Owning rental property on Maui has proven to be a “life-changer” for many buyers. It’s life changing in the sense that owning real estate in Hawaii can give a sense of accomplishment and also give the purchaser the feeling that hard earned money was not spent on something frivolous.
One way to experience this sense of accomplishment is to perform “due diligence.” This means a buyer would have researched as much as possible regarding total expenses compared to total income, as well as title aspects, financing, potential re-sale, etc.
There are a couple of choices to make in regards to which type of rental property would work best for a buyer. Generally, one would make a choice between long-term rental and short-term rental. This article will focus on issues regarding long-term rental property evaluation.
1. Consider the Budget
Yes, that is correct…determine the working budget first. There are a couple ways to address determining a budget, and the best way is to speak to a qualified lender to obtain a pre-qualification letter. They will look at the amount of down-payment available as well as debt to income ratio.
2. Look at Expenses
Here is a partial list of expenses one needs to consider.
- Property Taxes
- General Excise Tax (GET)
- Home Owner Association Dues (HOA), if any
- Homeowner’s Insurance Premium
- Rental Manager Commission
3. Calculate Rental Income
Once the gross rent is determined, the net rent can be calculated. Then once the net rent is calculated, we can look at a couple of additional indicators:
- Net rent will indicate what amount of mortgage payment the property can support while breaking even, showing positive cash flow, or showing negative cash flow.
- The yearly net rent is also used to determine the Capitalization Rate (CAP Rate). The CAP rate is an indicator of the return on investment in terms of rental income.
For professional representation in regards to purchasing rental property on Maui, I encourage you to contact me. In most cases, there is no additional cost to the buyer.