Hawaii is a popular destination for Canadians looking for a warm island escape. Perhaps you have been visiting regularly and are thinking about purchasing a vacation rental investment on Hawaii. If you are a Canadian buyer considering purchasing a home or condo in Hawaii, here are a few things you should know about the process.
The spectacular beauty and abundance of outdoor activities on Kauai attract visitors from all over the world.
Terminology and Expectations
- There are two types of property for purchase in Hawaii. Fee Simple Property means you own part or all of the land that the home or condo is on, and Leasehold Property means you do not own the land, there is a fixed term on the land lease and you pay a monthly land lease fee in addition to any other expenses.
- Strata Fees in Canada are the equivalent of HOA/AOAO Fees in Hawaii.
- Hawaii contract “contingencies” are Canadian “subjects.” A typical home inspection in Hawaii is 14 days, which is longer than a Canadian subject.
- Here in Hawaii, it is not uncommon for Sellers to offer their properties “as-is.” Though repairs and adjustments to price can be made during the home inspection contingency period, it is not uncommon for property owners to offer their homes “as-is.”
I have met several Canadians who were surprised at how difficult it was to obtain a US Mortgage, despite super solid financial history and income in Canada. It is important to have established US credit. It is also important to work with a Hawaii-licensed lender. Canadian lenders can’t loan money for US investments, though they can help Canadian buyers take equity out of their Canadian homes and use the cash to purchase in Hawaii. It is a typical requirement for Canadian Buyers to put 30% + down on a Hawaii home or condo purchase, and they will generally pay 1/2 – 3/4 point higher interest rates than a domestic US purchaser. Before making an offer you should get pre-qualified with a local lender who will need documentation such as pay stubs, tax returns, bank statements and proof of available funds for the down payment. It is common for Canadian or US Buyers to have enough cash reserves remaining in the bank after down payment and closing costs to cover 6 months of the mortgage on their primary residence and investment property.
Fees Associated with Purchasing
There are a number of fees associated with purchasing a home in the US that you may not be used to seeing in Canada. Some of these fees include title and escrow fees, inspection and appraisal costs, and possibly attorneys fees. Your real estate agent and lender will be able to guide you through these expenses and provide you with an estimate before you get started with a purchase.
- When you sell: It is important to note that as a foreign investor in US real estate, you will be subject to additional taxes when it is time for you to sell. You will be subject to FIRPTA (Foreign Investment in Real Property Tax Act) tax, which mandates that 10-15% of the sales price be withheld at the close of escrow. Once you file a US tax return and report the proceeds, any overpayment will be returned. HARPTA (Hawaii Real Property Tax Act) mandates that 5% of the sales price be withheld at closing. Once a Hawaii state tax return is filed, any overpayment is returned.
- If you rent your property: It is recommended that you obtain a Tax Identification Number (TIN) at closing if you plan to rent your property out. If you do not have a TIN, 30% of your rental income will be withheld to ensure you pay US taxes. If you are utilizing your US property for short term or vacation rental, you will also need to obtain a business license for collecting General Excise Tax (GET) and Transient Accommodation Tax (TAT).
- Property taxes: Property tax assessments are based on how the occupant utilizes the property. The most current rates, which cover from July 2016- June 2017 for Kauai Real Property Tax Rates are assessed as follows: Residential Investor $6.05/ $1,000, Vacation Rental $8.85/per $1,000, and Hotel and Resort $10.85/$1,000. Rates are based on assessed value of Building. Rates vary by island. Your local Realtor can advise you on the most current rates.
- Ask an expert: It is advisable to consult with an accountant or tax expert for advice before you purchase an investment property in the US.
Title and Escrow
In Hawaii we use Title and Escrow Companies, who are neutral third parties, to handle closing documents and transfer of the deed. You can expect to communicate with your title and escrow officer, in addition to your real estate agent, during the closing process. Closing time frames are typically 45-60 days when financing is involved, or 30 for cash. Funds for closing are often wired to escrow, and it is very important to be careful about any instructions you receive for wiring funds, as wire fraud around the globe is on the rise. If you are ever in doubt, call your escrow officer before wiring any money.
Some documents required for closing will need to be notarized by a US Notary. You may need to schedule an appointment at the US Embassy, which can take two weeks advance planning. It may be easier to drive over the Canada-US border to sign documents in the US with a notary there, depending on how close you live to the border or an embassy.
Setting Up Utilities and Accounts
Depending on which county you are purchasing in, you may be required to send in notarized IDs to the utility companies before being able to open a utility account as a non-US citizen. If you plan to have rental income deposited into an account, and pay bills out of that account, you will need to open a local bank account. There are no mainland banks on Hawaii, such as Bank of America or Wells Fargo.
If you do not reside on the island your property is located on, you will be required to hire a licensed property manager to handle your Hawaii rental. Long-term rental fees can start out at 10%, and short term vacation rental management fees can range from 25 – 40% and more, depending on the level of service and scope of management.
If you are ready to start the search for your Hawaii vacation home, contact me to get connected with a great local lender and get started with the search process.