property Tax Act (HARPTA) withholds 7.25% of the property sales price to help enforce Hawaii’s state capital gains tax on property owned by non-resident sellers.  An out-of-state seller must either file Form N-15 or form N-288C (if the current year’s Form N-15 is not available) if the money withheld exceeds the actual capital gains tax and the seller wants a refund.  There is a place requiring a GET and or TAT license number if the property has been a rental.

 

One common occasion that trips up non-resident property owners occurs when it comes time to sell the investment property.  Prior to issuing a refund, the state will check to verify that the seller has filed and paid the necessary forms and taxes and the state will go back much farther than three years (the federal requirement for maintaining copies of tax returns and associated records).  The state has required non-resident owners that have failed to file and pay to do so and have charged late fees, penalties, and interest.

 

Another common mistake, particularly involving family transactions, is the failure to obtain a new General Excise Tax License when the property changes hands or the owner dies.  Stott Real Estate, Inc. and Stott Property Management, LLC had to help recent clients that inherited a property.  A different property manager previously managed the property, and that property manager failed to file and pay GET for one six-month period while the owner was still alive.  The heirs did not obtain a new GET License.  Stott Property Management, LLC filed and paid the GET during the time that it was hired to manage the property under the deceased owner’s license until the heirs decided to sell.  Had the heirs obtained a new GET license, the state would not have discovered the earlier failure because a different GET license number would have been filled out on the form.  The state, however, did find the discrepancy, and Stott Property Management, LLC was able to file and pay the GET for that period after pulling the rental income figure from that year’s income tax filing.  Stott Real Estate, Inc. was then able to guide the heirs through the process of obtaining a HARPTA exemption because there were no capital gains as a result of the stepped up basis.

 

One other example involved TAT.  Stott Real Estate, Inc. helped a client sell a condo that was a vacation rental managed by another company.  That company collected the GET and TAT and gave the proceeds to the client.  The contract clearly indicated that the client was responsible for filing the required forms and paying the state of Hawaii the tax, however, the client failed to do so.  The state discovered the discrepancy when the seller filed for a HARPTA refund.  The taxes, penalties, and interest charged by the state were staggering and negotiations dragged on for over a year.

 

Hawaii residential investment property owners should heed and learn from previous owners’ mistakes.  The financial and emotional stress involved due to failing to file and pay the necessary taxes can be substantial.  Taking the steps to obtain a new license when family ownership changes hands will prevent a previous owner’s mistakes from punishing the new owners through no fault of their own.

 

Nosy Neighbors:  The harmless term, nosy neighbors, usually refers to curious neighbors that visit open houses to see the interior and back yard.  The purpose of this article is to highlight the direct danger to your finances as a landlord if you fail to recognize a more intrusive nosy neighbor.

 

Many landlords previously lived in the house or condo and have decided to rent it out in the hopes of returning at some point in the future.  They hold onto the property because they have fond memories of the neighborhood and the friendships that they have cultivated while living there.  Stott Property Management, LLC has some clients that fit into this category and Tim has spoken to them when first meeting with them and throughout the business relationship.  On more than one occasion, Tim has been told that the client would rather wait for the perfect tenant versus upsetting the neighbors.  Finding tenants that get along with the neighbors is the goal of most property managers.  There is nothing more frustrating than to be pulled into a dispute between two neighbors and having no real authority to resolve the dispute.  It ultimately comes down the neighbors either settling their disputes or hiring lawyers and taking their complaints to a judge to decide.  Most of the public overestimate the power of the lease and the landlord’s ability to enforce that lease and some neighbor complaints stem from misunderstanding and misconception.

 

Some of Stott Property Management, LLC’s clients follow Tim’s advice and encourage the neighbors to speak with the tenants to see if the issue can be resolved amicably.  In most cases, the initial animosity gives way to a mutual understanding and in some cases, friendship.  There are other clients that feel the need to “protect” their neighbors at all costs and the pattern repeats itself with every tenant that moves into the property.  In one extreme case, a client has given up tens of thousands of dollars in lost revenue due to lower rent and unnecessary tenant turnover because the neighbor had been crowned the “ruling authority.”  The owner had tenants that absolutely loved the house, agreed to market rent increases, and would have stayed “forever.”  The neighbor, however, did not like the tenants and the owners decided to force the tenants to move because of the constant complaints.  Stott Property Management, LLC had to lower the asking rent several hundreds of dollars per month to find a new tenant and the problems did not end there.  The same nosy neighbors complained about each successive tenant and harassed some to the point that they moved as soon as their lease expired.  A couple of employees, including Tim, told the client point blank that the neighbors are the problems, not the tenants, and that information fell on deaf ears.

 

It is unfortunate that some people get a high from these petty power plays and investment property owners need to be aware when it is occurring.  This same dynamic plays out in condominium associations, neighborhood boards, and with local authorities.  Failing to recognize and appropriately address the problem can be extremely expensive.  The best way to address a dispute between your neighbor and tenant is to encourage your neighbors to speak with your tenants if you are managing the property or to contact your property manager.  A good property manager will get involved if the tenants are violating the terms of their lease or encourage the neighbor and tenants to work it out directly if no violation is found.  In many cases, simple misunderstandings get resolved when neighbors speak to each other.

 

Normal Wear and Tear:

 

The term, normal wear and tear, is normally associated with rental properties and we will touch on how to differentiate between normal wear and tear and tenant damage at the end of the article.  This article discusses how normal wear and tear can affect owner occupied homes, second homes, and rental properties.

 

Hawaii’s Climate:  Anyone that has lived in Hawaii for more than a few years can attest to the toll the warm, humid climate takes on homes.  Exposure to winds directly off the ocean will accelerate the deterioration of paint, fasteners, windows, appliances, and electronics.

 

Hawaii’s climate allows residents to minimize or avoid the use of air conditioning and the high cost of electricity (3 times that of most areas in the United States) encourages conservation.  Additionally, many older homes, including ours, were built using tongue and groove siding supported by 4 x 4 posts known as “single-wall construction.”  The lack of insulation associated with single-wall construction makes air conditioning impractical and expensive. While single wall construction houses take advantage of Hawaii’s trade winds to keep a home comfortable, the interior of the home is exposed to the same humid air as the exterior of the home.  Appliances, electronics, and fixtures, will rust, break, and fail more often than homes in dryer climates and more often than homes that have central air conditioning and heat.

 

The high cost of materials and labor compound the expense of cleaning and maintaining a property.  One of the most common complaints we receive from our clients has to do with the cost of repairs.  Unfortunately, the price of owning a piece of paradise is expensive in more ways than one.

 

Inspections and Routine Maintenance:  Inspections are absolutely critical for people that own investment property and second homes that sit vacant for significant periods of time.  One major source of new property management clients comes from owners that have come back to the islands to inspect their rental property and are shocked by how poorly the property looks and functions.

 

Owners who try to manage their investment property from out of state often rely on tenants to identify and coordinate necessary repairs for them.  Some tenants will not report problems and either try to make repairs themselves or just live with issues because they are afraid that the owner will raise the rent if “they complain too much.”  The oblivious owner is happy that the “great tenant” pays the rent on time and keeps repair expenses low until he or she comes and visits the home for the first time in five to ten years.  The owner discovers that their investment property is now a “wreck” and the owner does not have sufficient rental income to make the repairs because he or she kept the rent the same for fear of losing the “great tenant.”

 

Some property managers do not conduct routine inspections and fail to identify and correct maintenance items on a regular basis.  Many of these property managers fall into the same trap of thinking their tenants will notify them when normal maintenance should be completed.

 

Problems from Deferred Maintenance:  The biggest problem from failing to address routine maintenance as required is the snowball effect on the cost and time involved to address several years of repairs all at once.  Many people can handle a few hundred to a few thousand dollars and coordinate the efforts of one contractor as needed.  Few people can write a check for tens of thousands of dollars and efficiently coordinate the efforts of several contractors when a house has suffered neglect over an extended period of time.

 

Renting a property with deferred maintenance invites a host of problems.  The most responsible tenants typically have a minimum set of standards that a poorly maintained home fails to meet.  The resulting tenant pool is limited to those tenants that have limited options due to financial constraints or credit issues.  Additionally, many tenants will feel they don’t have to care for a rental property if it appears the owner does not care about it.  It is very difficult to identify and properly document tenant damage and withhold funds from a security deposit in a poorly maintained home.  Owners that rent poorly maintained properties run a greater risk of having to evict a tenant and suffer large losses from unpaid rent, attorney fees, and cleanup costs.

 

Strategies for Success:  We typically recommend condos and townhouses in well-run associations for investors and people seeking second homes.  Maintenance fees cover insurance for the building and external maintenance.  Therefore, the only wear and tear that an owner has to worry about addressing personally are the contents of the unit and possibly the windows and entry doors.  Owners in an association can also benefit from lower maintenance costs associated with economies of scale.

 

Investors should hire a property manager who offers routine inspections as part of the service and uses third party contractors to conduct any necessary repairs.  There is a potential conflict of interest if a property management company also has an in-house repair organization.  You don’t want to be boosting your project management company’s bottom line by paying for unnecessary repairs.  We have hired property managers to manage our Texas investment properties even though we have extensive property management experience.  It is extremely difficult to manage a rental property when you are thousands of miles away.

 

Documenting Tenant Damage:  The state of Hawaii requires the landlord obtain a signed property inventory and condition from the tenant when a tenant checks in.  If the landlord does not obtain a signed copy of the property inventory and condition form, then the landlord may not withhold any of the tenant security deposit for cleaning, repairing tenant caused damage, or replacing missing items.  Stott Property Management takes photos of their rental properties when a new tenant checks in to provide a visual record in addition to the signed property inventory and condition form.

 

Disintegrating screens, rusted fixtures, disintegrating curtains, faded paint, and worn and faded carpet, and dry rot, are all considered normal wear and tear.  Obvious tenant damage consists of holes in walls and doors, stains, cracked and broken surfaces, and bent window treatments.  Trying to charge a tenant for “normal wear and tear,” may land you small claims court.  The Hawaii court system is very tenant friendly and a landlord’s documentation must be in order if a tenant ever challenges money withheld from the security deposit. 

 

Selling is an Option:  As a general rule of thumb, an investor will need to put down at least 50% of the sales price to break even on a rental property.  Oahu investors typically receive a far lower cash flow than investors who buy property in other parts of the United States.  We believe that a real estate investment should improve your monthly cash flow.  Think twice before turning your existing home into a rental if your calculations project a negative monthly cash flow before repairs.  You would be better off selling and placing the tax free capital gains into a savings account.

 

Homeowners who live in their homes for two out of the last five years receive a significant tax break if they make money on the sale of their home.  The capital gains tax exemption is $250,000 for a single person or $500,000 for a married couple.  This huge tax advantage starts to disappear after a few years when you turn your home into a rental.  Several would-be landlords decided to sell once we helped them crunch the numbers.

 

If after crunching the numbers, you are still unsure as to whether you want to sell or rent, then we can put your property on both the sales market and rental market at the same time.  Please contact us at 808-254-1515 or [email protected] if you would like to discuss selling versus renting in greater detail.

 

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