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Buying Advice

What’s the Issue with Short Term Rentals?

There has been a tremendous amount of focus on short-term rentals in Hawaii. This seems to be a highly debated topic on both sides of the coin. Many spots of the islands have been offering short-term rentals for many years. The short-term rentals in areas that are oceanfront, and lacking hotels, have been hugely successful. When you look at areas such as the North Shore of O’ahu f0r example, there is very limited space in hotels and B&Bs available. So as a result, a lot of tourists that want to visit the North Shore have very limited options.

The issue comes more into play when you are looking at areas that are master-planned communities that are not at all designed for short-term rentals. This is very true with many of the areas in Ewa Beach. The developers such as Haseko and Ewa Gentry have very methodically master planned out these communities, and there is no mention of allowing short-term rentals. Actually, it is just the opposite — it is forbidden.

The Issue with Short-Term Rentals

So here is the issue, homeowners are hearing about all this opportunity to make money with short-term rentals. They look at the math, and figure you can rent a house out daily for a good amount usually lower than a traditional hotel room, and then multiply that rate by X for rentals. It more than pays for the usual mortgage. Next, you find buyers that are using this math and buying properties and occasionally overpaying. So what happens if this is permanently stopped tomorrow? Could those owners still make the mortgage payment? I bet not. Many have bought very speculatively on short-term rental income projections and own multiple homes. So if rentals suddenly stop completely, what would the owner do? They would sell and sell fast. This would have a ripple effect of lower home prices for the area. The actual numbers of short-term rentals in any given area are staggering. Think if they all had to sell tomorrow, what would happen to the home prices in your community?

Community CC&Rs

When you buy in a master planned community such as some in Ewa Beach, you sign what is called CC&Rs. These are the covenants, conditions, and restrictions for the development. The HOA spends a great deal of time and money developing the rules for each of these master planned communities. This can be items such as what color you can paint your house, the flowers you can plant, and many other rules and restrictions that are part of the community. If you buy in the subdivision, these are the rules you must follow and the rules you agree to when buying. There are plenty of defined rules about short-term rentals. Most people do not realize that the rules from an association can be more restrictive than the rules from the city and county. So for example, if the city and county say you can build a house 40 feet high in the area, but the rules from the developer limit it to 20 feet, the rules from the CC&Rs win. In short, the rules from the HOA can be and usually are more restrictive than what the city the county may allow.

30-Day Rentals

We are not even taking into account the rules from the city and county who mainly only allow 30-day rental minimums on Oahu. The city and county already have task forces developed that impose large fines for rule breakers. If the fines are large enough you can rest assured the city will use this as a source of revenue and go after these homeowners and levy huge fines. When a neighborhood starts to have a lot of short-term rentals popping up, the neighbors take notice. A neighbor who does not want or agree with someone breaking the rules of the community can cause a lot of issues for a homeowner, so be aware.

Protect Your Investment

Nobody wants to see the value of there most important and expensive investment deteriorate. Most homeowners will try to do what they can to protect their investments. You really need to take a good look at the rules and consequences before making an investment around short-term rental potential income. I do not see the rules getting looser, and if anything, they are tightening island wide.

If you want to know more information about short-term rentals and whether it’s allowed in a certain community, please do not hesitate to get in touch, Making an informed decision is the best first step.

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Jared M

January 13, 2019

State, county, and city restrictions–or prohibitions–on short term rentals is driven largely by the hotel / resort industry–who see their share of the vaction rental pie getting smaller as the number of listings on sites like AirBnB, Craigslist, and VRBO has gotten bigger and bigger. The difference is that a typical homeowner or small real estate investor can’t afford to payoff local politicians (bribes, perks, campaign contributions, etc) the way that Marriot, Hilton, Four Seasons, Westin, and Hyatt can. Many of these good ol’ boy connections go back decades. In life, all you have to do is follow the money to figure out who the players are behind protectionist legislatatoin like Bill 108–which was largely designed to keep profits in the hands of the big players instead individual Hawaiins–depite the fact that many tourists and visitors to the islands not only can’t afford the big resort experience–they simply don’t want it (particularly on islands other than Oahu). Bills like 108 are also about the same old greedy city, county, an state government agencies attempting to extract as much cash from tourists and visitors as possible–in order to redistribute it to the locals through generous welfare and healthcare benifits, more needless government jobs, etc–regardless of the long term costs and effects of these policies and programs.

Restricting consumer choices and protecting established industries has always backfired in the end–and are always short sighted attempts to keep power and profits concentrated in the hands of a small anoited few–who are protected by legislators in the pockets of the rich. Hawaii’s solar industry is a great example of this. Hawaiins pay more for electricity than ANY other state in the union (40% more than the next highest state–Alaska (which has huge amounts of oil, gas, coal, and hyrdo-electric power) and 258% more than Lousiana (which has the lowest electricity costs in entire US)–partly due to the remoteness of the islands and complete lack of local fossil fuels to burn–but partly due to the electricity monopoly (HECO)-which has been repeatedly protected by the state legislature and state regulators–at the expense of all local businesses and homeowners. When solar net-metering was allowed starting in 2001–60,000 Hawaiin homes and businesses signed up for solar systems–resulting in solar power now accounting for roughly 10% of ALL electricity used in Hawaii–up from less than 1% before 2001. Net metering was nothing less than transformative for many Hawaiians–who, overnight, saw their power bills slashed–and their rates capped for the next 20 yrs.

But the powerful, rich, and well-connected monopoly complained that solar was eating into their heretofore fat, protected, and guaranteed profits–so state regulators (and the state legislature) allowed them to END net metering on the islands–which has, in essence, killed the once booming solar industry here–and once again doomed local businesses and homeowners to higher prices and global warming from continued use of fossil fuels. As always, the rich and powerful–protected by their cronies in office–got to keep all their money–and get to keep soaking the little guys.

Prohibitions–and new taxes and fees–on short term rentals and their owners is no different than protecting the utility monopolies. In both cases, the profits continue to go to big, powerful, connected mainland companies and shareholders–at the expense of the local residents. And will also certainly restrict the number of visitors to the islands–by driving up the costs of vacation housing–which, ironically, will in the long term reduce overall tax revenue to the state and sales revenues to local, non-resort businesses. It’s simple economics: higher prices = fewer visitors = lower sales revenue = lower tax revenue.

Doreen

January 19, 2019

Very interesting and thank you to the newest BIC! So excited for you!

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