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Quarterly Newsletter July - September 2021

| P r i n t   R e p l i c a |  The median price in September for single-family homes was $1,050,000 (19.3% higher than September 2020) and for condos was $478,000 (7.4% higher than September 2020).  The demand for both single-family homes and condos as measured by the number of properties sold in September and the number of properties that in under contract continues to exceed the number of newly added resale properties for sale in September.  Available inventory continues to tighten as a result.  There are only 1.2 months of single-family home supply and 1.8 months of condo supply.

 The Governor urged both tourists and residents to avoid non-essential travel through the end of October on August 23rd.  University of Hawaii’s Economic Research Organization’s Executive Director Carl Bonham would not predict the outcome of Ige’s press conference which will likely be covered nationwide since visitors were already choosing not to come during one of Hawaii’s seasonal visitor slow periods.  The governor warned tourists that their visit would likely be less enjoyable due to restrictions imposed on indoor gatherings at restaurants and bars.  Ige did not rule out reinstating travel restrictions if the infection numbers don’t subside.

 Ige extended his emergency proclamation another 60 days on October 1st until November 30th, keeping both travel restrictions and the mask mandate in place.  The Maui Jim Maui Invitational college basketball tournament announced that the Thanksgiving tournament will be moved out of Hawaii for the second year in a row, this time to Las Vegas.  An organizer stated, “Maui is our tournament home, which is why we are disappointed that the state COVID-19 restrictions will not allow us to host the Maui Jim Maui Invitational there this year.”  In related news, The University of Hawaii Rainbow Warriors are the only NCAA football team to play in empty stands with artificial crowd noise.  It’s unfortunate that Hawaii residents continue to suffer under arbitrary social distancing restrictions while the rest of the country is successfully and safely holding sporting events attended by fans.

 

A Mixed Plate of Talk Story

 

Mayor Rick Blangiardi mandated restaurants, bars, gyms, movie theaters, museums, arcades, and similar establishments require all employees, contractors, and volunteers show proof of full vaccination against COVID-19 or a negative COVID-19 test each week.   Customers must show proof of full vaccination, or a negative test result taken within the last 48 hours to enter the establishment.  Customers may still pick up takeout orders without meeting the requirements set by the mayor’s emergency order implementing Safe Access Oahu.  The order is currently set to expire in 60 days on November 12, 2021.

While restaurants, bars, gyms, movie theaters, museums, and arcades had to scramble to implement new vaccination and testing requirements for staff and customers, the state has given the Transportation Security Administration (TSA) and airlines more time to implement the governor’s latest Executive Order requiring employees to be fully vaccinated or undergo weekly testing.  Some organizations have quickly pointed out the double standard concerning government’s lack of urgency when private businesses are threatened with shutdowns for failing to comply.  A Honolulu Star-Advertiser article highlighted 160 businesses were warned, cited, or arrested over two weeks following mayor’s and governor’s emergency orders.  A social media post from a local restaurant owner highlighted in the article describes the “three birthday parties, one anniversary, and one special date” that had to be cancelled because a customer called the police when an employee failed to ask for proof of vaccination before sitting the customer down and the city shut down the restaurant for a day as punishment.  The article goes on to explain that most small businesses did not suffer any violations but that is small comfort to the customers, employees, and owners that were visited by the Honolulu Police Department (HPD).

 Residents and travelers to Hawaii may upload a copy of their vaccination card using the state’s Safe Travels Hawaii website to create and view your Hawaii SMART Health Card for a digital verification of your vaccination.  You can follow this link to upload your card.

 

https://travel.hawaii.gov/

 

A two-week exercise by the U.S. Navy and Marine Corps demonstrated the fleet’s ability to coordinate strike from various platforms across 17 time zones.  In one scenario, a new unmanned truck missile launcher fired two missiles to strike a decommissioned frigate over 100 nautical miles away while two Marine Corps F/A 18 attack aircraft fired two Harpoon missiles at the same frigate.  All four missiles, which did not have warheads, struck the frigate.  U.S. Marines landed on Kauai using hovercraft and MV-22 tilt-rotor Ospreys to quickly deploy Marines who set up camouflaged scout teams to identify passing enemy ships.  The exercise concluded on August 16th and is part of the Navy and Marine Corps strategy to counter China’s threat to clear transit of the South China Sea.  25,000 sailors and Marines on platforms including aircraft carriers, submarines, sea-launched aircraft, and troop carriers participated.

 The Honolulu Star Advertiser interviewed a retired Federal Transit Administration (FTA) official who worked at the organization for 30 years.  He retired as director of the Office of Project Planning at the FTA and was responsible for evaluating every rail project in the country, including the Honolulu Authority for Rapid Transportation (HART), until he retired in 2009.  The individual who has followed the HART project after he retired states that the project’s cost overruns are “unimaginable” and “the Honolulu project is way beyond anything that I’ve observed.”  He states that a 2007 study analyzing 21 completed rail projects, showed actual costs exceeding the original estimated cost in the cities’ Full Funding Grant Agreement (FFGA) by 6.2 percent.  The current $12.449 billion price tag of HART’s project exceeds the FFGA cost estimate of $5.12 billion by 143%.  Interim CEO, Lori Kahikina, disputed the average cost overrun figures without citing any other projects in the nation in typical Hawaii government official fashion.  Failing to properly plan and budget government projects appears so ingrained in the state of Hawaii’s and city of Honolulu’s culture, that local leaders are unwilling to recognize the abilities of other states and cities and learning from them.

 HART has no answers to problems with the train’s wheels being too thin for a track that is too wide, a passenger door that was observed open while a train was moving, and $3 billion budget gap.  The wheel and track problem is a major issue because it forces the trains to slow down from 55 miles per hour to 5 miles per hour to navigate the “X” shaped track intersections called frogs that are too wide for the current wheels by ½ inch.  Forcing the trains to slow down will prevent the system from having a train arrive at each station every four to five minutes per the currently designed schedule.  No contractor has bid on the proposed contract by the September 24th deadline, 2 ½ months after the contract was opened for bids.  On July 17th, a passenger door was open on at least one of the seven automated trains during testing.  The trains are not supposed to be able to move if any of the 24 passenger doors are open.  Apparently, the cause has not been identified or fixed and HART officials have declined to comment on solutions for either problem.  HART has asked the Honolulu City Council to propose a bill to implement a city visitor tax and commit a percentage of the tax to benefit construction of the project as it scrambles to resolve the $3 billion budget gap.

 Hawaiian Electric Company (HECO) has rolled out a program to encourage customers to add battery storage to the new or existing rooftop storage systems to avoid potential power shortages when Oahu’s largest power plant, a coal-fired power plant at Campbell Industrial Park in Kapolei, is retired in September 2022.  The retiring 180-megawatt power plant currently produces 16% of Oahu’s electricity during peak evening hours.  The battery systems will provide power to the owner or the electrical grid for two hours between 6:00 pm to 8:30 pm.  The program provides customers a one-time payment between $500 and $850 per kilowatt of new battery storage depending on how quickly an individual participates.  Existing customers with photovoltaic systems will be able to add five kilowatts of new solar panels.  People that provide the initial 15 megawatts of battery storage will receive $850 per kilowatt added, then the payment drops to $750 per kilowatt for the next 15 megawatts, and then to $500 per kilowatt.  The program is a unique approach to addressing the difficulty of managing the uneven power production by renewable energy systems like solar and wind power.  As a point of reference, the website, solarmetric.com, stated that a Tesla Powerwall that can provide 13.5 kWh of useable electricity currently costs about $7,500.

 A draft master plan for the University of Hawaii managed lands on Mauna Kea reduces the number of observatories at the summit from thirteen to nine and proposes repurposing portions of lower-level areas to educational programs and field research beyond astronomy.  The plan allows for construction of the Thirty-Meter Telescope (TMT) that is vehemently opposed by some Native Hawaiian groups who consider Mauna Kea sacred and other conservationist groups.  A fifth observatory would have to be removed to make room for TMT.  There have not been currently any comments from TMT’s opponents regarding the draft master plan.

 After a slow start, the UH Rainbow Warriors football team and the UH Rainbow Wahine volleyball team have gained their footing and appear to have some momentum.  The UH football team started off the year 1-3 with bruising losses to Pac-10 teams UCLA and Oregon State and a disappointing loss to Mountain West Conference (MSC) rival San Jose State.  UH has won its last two games against New Mexico State and #18 ranked Fresno State to even their record to 3-3.  The UH women’s volleyball team also started off slowly starting the season 3-5 against nonconference foes before opening the Big West Conference 4-0 and improving their record to 7-5. 

 Two tourists were each fined $500 for touching two resting Hawaiian monk seals in separate instances when they posted the encounters on Instagram and authorities became aware of the activities.  In each case, the monk seals barked their displeasure at the individuals when touched.  Governor Ige posted on several social media sites that any individual found to harass endangered Hawaiian wildlife will be prosecuted to the fullest extent of the law.  The National Oceanic and Atmospheric Administration Office of Law Enforcement investigated both incidents and levied the fines.

 The National Oceanic and Atmospheric Administration finalized a rule that prohibits swimming with, approaching, or remaining within 50 yards of spinner dolphins in Hawaii waters.  The Marine Mammal Protection Act already prohibits harassing dolphins and the new rule further specifies activities considered harassment.  The dolphins hunt for food at night and swim in sandy bottom areas closer to shore during the day to rest and nurture their young.  The rules were put in place to stop the human interactions with the dolphins disturbing their restful routines on the Big Island and along Oahu’s Waianae cost.  Once documented incident described 13 boats and 60 swimmers surrounding a pod of dolphins and some swimmers grabbing and riding the dolphins.  Ocean swimmers will not be cited if a pod of dolphins inadvertently approaches within 50 yards provided that the swimmers don’t disturb the dolphins and actively swim away from the pod.

 The U.S. Geological Survey’s Hawaiian Volcano Observatory raised its alert status from “advisory” to “watch” after a swarm of over 250 earthquakes around Kiluaea’s summit occurred the afternoon of August 23rd.  The earthquakes accompanied changes in the volcano’s ground deformation measured by tilt meters suggesting that magma is entering 0.6 to 1.2 miles beneath the southern portion of Kiluaea’s caldera. Kilauea started erupting again on Wednesday afternoon, September 29th.  The current eruption is once again limited to the lava lake in the crater with crowds witnessing lava fountains as high as 100 feet the following day.  Park officials say that park visitors can currently safely watch the eruption and caution against wandering into closed areas.  The activity is not currently threatening surrounding neighborhoods, but continuing earthquake swarms have scientists carefully watching for eruptions signs along Kiluaea’s East Rift Zone.   Scientists predict the smaller eruptions currently occurring could happen for years.  The head scientist at the Hawaii Volcano Observatory stated, “the magma keeps coming into Kilauea at a pretty constant rate and so it’s either filling the inside of the volcano … or it’s coming out to the surface.”

 A Honolulu Little League team qualified for the Little League World Series in Williamsport, PA.  The “HNL Boys” are the third Hawaii team in a row to qualify for the prestigious tournament.  The HNL Boys finished 3rd this year with a 4-1 record in Williamsport.  They lost to the eventual champion Michigan in the semi-finals after first beating Michigan three days earlier.  The twelve-year old all-stars showed poise and grace throughout the tournament and were awarded the sportsmanship award.  A 2018 Honolulu team won the title in 2018, a Central Maui team finished third in the U.S. Division in 2019, and the tournament was cancelled last year due to the pandemic.  Could spam musubi become the new breakfast of champions?

 Hawaii’s Carissa Moore took home the first Olympic gold medal awarded for surfing on July 27th.  The four-time world surfing champion mastered the unfamiliar Japanese surf while some top surfers struggled in the changing conditions.  Moore captured her fifth World Surfing League (WSL) title about seven weeks after capturing a gold medal at the Summer Olympics in Japan.  Moore, Hawaii’s most successful surfer, won her previous titles in 2011, 2013, 2015, and 2019.

Odds & Ends

Recent Real Estate News:  The governor’s eviction moratorium expired on August 7th after the state legislature teamed up with the governor to make evictions for failing to pay rent significantly more complicated.  The new 15-day demand letter must contain a significant amount of information and the Legal Aid Society of Hawaii has put a checklist on its website to help landlords write a complete letter.  Landlords can visit the webpage below for more information on the unnecessarily complicated eviction process.

 

https://www.legalaidhawaii.org/i-cant-pay-my-rent-mortgage.html

 Oahu landlords should start creating contingency plans if they are currently renting shorter term rentals in residential communities.  The Honolulu City Council is considering legislation that will change the definition of a short-term rental from a lease less than 30 days to a lease less than six months.  Additionally, the city is looking at only providing short-term licenses in the resort communities of Waikiki, Kuilima, and Ko Olina.  The reasoning behind the changes is the desire to provide more residential rentals.  However, this measure if passed, will likely fail to produce the desired result because the state is also making long-term rentals a riskier proposition with the changes in Hawaii’s eviction laws and Honolulu Department of Permitting and Planning’s failure to enforce and execute the latest changes in short-term rental regulation.  More homes will likely become empty second homes or be sold to owner occupants that can afford to buy their home if the bill passes.

 Sale & Management Involving Multiple Heirs:  Stott Real Estate, Inc. recently sold a residential property containing four buildings and five units on a lot zoned commercial in the Wilhelmina neighborhood.  We highlight this transaction since it also involved nine related owners spanning two generations and several years of planning.  The family hired Stott Property Management, LLC in 2014 to manage the family property with the goal of increasing rental income while bridging the disagreements in the family regarding priorities.  Stott Property Management, LLC required the family to designate one individual to communicate family decisions and four of the units were rented at the time it was listed for sale.  All but one family owner wanted to sell for quite some time.  The family decided to wait until the elder heir passed before starting the sale process.  The elder heir had previously lived on the property and it was a mutual decision to wait.  The goal was to sell before future generations inherited ownership and the number of owners grew past ten.  The same person who worked with Stott Property Management, LLC worked with Tracey for years to lay the groundwork, to obtain a survey and resolve issues discovered by the survey, collect trust documents, and collect signed power of attorney documents from each owner.  The process involved numerous family meetings to reach the point that Tracey could list the property for sale.  Tracey and the staff had to navigate the constantly changing city and state COVID-19 social distancing requirements in preparing the property to sell and to show the property to prospective buyers.  The sale took nine months due to the non-conforming use of the commercially zoned property and several would-be buyers cancelled contracts during the due diligence process.  Ultimately a buyer closed on the transaction in April 2021.  Some of the owners cashed out and will pay capital gains taxes while others deferred their capital gains taxes by completing a 1031 Exchange.  The successful conclusion highlights the advantages of working directly with a highly focused company and the challenges of managing and selling a property that has been passed to several heirs.  Property owners should carefully consider estate planning and family dynamics before deciding to pass on real estate to their heirs.  The number of heirs can expand with each successive generation.  Family members residing on the property can further complicate matters.

 

The Big Picture

 A decade of managing rental properties and two decades of owning investment property have given Tim and Tracey a decent grasp of and appreciation for keeping the big picture in mind when dealing with issues and making informed decisions.  The purpose of the article is to help investors and homeowners take a step back from the details and ask more basic questions like, “Should I sell my home or convert it into a rental?”  Failure to keep the big picture in mind can cost you tens of thousands of dollars in lost income or higher expenses and cause unnecessary stress.

 Selling versus Renting:  Many homeowners that are leaving the islands contemplate renting out their home versus selling without crunching numbers or even asking if their home would make an appropriate rental property.  The first question a homeowner should ask is:  “Would I have purchased my home as a rental property?”  In most cases, the answer will be no.

 The first reason has to do with the low annual rental revenue of Oahu rental properties in relation to the market sales price.  Some studio apartments have annual rents equal to about 7.5% of the sales price.  The rent-to-sales price ratio gets rapidly worse as the property becomes larger and more expensive.  The rent to sales price ratio for a $1,000,000 property is typically about 3%.  If you hire a property manager to manage a property, then the rental income is reduced by another 14.5% when taking property management fees and General Excise Tax into account.  In general, an investor will have to make a down payment on an Oahu investment property of at least 50% just to have their investment break even.

 Homeowners in general, don’t want to live in a property that would make a great rental.  Homeowners are typically wealthier and want to have nicer fixtures like granite countertops, hardwood floors, high-end cabinetry, etc.  A great rental property, on the other hand, is one that will use moderately priced fixtures that hold up well to the wear and tear associated with tenants.  Homeowners often decorate their homes according to their individual tastes.  The best rental properties appeal to the widest percentage of potential renters by offering neutral, “boring” colors that will match most furniture choices.

 Lastly, homeowners currently enjoy one of the best capital gains tax breaks available.  An individual receives a $250,000 capital gains tax exemption and a married couple receives a $500,000 capital gains tax exemption.  I am unaware of a better source of tax-free income available to ordinary American citizens.

 One of the times it makes sense to rent out your home is if you have plans to return to Oahu in a couple years or less and move right back in.  Stott Property Management has successfully helped many clients accomplish this goal.  In fact, we are currently renting out a condo for one family who is currently on a sabbatical in Europe.  They will return at the end of the year while pocketing about six months of rental income while they were gone.

 Your Tenant is The Customer:  Keeping in mind your tenant is the customer can help maintain perspective when it comes to making decisions about your rental property and your tenants.  Family demographics that changed gradually over time accelerated during the COVID-19 pandemic.  Many clients and potential clients tell Tim that they want to rent to a “nice family.”  A family includes a pet more often than it did in 2019 as parents adopted “fur babies” to help them and their children cope with social distancing restrictions.  You are shooting yourself in the foot if you try to market a rental house or condo in a pet friendly association and you don’t allow pets.  Allowing pets results in shorter vacancy periods and higher rents and remains one of Stott Property Management, LLC’s (Stott PM)  most ignored recommendations.  Do you want to make more money with your investment property?  Allow pets.  It is the one of the few competitive advantages that does not require owner capital.

 Another amenity that provides a great return on investment is air conditioning.  Many people who grew up in paradise did not have air conditioning and live happily without it.  Stott PM has noticed that air conditioning has become a must have for many tenants even if the dominant trade winds provide great airflow through a home most of the year.  Properties that offer air conditioning attract higher rents and experience lower vacancy rates compared to similar properties without it.  Offering both air conditioning and allowing pets currently provide the biggest bang for your investment buck.

 Property Maintenance:  One of the biggest mistakes we routinely see is an owner’s failure to quickly address cosmetic and functional repairs on a vacant property.  The cost of many cosmetic repairs can be much more expensive in Hawaii than the very same repairs in other parts of the country.  Owners will either refuse to do repairs or request multiple estimates even if the delay will result in weeks of additional vacancy time.  For every $1,000 of rent that a property brings in, one week of vacancy results in a loss of $250 in rental revenue.  About six years ago, Stott Property Management, provided an estimate to a client from a contractor that could get to work immediately.  The client thought the estimate was too high and thought he could save about $1,000 by hiring a contractor on his own.  In the end, the repairs took five months to complete (4 months longer than accepting the original estimate), costing our client at least $4,000 in lost rental revenue.

 Allowing deferred maintenance to accumulate can result in even costlier issues.  Stott Property Management inspects their rental properties at least once per year to make sure the tenant is taking care of the rental property and to look for repair items that should be addressed immediately.  Stott Property Management has taken over properties where spending a few thousand dollars resulted in an estimated $10,000 of additional rental revenue through higher rent over a years time. Ironically, these properties would also have fewer tenant related problems in the past because a well maintained property attracts more responsible tenants.

 Saving the PM Fees:  We have spoken to several people that try to manage their Hawaii property from thousands of miles away with the help of friends, or rent to “friends” in order to save monthly property management fees.  In one extreme case, Stott Property Management determined that an owner had been renting his property for approximately $2,000 under market per month for about ten years.  Saving about $24,000 in property management fees over that ten year time span ultimately cost the owner approximately $240,000 in lost revenue.  When learning the news, the owner continued to manage the property himself because he could not justify paying someone thousands of dollars per year to just “collect the rent”… Really?  A good property manager would evaluate the rent each year and raise it when the market rises.

 Failing to hire a professional carries many other risks as well.  Properly screening tenants is one of the most critical steps when considering a new tenant.  Ordering a credit check, checking with previous landlords, and verifying a prospects employment can save thousands in lost rental revenue, cleanup costs, and legal fees.  Stott Property Management does get hired from time to time to deal with problem tenants that would have been avoided if the owner had screened the tenant prospects before turning over the keys.

 Many owners that manage Hawaii property from the continental U.S. often rely on their tenants to make repair requests when problems come up.  An owner who has had the same tenant for ages, may not have seen their property for seven to ten years.  When the tenant does move, the owner is shocked that the property is a wreck.  We started managing one property for a client who allowed the tenant to rent his house for $900 per month as long as he took care of the house.  The tenant lived there for ten years.  When the tenant vacated, the owner spent about a month fixing all the problems that the tenant failed to address.  Once the house was ready, Stott Property Management rented the house for $3,000 per month.  Once again, an owner lost hundreds of thousands in revenue by trying to manage the house himself.

 Negative Cash Flow:  Many owners of Hawaii rental property tolerate negative cash flow for years in the hopes that rents will increase enough to provide positive cash flow or sales prices will rise so  they can sell for a greater profit.  Since rents typically increase at the same rate of inflation over time, an owner may have to wait 10 years or more for rents to increase enough to cover the mortgage and operating expenses.  If you own an investment property that is producing negative cash flow and you can sell for a profit, consider conducting a 1031 exchange into a property in another part of the country that will generate better cash flow.  Why work harder and longer to make up for a negative cash flow situation when you could possibly invest in a property that will give you cash every month with no effort?

 Leverage Your Time:  In order to retire comfortably, a person’s investments must generate enough passive income to pay their living expenses with some margin for error.  Owning investment real estate is a great way to generate passive income, however, many investors stop buying investment property because it is such a hassle to manage.  Who wants to work a day job, only to answer tenants’ phone calls in the middle of the night and show vacant property on weekends?  By hiring a property manager, all you have to do is review monthly statements and verify that the money has been deposited into your account.

 Tim and Tracey started investing in 1998 with the purchase of their first duplex.  They had “romantic visions” of fixing up the place themselves and saving a ton of money in labor costs.  After several weekends working at the duplex while trying to keep their toddlers amused, and several late nights painting, the duplex was ready to rent.  While some of the cosmetic repairs were successful, others had to be reworked a few years later resulting in little net savings.  The experience turned out to be a valuable lesson in knowing your limitations and leveraging your time by hiring the appropriate expertise.  Tim and Tracey have since expanded their investments to include six duplexes, a four-plex, and a single-family home over the span of 20 years.  By factoring in property management fees when purchasing new acquisitions, Tim and Tracey were able to generate positive cash flow while paying someone else to deal with the headaches.  These investments helped to ease the sting of college tuition for their two grown children and now are an essential part of Tim and Tracey’s retirement nest egg.

 While some companies specialize in either residential real estate sales or property management and imply specialization provides an operational advantage, Stott Real Estate, Inc. offers both services.  Tim and Tracey believe in educating their clients, giving their clients the necessary information to evaluate their options, and then executing according to their clients’ decisions.  Stott Real Estate, Inc. has the depth of knowledge necessary to provide their clients useful, timely information and provide objective advice when requested.  Please call Stott Real Estate, Inc. at 1-800-922-6811 or e-mail [email protected] if you would like our help with your property.

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