The
problem of buying properties on Oahu that owners can use themselves
when they visit was many times discussed. Such properties
fall into one of four categories: (1) properties kept vacant;
(2) properties rented on a long-term or month-to-month basis;
(3) vacation rentals; and (4), hotel pool properties. Each
of these has advantages as well as disadvantages.
Properties kept vacant
There are many decided advantages to vacant
properties. They are always available for immediate use, appreciation
is enhanced by the lack of wear and tear by tenants, and with
no tenants, the owner can install quality furniture and furnishings.
Plus, a vacant property usually qualifies as a second home
thereby enabling a better mortgage rate.
The second category, fixed rentals, applies
to properties with either long-term or month-to-month tenants.
Fixed rentals usually provide relatively stable income flow
with tenants that are prequalified and subject to approval
by the owners. The major disadvantage of a fixed rental is
the property may not be available when the owner wants to
use it.
A long-term tenant’s lease has priority
over the use of the property by the owner; i.e., a long-term
tenant is entitled to remain in the property until the expiration
of their lease even if it conflicts with the owner’s
plans. This is not the case with a month-to-month tenant that
can be given notice to vacate at any time. Better tenants,
though, will usually insist upon a long-term lease vice renting
on a month-to-month basis. If the property is a fixed rental,
the owner either has to schedule their use of the property
around a long-term tenant; i.e., plan their trips so as to
be here when their tenant vacates.
Or, the owner has to have a month-to-month
tenant. Each type of tenancy creates potential inconvenience
and/or lost rent to the owner. An additional problem may be
created if the fixed rental is furnished. A furnished rental
provides convenience to the owner when they use the property;
however, if the furnished rental is larger than a one-bedroom
unit, it may be difficult to rent to good tenants for any
extended period of time.
We have a number of property management accounts
where the owners routinely schedule Hawaii vacations around
their tenants. Most of the properties are unfurnished. The
owners usually rent or use locally stored furniture and furnishings;
however, some of them simply “camp out” in their
homes.
Category (3), vacation rentals, are properties
that are used as an alternative to a hotel. They usually tend
to be houses near a good beach or high-rise units in Waikiki.
Vacation rentals are fully furnished with extensive housekeeping
required following each rental.
The minimum rental period is often 30 days
to avoid the need for the owner to obtain a special use permit
and pay hotel (transient accommodation) taxes. A vacation
rental would appear to be ideal for an owner who wants to
use their property when they visit.
Some recipients of our newsletter stay in
their vacation rentals every year while maintaining the properties
essentially fully occupied at relatively high rents the remainder
of the time. If you are able to do this, the investment numbers
may be very attractive. However, it is definitely not the
norm. Much of the vacation rental business is repeat business
from past clients.
Therefore, it often takes a number of years
for a non-beachfront property to be rented on a fairly consistent
basis. Plus, peak rental periods often coincide with when
an owner wants to use the property. Unfortunately, there is
not a good centralized system on Oahu for handling requests
for vacation rentals. Nor, is there a property management
company with a sizable inventory of such properties.
Vacation rentals are management intense. Most
of the larger property management companies have decided (like
we did) that it’s not time and cost effective to handle
them. Companies with relatively small inventories, therefore,
tend to handle vacation rentals.
Category (4), hotel pool properties, are
high-rise units that are rented as if they were hotel rooms.
Almost all of them are located in Waikiki. Hotel pool properties
have to be furnished and maintained to standards established
by the company that manages the hotel pool.
The initial outfitting (and periodic replacement)
costs, though, are usually quite reasonable in view of bulk
purchases. Most of the properties provide a daily housekeeping
service that becomes optional when the owner uses the property.
The advantage of a hotel pool property compared to a vacation
rental is the occupancy rates are likely to be considerably
higher. Many of the buildings have established rental arrangements
with tour companies.
The major player on Oahu for managing hotel
pool properties is Aston. Their system (for at least some
of their buildings) is to pool and split the rental proceeds;
i.e., the rental receipts are divided between those units
that were available for rent regardless if they were actually
rented. An owner wanting to use their property is required
to provide advance notice (typically 90 days) and can remain
in their unit as long as they want.
Vacant properties are in a separate category,
as they are not really an investment property although the
value of such homes is certainly likely to increase with time.
In view of the time required to establish repeat business,
I do not recommend purchasing a property with the intent of
converting it into a vacation rental unless it is a home where
there would be immediate high demand for it like a beachfront
house.
Hotel pool properties can be a relatively
inexpensive method of getting involved in investment real
estate on Oahu. If you plan to use the property extensively
yourself; i.e., if that is the purpose behind the purchase,
it would behoove you to calculate the cost to you of owning
versus renting on your trips. The most common form of investment
is fixed rentals.
Their problem is that it is very difficult
to keep them consistently rented with good tenants that will
agree to rent for periods of less than a year. Therefore,
you’ll probably need to adjust your own vacations around
your tenants’ leases.
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