5 Considerations When Investing in Short-Term Rentals

The short-term rental market has exploded in recent years. With Airbnb and VRBO taking off, short-term rentals are more in the spotlight than ever. There are many reasons to consider investing in STRs and 5 important considerations when doing so.

  1. Appreciation Potential
  2. Tax Advantages
  3. Equity Payoff
  4. Income from Rentals
  5. Associated Expenses

1. Appreciation Potential

lines on chart going up

Time in the market is always better than timing the market. Especially in real estate. Land is the one thing they are not making anymore! I’ve heard all the doomsday nay-sayers calling a crash over the past couple years and yet the market in Hawaii continues its uptrend. In fact, The median price of condos on Maui just hit an all-time high at an $908K. Inventory for STRs remains very low as this market continues to be highly desired.

2. Tax Advantages

piggy bank holding umbrella with work tax raining down

There are many tax advantages to owning a short-term rental. Depreciation is the most obvious. There is a short-term rental loophole where STRs get treated as regular businesses rather than rental income, and losses can be non-passive. This means it can be a tax shelter and losses can offset your 1099 and W2 income. Some conditions need to be met for it to qualify as non-passive, but these can easily be met with participation by the owner. Cost segregation and bonus depreciation are more advantages of STRs.

3. Equity Payoff

There are advantages and disadvantages to paying down your equity. Potential advantages include increased cash flow, less worry, and eliminating debt. Not to mention that with increased equity in the rental, you can use that to continue to invest in more rentals. Drawbacks may include less liquidity, diversification, and lower potential returns than alternative investment.

4. Income from Rentals

two signs that say income and expenses

It is important to understand the income potential for any investment. Make sure you have access to the rental history in terms of occupancy and rates. Your realtor should be able to help you access this information. You can also look at similar rentals in the area. Other considerations are what the economy is doing on the macro level. Keeping in mind luxury is more recession proof than economy accommodations makes the Maui STR market more impervious to macro-economic conditions.

5. Associated Expenses

In considering the income, it is important to consider the associated expenses as well. While these are all tax deductible, from a cashflow perspective they are worthwhile considerations. Depending on the location and type of rental, HOA fees may be your most significant expense. It is also a good idea to look into the HOA capital project schedule and what portion of that expense will be the responsibility of owners. Other expenses include platform fees, property management fees, insurance, repair and maintenance, furnishings, utilities, cleaning, guest supplies and toiletries and property taxes.  General Excise Taxes and Transient Accommodations Taxes are also due on the income earned here in Hawai’i.

While We Are Here…

I have to take the opportunity to share with you this great unit available at my favorite luxury complex in South Maui. Makena Surf Unit C106 has amazing short-term rental potential.  Check out my past market stats blog on Makena Surf. This unit boasts a larger floor plan at 1600 square feet, high ceilings, optimized privacy thanks to the fishing heiau, and concrete construction for extra quiet.

Here is a YouTube video I made touring the complex and this unit. Please reach out with any questions on this or any other short-term rentals on Maui.

About Me

As a lifelong resident of Maui and realtor for over 20 years, I have a unique long-standing relationship with residents and visitors alike. I bring a deep understanding of the many layers and subtleties of Maui’s Real Estate industry. My broad ranging experience allows me to better understand and meet your needs. Whether you are buying or selling your first home, a second home, an investment property, looking to do a 1031 exchange or even large land transactions and subdivisions, I have done it all. I love water sports, mainly international competition in canoe paddling, one man canoe, surfing, paddle boarding, Jiu jitsu training, soccer, rugby, family time, friends, socializing, food, pets, work and staying active.

If you ever want to chat about what’s happening in the Real Estate market on Maui or have any questions on your equity, current options and their tax advantages or disadvantages or to discuss any other real estate needs, feel free to call, text or email. I am here for you!

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June 1, 2023

Great article John….super helpful and insightful content.

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