Investing in real estate in Hawaii can be an enticing idea. Historically average rents have been high – $1,700 for a one-bedroom on Oahu as of September 2022 – and real estate has steadily appreciated – long-term average annual appreciation of 4.7 percent for a single-family home and 4.54 percent for a condominium since 1985.
These are not the only reasons to invest in Oahu real estate, and there are a variety of housing options available. Read on to learn more, including how you can finance an investment property on Oahu.
Why invest in Oahu real estate?
Reason #1: You can earn rental income.
Even after paying for expenses, such as mortgage, insurance, taxes, utilities, and maintenance, many properties in Hawaii can earn a cash flow from the rent. Think of earning a paycheck each month with minimal work, and the paycheck will always increase as time goes on with the increase in rental rates!
As of September 2022, the average rent for a one-bedroom apartment in Honolulu is $1,700, a 9% increase from the same time last year. Let’s say you purchased a Waikiki condo for $450,000 cash, for example, and you pay around $1,200 monthly for utilities and the homeowners association (HOA) fee. This means that you would be taking home $500 monthly in rental income – while also earning appreciation on your apartment and looking forward to rent prices rising on Oahu.
You could also purchase a small apartment property or multifamily home, which are prevalent on the island of Oahu where land must be maximized for housing since it is limited. An investor has the opportunity to live in one of the apartments or part of the home while building equity from rent and helping to cover the mortgage payment.
Reason #2: Watch your Hawaii home appreciate while earning income.
Homes in Hawaii’s property value historically have always increased over time, as known as appreciation or capital gains. It is true that real estate in Hawaii has had some fluctuation, but it has never been as drastic as the continental United States, such as during the recession and real estate crash of 2009.
For the past 36 years median sales prices in the city and county of Honolulu, which is the island of Oahu, have increased by 4.7 percent annually, and condo median sales prices have increased by 4.48 percent annually, according to data from the Honolulu Board of REALTORS®. Think if you bought a condo at the median sales price in 2017 - $405,000 – it could have appreciated to the median sales price by 2021 - $475,000. That would be a gain of $70,000 while also earning a rental income!
Reason #3: Rent increases with inflation, but your original purchase price remains the same.
Nowadays prices have gone way up. A carton of eggs is around $8 on Oahu when it was half that price just a few years ago. This increase in prices and getting less money for your dollar is called inflation.
The good thing about real estate is that you buy a home for a certain price and mortgages, if applicable, are a fixed amount each month. Your real estate investment purchase price does not go up with time; however the home’s value and the rental income typically will increase over time – making real estate one of the top investments when hedging against inflation.
Reason #4: You can earn money by putting less money down compared to other investment options.
Investing in real estate gives you leverage since you only have to put a percentage of money down to purchase a home worth much more than the initial investment. Other investment options, like stocks, do not offer this type of leverage.
For example, you would need to pay $900,000 to purchase $900,000 worth of stocks. However, if you were to purchase a duplex on Oahu for $900,000, you might only need to pay 20% of the purchase price: $180,000. If the duplex was to appreciate by 5%, you would make $45,000, and this only cost you $180,000. If the stocks were to appreciate by 5%, you would have had to have spent the full $900,000 to make the $180,000.
Depending on the property, your lender’s requirements, and your financial situation, the amount needed to purchase an investment property will vary. However, the full purchase price is not typically required for a real estate investment.
Reason #5: There are a variety of tax deductions on real estate.
Every year, you can take some sort of tax deductions from a real estate investment. There are tax deductions for mortgage interest payments, business deductions from operating expenses of income rental properties, on cash flow from investment properties, property taxes, insurance, depreciation (even if your home gains value overall), and other tax deductions. An accountant can inform investors more about tax deductions on Hawaii investment properties.
Reason #6: A 1031 Exchange makes it easier for investors to buy and sell properties without paying a ton on capital gains tax.
The Internal Revenue Code (IRC) solidified a way for investors to defer capital gains taxes when selling and buying properties simultaneously. For example, if an investor purchased an eight one-bedroom apartment building in 2015 for $2,500,000 and today the property value is $3,000,000, if the apartment building was sold, capital gains taxes around 20 percent would need to be paid on $500,000 – nearly $100,000! However, the investor finds another similar apartment building that would net more income, and desires to use the proceeds from the currently owned building to purchase the higher yielding rental income property.
Instead of paying this tax to the government, a 1031 Exchange allows an investor to use the money earned from the sale and invest it into another property – deferring the taxes. Thus this investor could use the $500,000 to immediately purchase the next apartment building without paying the capital gains tax. A 1031 Exchange is a great option for a Hawaii real estate investor because appreciation has been historically high, allowing someone to diversify their portfolio with other real estate, earn rental income, and benefit from not paying huge amounts of taxes.
Reason #7: Real estate is great to add to a retirement portfolio.
The cost of living in Hawaii is high, and if you are thinking about retiring, a traditional 401k with stock options or pension might not be enough to live comfortably – especially as prices (inflation) continues to increase. Investing in real estate on Oahu allows owners to make a steady rental income – that continually increases. And as the years go on, you might have less and less expenses with the property since you might be able to pay off your mortgage.
Rental income from real estate investment along with owner-occupied homes can be a great asset in a retirement portfolio, providing a steady secure income source – along with happy memories in the home.
What types of real estate should I invest in?
Those seven stellar reasons to invest in real estate on Oahu might have made a strong argument in your mind to begin your search for the right real estate investment for your situation. On Oahu, there are a variety of housing options that might be right for your investment property.
Are single-family homes a good investment on Oahu?
Single-family homes are a popular choice for real estate investment on Oahu for a number of reasons. There is a high demand for renting a single-family home, and they can yield top rental income. Appreciation on single family homes has been historically when compared to condos on Oahu. It is often easier to finance a single-family home when compared to a multi-family home or apartment buildings. And if you ever need to, single-family homes are easier to resell with less average days on the market than condos. Also, single-family homes do not have the high homeowners association fees (HOA fees) like most condos in Honolulu, eliminating a big expense.
How about investing in a multi-family home in Hawaii?
Multi-family homes are a popular option for real estate investors on Oahu, as you can live in part of the home and rent out the rest of the home to generate income to pay your mortgage. Alternatively, you can purchase multiple multi-family homes and have multiple streams of income through many tenants paying rent. On Oahu, multi-family homes can be split to house anywhere from two families to four families, on average, but there are some “mega homes” that are split to house even ten to twelve families.
On Oahu, some homes have legal Accessory Dwelling Units (ADUs), which are completely separate homes built on a single-family lot and became popular within the past few years due to legislation being passed to promote ADUs, which can also be known as an in-law apartment. In September 2015, the City and County of Honolulu created an ADU Ordinance that legalizes the development and long-term rental of ADUs.
The following are the minimum requirements for a property to be able to build a legal ADU according to the City and County of Honolulu’s Department of Planning and Permitting (DPP):
- Lot is zoned residential or country.
- Lot is at least 3,500 square feet.
- The lot only has one dwelling unit.
- The lot isn’t landlocked.
- The property owner or owner’s family will live in the primary dwelling or ADU.
- There is at least one parking space for the ADU or the lot is within one-half mile of a rail station.
- ADU maximum size is 400 square feet for 3,500 to 4,999 square-foot lots or 800 square feet for 5,000 square-foot lots or larger.
A multi-family home or home with an ADU can be a great investment property, as you can earn income on rents from multiple tenants. This type of investment will earn rental income that will exceed any kind of mortgage payment. However, realize that you will have to spend more time being a Hawaii landlord, and homes within the multi-family property might have a higher turnover in tenants than in a single-family home.
Condo
A condominium is a popular choice for an investment property on Oahu, as the price point is lower than a single-family home and other investment options. Condos historically have had great appreciation rates on Oahu, over 4% on average annually – similar to single-family homes. Some condos in Waikiki are also zoned for short-term vacation rentals – or Airbnb’s – so investors can benefit from huge potential vacation rental income.
Another benefit of investing in a condo is it typically has less maintenance that needs to be done by the owner compared to a single-family home since owners will pay a homeowners association fee (HOA fee) that will cover the maintenance of shared utilities and areas in the building, such as the exterior painting, security guard, pool, lawncare, and other features. If an investor rents out an apartment in a condo building, some of the management and maintenance can be done by the condo building workers themselves instead of the owner, creating an easier management opportunity than a single-family home, for example.
Apartment Building
In Honolulu, there are a number of apartment buildings that will go for sale that have less than 50 units, offering an enticing option for a real estate investor. A lot of these buildings are more than 50 years old, and many will have around six to twelve units. These are great options for investors as rental income opportunities are strong and the appreciation of these buildings typically remains high, even when the market has been slow. Many investors might not think about buying or selling a commercial apartment building in Honolulu, but it is a great option for the savvy investor, and Oahu has a number of smaller apartment buildings that often go for sale.
I would love to work with you to see which type of property is right for your real estate investment, so please reach out to me, Elaine Chow, at any time to discuss investment property options in Hawaii.
