Lately, there seems to be a large amount of talk all around Airbnb and short terms rentals in Hawaii. This is a segment of the market that has popped up quickly and spread like wildfire. When you have high cost urban areas, such as Hawaii most property owners are looking for a way to help subsidize the mortgage and expenses. There are a very limited options to owners and one of those options is considering a border or renter. The short term rental companies are now well-oiled machines that seem to make this process simple, easy, and most of all profitable, for the property owner. I think the initial idea was developed around a property exchange concept. Meaning, if I want to travel to New Zealand, for example, and someone living in New Zealand wants to travel to Hawaii, you could swap houses for the trip. This then grew into renting a part of your house to a traveler and make money. Now we are looking at people buying houses and simply trying to rent them full time to cover all the expenses. If you can legally rent a home short term for a good multiple, then you potentially can make a lot of money quickly, in theory anyway.
The online companies have made the process fairly easy for the participants. You go into their portal, answer questions, snap some photos, and then link a bank account. Shortly thereafter, you start getting inquiries and bookings. This is actually a very simple and easy process from the online perspective. The companies have thought of most of the potential issues and problems so that the homeowner does not have much to worry about. Once you get past the idea of having a stranger in your house and start to see the income, most homeowners are happy and making money.
So now is the other side of the coin. When you have strangers in your home, they obviously will not care or treat the home the same way you would as the property owner. You potentially can see damages, neglect, and a faster rate of wear and tear. You also can not really control the renters. So you can potentially have additional issues and problems. Not everyone on the internet is truthful, go figure. The nice couple coming to vacation in your home might actually be a group of spring break party goers looking to let loose. This can translate into lots of cars, noise, and most importantly, upset neighbors. Your home is not a hotel with security, so it is a true case of be careful what you wish for.
Short Term Rentals Rules
In addition, most of Oahu is NOT set up for and does NOT allow for short term rentals. The typical rules in most of the areas on Oahu look at short term rentals as 30 day minimums. This means the city and county does not allow for rentals under 30 days, so the numerous renters for sequential weekends are not permitted. This is not something the booking companies will advise you as the homeowner. It’s more of a buyer beware and check your rules and regulations. Most subdivision and homeowners associations also have their own covenants and restrictions. So let’s say that short term rentals were allowed in your neighborhood, the deed restrictions and rules for your property might dictate otherwise. Your association may not allow for any short term rentals and only allow single family owner-occupied living. This is something that should be checked out first and foremost and then you must check the rules with the city and county. Most homeowners are hearing that a neighbor is allowing short term rentals so it must be fine and I can as well, that usually is not the case. It is sort of the concept of everyone is speeding, so it must be ok for me to speed; that is usually wrong and does not work out well.
You also need to take into account taxes. Certainly the city, county, and federal government all have extremely comprehensive rules on taking, charging and paying the taxes to the correct municipalities. This is not something that a homeowner can just collect rent and not expect to pay some taxes on. You absolutely need to be very well educated on how the GET, TAT, and federal taxes work and how those might impact a homeowner. Generally, if you try and resolve this at the end of the year and have not set income aside you might be heading for big trouble.
You should also talk with your lender and read your promissory note. Many lenders have provisions for renters versus owner-occupied language in a note. This includes VA loans that are given for owner occupants. The downpayment, rules, and regulations from the lender can change based on what your initially intended use is. Many notes can call for an acceleration of payments if the contract is broken. There is a huge difference in the lending for an owner-occupied property versus an investment property. This also pertains to insurance and coverage. You need to check with a licensed insurance agent to make sure you are covered for whatever you might want to do. If you are renting a home and not living in the home this can change the coverage. Make sure that is something unforeseen happens you will be covered.
There is also a lot of pending legislation surrounding short term rentals. This is nationally, state wide, and locally. There are task forces set up to check in on and in many cases fine this who are caught breaking the rules. The pending legislation calls for HUGE fines in the future that will make anyone stop and reconsider. If the hotels are losing income and if the state is not getting taxes as they should, you had better believe they will be tightening the rules and regulations and increase the fines. I would highly recommend against buying a home or property with the expressed intent on paying the mortgage by offering short term rentals. This is something that can change rapidly. There is also a huge difference in the rules for renting a room out while you live in a property versus renting a whole property short term. If you are counting on that source of income to pay the bills and that suddenly stops can you still afford the payments?
I am not saying that you should or should not offer short term rentals. It is, however, important to check the rules, taxes, and make sure you make an informed decision. This is a concept that needs professional advice directly from the source. Please do not take the advice of a friend or neighbor, but actually seek out professionals (plural!) who are extremely well versed in the laws and rules of short term rentals. It also makes good sense to see what is potentially on the horizon from a legislative perspective. Are the laws and rules potentially changing in the near future? Make sure you do your homework and get well educated before making any decisions on short term rentals. Check with your local city, government and state officials to make sure this is something that can legally be done and how that might look.