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I've never heard of this "1% rule". If you know of a place where it actually can occur, let me know. I own properties in 3 different states (including Hawaii) and not in any of those states could an investor purchase a home and get a rental rate equal to 1% of the purchase price of the home. If you're talking about multi-plex buildings ... I think you can get closer to 1% overall with all the rental units combining up to about 1% of the purchase price. But you really need to get up to larger plexes before you start to see this. But I don't think it is realistic when dealing with a single family home or a single condo unit.
Are you thinking 10%? Even in today's higher priced market a $1,000,000 SFH should generate $42,000 to $50,000+ yearly in Kailua, Manoa, Hawaii Kai depending on condition/location. I wouldn't expect those rates on
Kauai but 1% yearly on a $1,000,000 home is only $833/month
Are you thinking 10%? Even in today's higher priced market a $1,000,000 SFH should generate $42,000 to $50,000+ yearly in Kailua, Manoa, Hawaii Kai depending on condition/location. I wouldn't expect those rates on
Kauai but 1% yearly on a $1,000,000 home is only $833/month
Did you read the original post where the "1% rule" was explained and an example given ? They were not talking about 1% of the purchase price needed for "Annual Rent" as you are trying to illustrate.
They indicated this "1% rule" means that monthly rent should equal 1% of purchase price to cover the mortgage, vacancies, repairs, etc.
And an example was provided of a $450,000 purchase price SFH on Kauai should generate $4,500 in monthly rent.
My point was I don't think that sort of analysis or ratio of purchase price to monthly rent is possible. But the conversation as framed in the earlier posts was talking about monthly rent -vs- purchase price. You are talking about annual rent -vs- purchase price. Big difference.
The 1%, 2% rule is a way to discourage investors in high profit markets and to sell crap in low profit markets.
If you want to look at a rent to price ratio you NEED to look at the CHANGE in rents and price.
If I have a crappy property in Indianapolis that buyers will ONLY pay 50 times monthly rents (2%) AND those rents and values barely increase then I am losing money to inflation and CapEx. Now if I buy in Honolulu at .8% price to rent ratio and values increase at say 8-12% like they have over the last 50+ years then every time my property increases by $100,000 I can expect a monthly rent increase of about $800!
See how the .8% PTR ratio is BETTER than a 2% PTR ratio in a low appreciation market?
I've never heard of this "1% rule". If you know of a place where it actually can occur, let me know. I own properties in 3 different states (including Hawaii) and not in any of those states could an investor purchase a home and get a rental rate equal to 1% of the purchase price of the home. If you're talking about multi-plex buildings ... I think you can get closer to 1% overall with all the rental units combining up to about 1% of the purchase price. But you really need to get up to larger plexes before you start to see this. But I don't think it is realistic when dealing with a single family home or a single condo unit.
To be honest with you, if I had cash to buy 3 homes in Kauai, I would not buy 3 homes on Kauai. I would buy 1 home on Kauai. I'd take the cash that would be used to buy the other 2 homes (let's say approximately $1,000,000) and use it as a down payment to leverage myself into a mid-sized multi-plex (10 to 15 units) on the mainland. I'd use a property management firm to manage the units and carry a mortgage with a 15 yr payoff. Then I'd live in Kauai. You should find you get a better overall return on the multi-plex.
Regarding Vacation rental vs long-term rental ... I like long-term rental better (if you don't need/want to use the unit yourself. Your property tax millage rate is substantially higher as a vacation rental than as a long-term rental. And as a vacation rental, you need to pay the electric bill (and vacation renters tend to run the a/c 24/7). A long term rental you can charge the utilities to the tenant. And a vacation rental on Kauai requires you to constantly be working to find your next tenant and keep it filled. I don't think you can achieve 80% occupancy year round on a Kauai vacation rental. Units in my building in Waikiki average about 80% occupancy. And Waikiki has a far larger tourism base than does Kauai.
But my exposure is on Oahu, so take my thoughts on your situation in Kauai with a grain of salt.
WaikikiBoy, great post! What ARE you doing with your 3 properties? All long-term rentals? Truthfully, out-of-state investments make me nervous. I've heard of folks doing it but the mantra seems to be to be very very careful. Doing a little research into multi-family rentals, you are correct, this seems to be the vehicle for getting as close to 1% as possible with the down side seeming to be the slow appreciation rate as multi-family assessed value is determined and tied to the rental income potential. This could be a cap of sorts as they are looked at commercially whereas single family homes appreciate according to the residential market. I'm just starting to research this so I don't know this for certain... just what other investors reasonings have been for purchasing SFHs rather than Multi-family.
Very good point about the millage rate. Could you post the two rates for what you are seeing in Oahu? Like to see the difference...
Quote:
Originally Posted by KauaiHiker
Kauai vacation rental laws are similar to what you describe on Maui, as I hinted at in my first post. There are "visitor destination areas" (VDAs) where short-term rentals (less than 30 days) are automatically allowed (I'm not sure, but I thought you still needed to apply for a permit so they get your tax if and make sure you're collecting the hotel tax and excise tax for them). In the VDAs, there are about 80% condos, except Princeville where the average single-family house is over 1M.
KauaiHiker, this was good stuff! I googled "visitor destination areas" and found kauai.gov which had a huge 250(?) page pdf on all the regs for properties on the island. Just glancing, it seems that a property had to be designated a VDA before a certain date in order to get a valid permit now. Otherwise it is not likely to be approved as one now.
Its pretty clear that some folks who live on the island have invested in long-term rentals and others in vacation rentals. I am curious as to the reasons they chose one path over the other.
Discovering the VDA rules helps since that would be a huge deciding factor in how you could rent out your property. Yet it seems that there are still investors actively looking to purchase pre-classified VDA to rent out. I wonder what they see...
The 1%, 2% rule is a way to discourage investors in high profit markets and to sell crap in low profit markets.
If you want to look at a rent to price ratio you NEED to look at the CHANGE in rents and price.
If I have a crappy property in Indianapolis that buyers will ONLY pay 50 times monthly rents (2%) AND those rents and values barely increase then I am losing money to inflation and CapEx. Now if I buy in Honolulu at .8% price to rent ratio and values increase at say 8-12% like they have over the last 50+ years then every time my property increases by $100,000 I can expect a monthly rent increase of about $800!
See how the .8% PTR ratio is BETTER than a 2% PTR ratio in a low appreciation market?
Honobob, this is a really good point! I'm starting to look at the 1% rule as merely a benchmark which is easy to calculate in my head. I think, as you say, it is better to look at a property holistically -- at both rental income AND appreciation over time.
Now I'm thinking there's no way you could know this and not have investments yourself. Care to share what you chose to invest in and where?
Wondering if anyone is familiar with real estate in Kauai?
does anyone know the best investment return for the real estate dollar? vacation rental or long-term yearly rentals?
I own, with my son who lives on Kauai, a SFH in Princeville, and have been running it as a Vacation Rental for 27 years. The mortgage will be paid off next year, so we are looking into converting to LTR.
I do all the marketing, customer service, booking, and book-keeping, and my son and his wife do all the maintenance, deep cleaning, supplies purchasing, and furniture/appliance replacement. A cleaning lady cleans after each guest. By law, you need someone on the island for guests (don't call them tenants) to contact. We are in a VDA (Visitor Destination Area) and have all permits and tax I.D.s.
Last year, we ran 78.63% occupancy and grossed $83,852. We get $1600/wk Jan-mid-Sep, $1500 Mid-Sep-mid-Dec and $2000/wk Christmas/NewYears. We are booked about 28 weeks ahead.
At that rate of income, we have been able to pay the mortgage down an extra $14,000 in just the last year. Of course the mortgage was only about $270,000 to begin with, since we bought the bare lot in 1989, and my son built it as an owner-builder. We put $30,000 into it, the bank put the rest, and it's now worth about $1,200,000.
We have been told that we will get about $3,500 a month as a LTR, bringing in about half what the VR has brought in, but expenses will go way down too. Taxes way down, insurance way down, utilities zero, supplies zero, cleaning zero, etc.
The Vacation Rental mode pays much more, but it has been a very labor intensive 27 years. I've enjoyed it.
I can't remember whether I'm allowed to post my web-site here, so unless the moderator tells me otherwise, you'll have to find me with Google.
I'd suggest you read up on real estate investing for long term rentals to learn the general rules that apply. Just buying and owning them isn't going to make you any money. In fact it can be quite costly owning just one rental.
There are a lot of other forums on this topic, I won't post a link, but go to bigger pockets. They generally advise a investor shoot for whats called the 1% rule. Basically if you buy a property to rent out, the rents should equal 1% of the purchase price to cover PITI, repairs, vacancies etc.
example; Say you buy a SFH on Kauai for $450k, it should bring in $4500 a month in rent. Now we all know that this rule is very hard to come close to in HCOL areas, but if you're not coming anywhere close to the 1% rule, it might not be a good investment!
A lot of the metrics don't really apply to Hawaii investment real estate. I've actually seen the 2% rule before, basically doubling your stated rents. Say you buy a $300k 1br condo, the 1% rule means that you'll be renting it for $3k. The 2% rule, $6k/month in rent. Not likely. Those metrics work in the mainland because you can buy a $100k house and maybe rent it for $1k.
The mainland sites advertise stuff like putting 10-20% down and making a profit after all expenses covered for. This simply isn't possible in Hawaii unless you're really lucky or much smarter than everyone else. In reality, you'll probably have to put down 50% if you want to break even monthly. You won't really make rental income until the property is paid off or mostly paid off, but the property should appreciate in real terms faster than inflation in the long run. The combination of property value increase and equity built over time is where you'll generate your return on a Hawaii property.
I own, with my son who lives on Kauai, a SFH in Princeville, and have been running it as a Vacation Rental for 27 years. The mortgage will be paid off next year, so we are looking into converting to LTR.
I do all the marketing, customer service, booking, and book-keeping, and my son and his wife do all the maintenance, deep cleaning, supplies purchasing, and furniture/appliance replacement. A cleaning lady cleans after each guest. By law, you need someone on the island for guests (don't call them tenants) to contact. We are in a VDA (Visitor Destination Area) and have all permits and tax I.D.s.
Last year, we ran 78.63% occupancy and grossed $83,852. We get $1600/wk Jan-mid-Sep, $1500 Mid-Sep-mid-Dec and $2000/wk Christmas/NewYears. We are booked about 28 weeks ahead.
At that rate of income, we have been able to pay the mortgage down an extra $14,000 in just the last year. Of course the mortgage was only about $270,000 to begin with, since we bought the bare lot in 1989, and my son built it as an owner-builder. We put $30,000 into it, the bank put the rest, and it's now worth about $1,200,000.
We have been told that we will get about $3,500 a month as a LTR, bringing in about half what the VR has brought in, but expenses will go way down too. Taxes way down, insurance way down, utilities zero, supplies zero, cleaning zero, etc.
The Vacation Rental mode pays much more, but it has been a very labor intensive 27 years. I've enjoyed it.
I can't remember whether I'm allowed to post my web-site here, so unless the moderator tells me otherwise, you'll have to find me with Google.
HankDfrmSD, Fantastic post, Exactly what I was hoping for – Thank you sir!
Curious, why the switch from vacation to long-term rental?
What would you say your top three challenges/problems are operating as a vacation rental?
Based on the figures you mentioned, what would you budget for taxes, insurance, and utilities? Might seem sensible to install solar/PV System since "guests" seldom conserve electricity and that can be a pretty heavy bill . However Princeville may be too cloudy...
Would love to see The house, what keywords would you recommend to Google?
Thank you so much for sharing !!
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Vacation vs Long-Term Rentals
I'm starting to look at the 1% rule as merely a benchmark which is easy to calculate in my head. I think, as you say, it is better to look at a property holistically -- at both rental income AND appreciation over time.
Renting VR or LTR
