Are There Downsides to Owning Oahu Vacation Rentals?
The thought of a vacation investment property is appealing for some. When you can have that property in the Hawaiian Islands - even better! But are there any downsides?
Real estate in general is usually a good investment, and in Hawaii especially so. Even after 2008, prices in Hawaii dipped less than the nation on average.
But owning a vacation property on Oahu is not all rainbows and sunshine. There are rules that differ from mainland investment properties. While holding real estate can be a great investment, it isn't one that can turn over a massive profit immediately. Rather, it increases your cash flow.
There are some downsides to owning vacation property on Oahu, though.
When buying a vacation rental property, you'll typically need a higher down payment than with a primary home loan.
It's important to note - Second Homes and Investment Properties (AKA Vacation Rentals) are different terms, and have different rules surrounding them. Most second home mortgage terms restrict or forbid renting.
With investment real estate loans, lenders realize you're taking on higher risk. They may even require that you have a reserve of 2-6 months worth of living expenses in on hand, including the payment on the second property.
Investment Property Taxes and Fees
While you can deduct business-related expenses, you’ll also need to pay federal taxes on additional income. Other taxes may include state and local taxes as well as property taxes.
Maintaining the Property - Added Expenses and Upkeep
If you don’t live on Oahu, you’ll probably need to hire a property management company to handle all of the details and maintenance of the investment property. There could be a lot of upkeep involved with owning a vacation rental, especially in a place that has dense or rich foliage. You might need a gardener as well as a handyman on call.
It’s also important to consider unexpected expenses such as repairs or replacements of appliances or home maintenance. Will you be paying the utilities, or will you be passing that on to the renter? A good rule of thumb is setting aside about 1% of the home's purchase price for unexpected repairs and maintenance.
Related: Hawaii's Guide to the Cost of Living
Oahu Rules on Vacation Property
In June 2019, Honolulu Mayor Kirk Caldwell signed a bill enforcing some of the strictest vacation rental laws that Hawaii has seen in 40 years. This law limits bed-and-breakfast rentals where the owner lives on-site to only 1715 properties in Honolulu. At the time, there were between 8000 and 10,000 vacation rentals on Oahu but only 770 of them were actually legal, licensed short-term rentals. Rentals in resort areas such as Waikiki, Turtle Bay, and Ko Olina are exempt from these laws.
The law came about because residents complained about “un-hosted transient vacation units particularly when a significant number of transient vacation units are located in the same neighborhood” [Travel & Leisure] The bill was designed not to punish travelers but owners who advertise illegal rentals.
The city of Honolulu started issuing licenses to legal bed and breakfasts and now it is necessary for all bed-and-breakfast owners to display their permit number in all online advertising including social media.
Under this bill, short-term vacation rentals are now defined as dwelling units with no more than five bedrooms for rent, rented for 30 consecutive days or less, where the owner does not live on site. New short-term vacation rentals are not allowed in single-family residential and agricultural zones. These are only allowed in hotel, resort, commercial, and multifamily commercial zones.
Any vacation property must have a certificate of registration from the Hawaii Department of Taxation and after registering and obtaining this tax ID, property owners must pay the Transient Accommodations Tax applied to stays of less than 180 days. This tax is 10.25%. Property owners also must pay the General Excise Tax, which is assessed on all business activities including short-term rentals. This is approximately 4.712%.
As of July 1, 2021, Honolulu City and County has a new property tax class: the bed-and-breakfast home or Class J. This tax is 0.65% of the assessed value. Bed-and-breakfast’s are defined as rentals of less than 30 days where the homeowner or another operator is present during the stay. Transient vacation rentals are technically un-hosted or where the tenant reserves the entire home or whole home less than 30 days at a time and the owner is not present. These are taxed at the hotel and resort class at 1.39%.
Building and housing codes
On the island of Oahu, the building and housing codes specify the minimum requirements for construction, health, safety, and maintenance and regulations can differ between residential and nonresidential uses. Each subdivision may have its own HOA rules that could regulate a bed-and-breakfast listing.
Have we confused you yet? It seems like a lot of taxes and sticky rules but by trusting your vacation property purchase to an experienced Oahu real estate agent, you can easily navigate this investment world and find the perfect vacation investment property for your needs and long-term financial goals.
Purchasing a property that already falls into this allowable category is typically the best option. The property has already jumped through the necessary hoops and can transfer quite easily. The key is finding those properties that require the least amount of fuss.
It's important to understand all the details behind the sometimes confusing world of real estate investments, especially in Hawaii, but with a little guidance from knowledgeable staff, we can help you find the perfect vacation home on Oahu. Get started below.