Friends and clients will often ask, “Is a vacation rental in Hawaii a good investment?” This is a loaded question, of course, and there are many answers that are very situational. To answer in a nutshell, it depends. Here are some questions to think about if you are entertaining the idea of investing in a vacation rental in Hawaii, or anywhere else.
You can’t get much closer to the ocean than at this stunning vacation rental retreat in Kauai that is currently on the market in Anahola.
What is your objective?
Are you looking at this purely from an investment standpoint, as a strategic part of your long-term financial plan? Historically, real estate is a safe place to invest money, if you are in it for the long haul. As we have seen, and most recently in the dramatic market collapse of 2006, any financial market can be fickle and heavily reliant on factors out of our immediate control, such as supply and demand. With that being said, it is a tangible asset, which means that even if we experience another downward shift, people need a place to live. And currently, there is more demand for housing than the market can supply here in Kauai, which has caused a spike in prices and a competitive market, especially for first-time home buyers. Even the rental market is tight, and in many cases, you might as well buy when compared to the cost of renting in the more popular destination areas. So from this stand-point, any investment in real estate is likely to appreciate over time. So if you love vacationing and visiting Hawaii, it seems worth considering investing in a vacation rental that you can help offset the cost of by renting out to other vacationers. Once the mortgage is paid off, you may still have ever-rising HOA fees to consider, if you purchase a condo, but as long as Hawaii remains a popular tourist destination, there will be a market for vacation rentals. The popularity of Kauai continues to grow – in 2018 flights to the island are expected to increase by 38%. Read more about Kauai tourism in this article, recently published by The Garden Island newspaper. If you are in it for the long-haul, your investment will likely appreciate in value. And the closer your investment is to the beach, the better.
On the other hand, if the idea of sharing your home or condo with others who may not care for it like you do makes you cringe, you may want to consider another vehicle for investment. Owning a vacation rental can be stressful at times. I own a vacation rental in Washington state, and because it was a home we lovingly restored and cared for, it can be difficult dealing with reports of damage and carelessness that cost money. We have an emotional attachment to that home. It still makes sense for us, because we utilize the cash flow, which is higher than renting on the standard rental market, and since it is a business, every time we go back “home” to visit, it is a business trip. I recommend you talk to your tax professional about this. Here is an interesting article on the tax benefits of owning a vacation rental.
We keep our house precisely because it is a good long-term investment. I am a believer that if you don’t have to sell, you shouldn’t. Of course, if you are nearing retirement, selling might coincide with your retirement plan, but wow, I have seen some great equity gains to be had by folks who held on to real estate. Have you ever heard the term “wake up money”? It refers to the passive income you can enjoy as a benefit of owning real estate outright if you invest wisely.
So if you find your dream home on Hawaii and can afford it without the hassle of allowing others to rent it out, more power to you. You won’t have any restrictions on when you can visit or have to deal with renters at all. Even if you have great guests, accidents happen, and wear and tear is a reality. Just think about how much hotels invest in maintenance and upkeep of their properties. Which brings us to another point…
Who is going to take care of your property?
Depending on where you live, how often you plan to reside in your vacation rental, and how much work you want to do, you may consider hiring a vacation rental company to manage your vacation rental. Here on Kauai, there are a number of well-qualified professionals who can manage your vacation rental for you so you do not have to worry. Hawaii Life has a vacation rental division that is fabulous. Most short-term property managers have a wealth of experience to guide you through the process, provide you with contracts and checklists as well as offering bookkeeping and money handling services on your behalf. Unless you reside here, you are actually required in the state of Hawaii to hire a local company or person who can check on your property and respond to guest requests.
If you do decide to undertake this task on your own, vacation rental websites like VRBO.com and Airbnb.com can help you get online exposure and offer online hosting capability as well as tools, resources, and support on operations. Be sure to hire a professional photographer to capture your new vacation rental in its best light. It is also essential that your vacation rental is kept in top condition, sparkling clean upon arrival, and that the landscaping is pristine.
Attention to detail goes a long way in the vacation rental business. Furniture should be tasteful and modern, decking and exterior surfaces should look fresh and well-maintained. A welcome basket for guests is a nice touch.
Do you have enough capital?
If financing your vacation rental will be part of your strategy, it is a good idea to talk to a local lender in the area you intend to buy. For an investment purchase, the lender will usually require 25% down (for the best rate) and at least 6 months of “reserves” that would cover your primary and investment properties in the event they sit vacant.
You will also need to have money available in the event that you need to make an unexpected repair, or cover a longer period of vacancy. It is common to require a refundable deposit to be put down by guests to ensure they take good care of your home and to cover any accidental damage. Ask guests to purchase a non-refundable insurance policy to cover bigger losses. On VRBO, they offer a policy, through CSA travel protection that protects both the guest and the homeowner. For example, for $99, the guest is covered for up to $5,000 in accidental damage protection.
Another good idea is to have a business insurance policy on your home, rather than standard homeowner’s coverage. Home Away Assure is a CBIZ Insurance program designed to completely replace your homeowner’s policy. It covers you for more than just liability in the event a guest claims they were hurt while staying at your property, for example. In the event that a pipe bursts, for example, your policy would not only cover the damage but the loss of income generated by your business during the vacancy. I have a policy through my trusted insurance broker, but I have found a wealth of information and resources available on the VRBO/Homeaway website. In our first year of operations, so far we have not had to exercise any of the coverage or utilize any damage deposits, but it gives us peace of mind knowing it is there. For further reading, check out this article.
Does it “pencil”?
Finally, a key component to deciding if any property is a worthwhile investment or not is through financial analysis. I happen to love numbers and have an awesome excel spreadsheet at my disposal that helps me crunch numbers for any specific property my clients are considering. It uses a conservative annual appreciation calculation of 2% per year and a variable vacancy rate, among other variables, like taxes, Home Owner Association fees, and annual maintenance. It shows a 10-year return on investment (ROI) calculation. How you determine a good ROI is subjective. If you consider that having your money in a very basic CD (Certificate of Deposit), which is about as risk-free as you can get, appreciation currently is at about 1.4% per year in a high-yielding CD, then a 10% ROI seems like a pretty solid number. This article has some information on basic investing in case you are interested in seeing how real estate can compare. On the other hand, if you have a high tax liability, it may be beneficial for you to invest in a property that doesn’t produce income and take it as a loss on your taxes. These factors are very personalized and subjective, and for a complete analysis of your financial situation, I recommend you talk to a trusted CPA or tax professional.
Here on Kauai, there are already a number of successful vacation rentals in operation. Usually, property owners are more than willing to share the numbers and book of business with prospective buyers, which can be beneficial for having an idea about what expenses you can expect to incur as well as income you can project to make. It is imperative that if you are considering investing in a vacation rental that you do your research to make sure it is legal to do so. There are specifically zoned areas where this type of use is permitted. And like purchasing any property, you also need to do your due diligence when it comes to a home inspection, evaluation of cesspool/septic/sewer, termite inspection, and more. A good agent will help guide you through all of these processes.
Take your time. Conduct your research. Utilize your resources. There are a number of vacation rentals currently available on the market that might be worth checking out. Here is one of my favorites:
This stunning Kauai residence is ideally located with direct access to the beach. In 2016, it grossed over $300,000 in vacation rental income. It is currently listed for sale by my colleagues, Ben Wellborn and Tiffany Spencer, both with Hawai’i Life Real Estate Brokers.
Call or email me if you are interested in touring this home, or any potential vacation homes or condos for sale in Kauai. Let me put my years of experience and return on investment spreadsheet to work for you.