Investors' Guide

Investing in real estate can be like playing Monopoly: buy a property; avoid bankruptcy; generate rental income; buy more properties; hedge against inflation; and see the cash flow. Real estate is a great investment for a variety of reasons, and historically Hawaii real estate has been an excellent portfolio choice.

Why should anyone invest in Hawaii real estate? Here are a few reasons.

You make money on less money down.

When purchasing real estate, typically you only have to put a percentage of money down, allowing you to make more money on less money, also known as leverage.

For example, when purchasing $500,000 worth of stock, you would have to pay $500,000. However, to purchase a $500,000 Waikiki condominium, you might only need to pay $100,000 (20%). If prices increase by 5%, the price increase for $500,000 would be $25,000. The Waikiki condo cost you $100,000 to make $25,000 but the stocks cost you $500,000 to make $25,000; this is the leverage that a real estate investment affords.

Depending on your lender requirements, your financial situation, and the property, a different amount of percentage down will be required. However, even for multi-million-dollar properties, investors do not typically have to pay the entire cost.

Real estate resists against inflation.

As time goes on, prices generally increase, and you can’t purchase as much with a dollar as you once could. Do you remember li hing mui s nacks for a few cents from the crack seed store?

Since real estate is bought for a certain price and monthly mortgage payments are generally fixed, the price you pay for your real estate investment will not go up with time – resisting against inflation. However, rent prices you charge may increase with inflation, increasing your overall income.

Hawaii homes have always appreciated in the long-term.

Appreciation or capital gains are the increase in the property value over time. While the Hawaii real estate market does have its ups and downs, historically it has always had steady appreciation, and the downs are not as drastic as the Mainland. Since 1972, the long-term average annual appreciation has hovered around 6 percent for a single-family home and 5.4 percent for a condominium.

You can have a cash flow from rental income.

Cash flow is the income generated from rent after expenses like taxes, insurance, utilities, and wear-and-tear have been paid. This money is like an extra paycheck each month and can increase as rent goes up with the market. In Hawaii, rents typically go up, so your monthly cash flow may increase over time.

As of September 2019, the average rent for a one bedroom apartment in Honolulu is $1650 per month. If you buy a one-bedroom apartment for $150,000 cash, with the utilizes and maintenance fees at $1100 per month, you would be making $550 cash flow monthly.

Every year you can take tax deductions.

Benefits around tax time of real estate are numerous: deductions on mortgage interest, cash flow from investment properties, operating expenses, property taxes, insurance, and depreciation (even if the property gains value, and more. Around tax time, assure your ask your accountant about the tax incentives from your Hawaii real estate investment(s).

On sale of a property, you can use a 1031 Exchange to defer capital gains taxes.

A 1031 Exchange from the Internal Revenue Code (IRC) is another great tax benefit, that allows investors to sell properties and buy other, like-kind properties – completely tax deferred. For example, the family house that was purchased in 1940 for $40,000 might be worth $1,000,000 today. If you simply sold the family house, you would have to pay capital gains taxes (around 20 percent) on $960,000 (minus improvements).

With a 1031 Exchange, you can take the money earned from the sale and invest in other properties – tax deferred. Investing the capital gains from this family home allows a portfolio diversification, potential rental income and appreciation, and a huge savings from taxes.

Your real estate portfolio can make a steady income and help secure a peaceful retirement.

Have you built up your real estate portfolio over the years? Are you making a steady rental income after your mortgage and other expenses? Perhaps you have already paid off your mortgage. Real estate investments and rental income can provide a steady, secure source of income, that helps over the years and during retirement.

If you plan properly and buy right, an investment in Hawaii real estate is typically a safe and rewarding investment. And if you or someone else lives in the property, it can provide years of happiness and memories as well.