Aunty’s Perspective on Real Estate in Hawaii

A guest post today from Aunty –

There are several ways to invest in real estate.

Pants on fire!

The one that gets the most attention is buying low and selling higher for a profit. This is called “flipping” and this method is fast and exciting with potentially high rewards in a relatively short period of time.

There are some drawbacks to flipping, the biggest ones are not timing the market and getting too greedy. Many a successful investor prior to 2008 got caught with upside down properties that hit them hard and left them with bad credit and nothing to show for it.

For the savvy and hardworking:

There are also creative ways to get into real estate such as wholesaling, purchasing liens, tax deeds, subject to financing, etc., but Aunty has never really gotten into those – mostly because I didn’t understand them well enough, but also because I always wanted to be a landlord.

Landlord dream

This was a dream of mine ever since I was a little girl growing up in Palolo Valley clutching $100 in cash and flying through the backyards of neighbors to deliver it to our nice landlord. My mom was a hardworking single mother supporting a family of 4 kids by herself, money was tight, and $100 was a LOT of money in the 50’s. (Yep, Aunty is old.)

Homes in Hawaii cost about $30K back then, and the ROI (return on investment) for a landlord would have been 4%. Not that great a return? Maybe not, but it was solid steady income, especially for a 7 year old who couldn’t believe the abundance in her hands as she ran through shortcuts to deliver this fortune into the hands of a landlord. [*note about ROI – this formula is an annualized return of monthly rent x 12 months divided by cost.]

Appreciation and rents over 50 years

Hawaii’s real estate appreciated over the years, and 3 decades later, in the 80’s, a house in Palolo would cost $120K, rents would have gone up to $400/month, and the ROI would have been 4%, with an appreciation of the original asset at 400%.

In the late 80’s, Hawaii house prices soared and soared even more in the 1990s. It was like a huge bubble that didn’t pop. It retraced a little, but never came close to mid 80’s prices.

Today, an average house in Palolo would sell for $600K. Palolo is an interesting neighborhood of older wooden houses with a spattering of huge new houses nestled into a valley with a couple of low income housing complexes. On the other side of the mountains is Manoa Valley, a verdant valley of wealthier residents with older larger homes in the $1+ million range.

At $600K, the average Palolo house has appreciated by 20 times its original value of 60 years ago. Rents have increased to about $2000/mo. ROI based on today’s FMV (fair market value) would be 4%. ROI based on 1980’s prices would be 20%. ROI based on 1950’s prices would be 80%!

[Please forgive Aunty’s overly simplified numbers – they are not taking into account monthly expenses that would offset rental income lower, and they are based on an all cash purchase of a property.]

Adding a mortgage to the mix

However, if the property was mortgaged at 70% LTV (loan to value), then the cash down portion of the investment, which is the amount of your investment drops to 30% of the cost of the property.

In 1987, if you could get a 70% LTV with a 10% annualized interest (loans had higher rates back then), you would have a negative ROI of on a $120K house bringing in $400/month in rental income because you would have a negative monthly cash flow of $800. Your cash basis would have been $36,000 with a -26% ROI.

Today, if you could get a 70% LTV with a 4% annualized interest, you would still have a negative ROI, and a negative monthly cash flow of $2400. Your cash basis would be $180,000 with a -16% ROI.

What does that mean?

Hawaii is not a cash flow income-generating place to invest in unless you have a huge chunk of cash to purchase and you will be satisfied with a 4% annual return on that cash, or you bought a while ago and your mortgage has been paid off.

It also means that Aunty does not invest in rental income properties in Hawaii, because these options and numbers are not good.

What to do?

If one does want to invest profitably in today’s Hawaii real estate, the modus operandi is buy and flip – but carefully, with good market research and reliable resources for rehabbing.

Or, look for better markets that have better numbers for investing. Places such as Indiana, Las Vegas, and other cities that have low property values and moderate rental incomes that give very decent cash flow and higher ROIs (10% or better!)

No more yesterday

Slowly and steadily, we are building a real estate portfolio, but not in Hawaii. Perhaps later, if and when it makes sense to do so.

Gone is the little girl who would fly on skinny legs to complete her most important task of delivering rent each month. Today’s scene includes a property manager who takes care of everything. Automatic deposits and debits in an investment business checking account replace the hand-to-hand payee/payer transaction that first sparked the aspiration, “I am going to be a landlady one day!”

Is real estate investing the best investment vehicle? I cannot say for you, but for Aunty, it fulfills her lifelong dream. Have your got your dreams, your success?

Whatever you dream of, may it be.

Note: Aunty is the gal that blogs at Honolulu Aunty where she writes on a variety of topics, money, recipes, travel, and a good half dozen more.