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 Hawai’i real estate has been an excellent portfolio choice.

Why should anyone invest in Hawai’i real estate? Here are a few reasons.

(1) 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.

(2) 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? Ask an old time Hawai’i local about the crack seed store and its prices, you do not remember.

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.

(3) Hawai’i homes have always appreciated in the long-term.

Appreciation or capital gains are the increase in the property value over time. While the Hawai’i 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 U.S. 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.

In recent years, average sales prices for Hawai’i homes have continued to increase. In June 2019, the median single family home sales price was $800,000, and in May 2021, the price was $978,000. For condos, the median sales price was $432,500 in June 2019, and it was $457,750 in May 2021. In fact, Oahu median sales prices have increased year-over-year around 70% of the time since 1985, according to data from the Honolulu Board of Realtors. In Hawai’i, it seems the graph for sales prices is always finding a new peak.

(4) You can invest in a fixer upper and experience equity.

While flipping a home in Hawai’i is a risk that could be very profitable, another idea is to purchase a home as an owner occupant. Lower interest rates are available to owner occupants, and you can make cost-effective improvements through sweat equity without the rushed timeline of flipping.

After the remodel is completed, your property will most likely have increased in value, giving you future options for more investing, such as renting or purchasing another property.

(5) 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 Hawai’i, rents typically go up, so your monthly cash flow may increase over time.

As of July 2021, the average rent for a one-bedroom apartment in Honolulu is around $2,000. If you get a deal and buy a one-bedroom apartment for $250,000 cash, with the utilities and maintenance fees at $1,100 per month, you would be making $900 cash flow monthly. If you had a mortgage after 20% down at closing, your mortgage might be around $900, and with maintenance and utilities, you would be breaking even – while also gaining appreciation on your condo and hoping for the average rent rates to raise.

Since mortgage payments are high in Hawai’i, it is not uncommon for homeowners to rent rooms to help cover the mortgage. While living with a roommate might not be for everyone, this can assist the homeowner in building equity and saving cash for another investment.

(6) 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 Hawai’i real estate investment(s).

(7) 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.

(8) New homes in Hawai’i often appreciate before they're built.

New developments or new construction is a great way to get into the market in Hawai’i. I have many friends who've purchased condos in Kakaako or homes in Ewa Beach, where they were handed the keys to their new home with thousands of dollars of equity in it. It's difficult to time the market, but if you shop for new homes based on the surrounding neighborhood, qualify construction, and the developer's reputation, you'll have a great chance of being able to sell the unit for a nice profit after you buy it. Real estate developers don't require you to work with an agent, however, having a knowledgeable agent work with you comes at no cost. It's better to have someone represent your interests.

Each development comes with its own programs, so make sure you understand if there are any restrictions of selling your new home before you purchase it.

(9) 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 Hawai’i 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.