How Hawaii real estate Investments perform vs mainland real estate investments

People who live in Hawaii consider themselves to be incredibly fortunate. It’s one of the most beautiful places on the planet and provides a lifestyle that few other places can rival. From its endless golden sand beaches, all open to the public, to its lush, rolling hills with incredible hiking trails, Hawaii offers so much that enriches your life.

Pool at an Oahu luxury home

It’s not just the lifestyle that draws people here from the mainland and across the globe. Hawaii real estate investing can be very lucrative, in some cases, even more so than on the mainland. The real estate market here is different and has its own dynamics and that provides investors with an incredible opportunity to make a great return on their investment.  

I have been practicing what I preach for a very long time, investing in real estate, doing development projects and syndications for over 20 years. Based on my experience and in-depth knowledge of the market, I can share with you some insights on how Hawaii, and in particular, Oahu vs mainland real estate investments differ.

Related: Pros and Cons of Buying a Condo in Hawaii

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Understanding Oahu real estate investing

Before making any investment, it’s important to understand the market dynamics, and several factors make these dynamics unique for Hawaii. We are a part of the US but we’re also a small dot of islands in the middle of the Pacific. Hawaii is one of the most remote islands in the world and it’s because of its unique geography that the land is in limited supply. Yet, Hawaii has a truly global brand and is widely regarded as a slice of paradise on earth, one where owning property is possible in a beautiful yet safe place for investing.

People from not just the mainland but across the globe aspire to buy property in Hawaii. The internet has made it much easier for them to do much of their due diligence without even setting foot here. The barrier of entry is much lower now that you can research everything about Hawaii through the internet without having to make many trips here first.

View of Ala Moana Skyscrapers

As you can imagine, this leads to an incredibly high demand for Oahu real estate, and since we’re a remote island, there’s a very limited quantity of land available. The government also doesn’t want unchecked development going on so it has very restrictive regulations in place for new developments. This leads to a supply-demand imbalance and consequently, prices for housing and for investment properties rise more than most other places in the US.  It also means that our CAP rates (Capitalization Rates) are lower here than they are in many areas of the mainland US.

Typically you will see 3-4% CAP rates, and sometimes lower, here on Oahu. That's why, if you are leveraging, or using a bank loan to acquire an investment property here, it costs more money down to break even or to be cash flow positive. Typically, it takes a down payment of 35-45% of the purchase price to break even on Oahu.

Compared to many parts of the mainland the down payment amount is usually between 20-25%, so be prepared for a higher price to acquire the investment and a lower initial cash flow to begin with.  We’ll discuss this in more detail later on in this article.

Related: ABC’s of Oahu Real Estate Investing

Avoid this mistake when evaluating Hawaii vs mainland real estate investments

The crucial mistake real estate investors make when evaluating deals in Hawaii is that they focus solely on cash flow based on a 3-4% cap rate on residential and multi-family investments. When you focus on just the CAP rate you neglect other key elements such as appreciation, depreciation, etc. The question then becomes, why would you invest in Hawaii if you can get a 6-7% CAP rate anywhere else? 

Ala Moana, Oahu

The simple answer, backed by decades of data, is that Oahu properties over the life of the investment, typically outperform mainland investments. Our IRR (Internal Rate of Return) far outstrips the mainland the longer you hold the property. So even if it costs more to buy the investment property initially and more down payment to breakeven, the longer you hold on to a real estate investment on Oahu, the more you will potentially make on the investment over time than if you invested on the mainland.  The Supply Demand imbalance leads to historically higher appreciation rates for the property and rent rates typically follow the appreciation rate so the overall yield performs well over time.

When evaluating a potential opportunity, make sure that it aligns with your investment goals. If your primary consideration is cash flow and you’re not interested in overall long term performance, then Hawaii is probably not for you, since you can probably get better cash flow on mainland properties, even if you sacrifice significant value appreciation and higher rents down the line. If you have a long term objective, the property appreciation and higher rents as a result of consistently low vacancies bring high demand which delivers great overall returns.

Related: Financing Options For Hawaii Real Estate Investments

Lower Capitalization Rates

CAP rates or capitalization rates are an assessment of the yield of a property over one year. Effectively it is a snapshot of what the return would be for the property this year if you paid cash for it and rented it out.  It is used to do a simple back of the napkin kind of estimate and compare the rates of return on multiple commercial or residential real estate properties. It can be described in simple terms as the yield a property will bring in over one year. The formula to calculate CAP rates is: 

Annual net operating income (NOI)/the property’s market value

For example, if a property is worth $1 million and generates $40,000 of NOI,  it will have a CAP rate of 4% ($40,000/$1,000,000). This means that based on the price paid for the property, you can expect around 4% as the annual operating cash flow.

Pool at a luxury home on Oahu

For the purpose of this calculation, it’s also important to define NOI or Net Operating Income. NOI is simply the income from the property minus expenses. Keep in mind that when calculating NOI, debt servicing is not included in expenses. In other words, the expenses don’t include the repayments of the loan on the property.

Since the CAP rates tend to be on the lower side in Hawaii and prices of properties are higher than in most areas of the US, this means that as an investor, you should come in with realistic expectations. Don’t expect to put 10% down for a vacation rental, rent it out, use it for some time, and even make positive cash flow. Investing in real estate here doesn’t work like it does in Texas or Arizona. If you’ve been utilizing this strategy elsewhere, you will need to pivot your investment strategy here.  

Historically Higher Appreciation Rates

Hawaii real estate typically has higher appreciation rates than most areas of the mainland. This means that in the long term, the price of property here rises more than it does on the mainland during that same period. Since rent rises usually tend to follow appreciation, this provides Hawaii real estate investors with a higher internal rate of return or IRR. 

Victoria Park

IRR, or internal rate of return, is a financial metric used to evaluate the profitability of an investment or project over the life of the investment. It represents an estimate of the value it generates during the time frame in which you own it. Effectively, the IRR is the percentage of interest you earn on each dollar you have invested in a property over the entire holding period.

A higher IRR means that the investment will likely make you a lot of money in the long run while a low or negative IRR would mean that the investment won't be as profitable. Hawaii real estate investments typically have a higher IRR compared to the mainland so even though it may cost a bit more to get in, you'll usually end up making more money in the long run.

Related: 3 Ways to Invest in Hawaii Real Estate 2023

Over The Long-Term

The Federal Housing Finance Agency's House Price Index tracks changes in single-family home values from all 50 states. Based on its data, the five-year appreciation for a single-family home in Hawaii is at 53.3% compared to 45.5% in California, 48.3% in New York, 52% in Colorado, and 37.2% in Illinois. The delta becomes more significant when the time period is extended to multiple decades.

The data from the Honolulu Board of Realtors also tells a similar story. From 1985 through 2022, the median sales price of a single-family home and condo on Oahu has increased 596.7% and 467.9% respectively.

Evidently, the long term performance of real estate investments in Hawaii gets better and better, compounding over time with higher rentals to yield higher IRR. Investors can capitalize on this opportunity but it’s important that they keep a longer investment horizon.

Single family home on Oahu

So if you put 35% down on a Hawaii property now and breakeven on the cash flow, it may appear to not be a great investment for you, but if you hold it over a 10 year timeframe, then you get the benefit of having put a fraction of the value of the property down as a down payment, and you will get the benefit of the entire property's higher appreciation rate over that time and the higher rental appreciation as well, therefore, getting you an overall better return over a 10 year period. You are sacrificing upfront cash flow for future larger returns down the road.

Ways To Increase Your Hawaii Investment Property Performance

Smart real estate investing isn’t just about buying a property and letting it do its thing. There are many different strategies that you can use to increase your CAP rate and generate even better returns. These include adding more value to the property through renovations, building ADUs, investing in fixer uppers, etc. 

Investing in new developments is also a great way to cash in on significant value increases. Also, consider buying properties in emerging areas. These would have a much longer investment horizon but the potential increase in value will be far more significant once demand in the area catches up.

Trump Waikiki terrace

There are several ways to increase your cap rate and generate better returns. These include adding value to a property, buying properties in emerging areas, and more.

Challenges of investing in Hawaii real estate 

All investments can face challenges and it’s up to savvy investors to make sure that they limit their downside risk. Despite having consistently high demand and limited supply, there remain some challenges that you must consider when investing here. 

For example, if you’re buying a property that requires considerable renovations, keep in mind that the material and labor cost will be higher than it is on the mainland. Factor that into your calculations accordingly. The maintenance costs tend to be on the higher side as well, particularly for oceanfront properties.

Hawaii’s distance from the mainland could also be a hindrance for you and there are laws that you need to be aware of when it comes to handling the management of your own investment properties. If you’re not planning to live here yourself, you’ll need to have a dedicated team of property managers.

Related: What are some unexpected difficulties of investing in Hawaii Real Estate?

Wrapping Up

When comparing Hawaii vs mainland real estate investments, it’s clear that the numbers don’t lie. Properties here appreciate more in the long run than properties on the mainland and the rents rise in sync with that appreciation. This provides you with a higher IRR even though the initial cost to invest is higher. 

Once you understand this simple truth of Hawaii real estate investing, you can begin to realize the incredible potential that the state offers to investors. You’ll be in a better position to make informed decisions and generate a substantial return on your investment. Remember, you must always be mindful of your goals and consult your financial advisors before making any significant investments.

Are you convinced about investing in Hawaii real estate? Great! We can help find a strategy that best suits your investment objectives. Our complete concierge service also ensures that the management of your investment properties in Hawaii always remains in good hands.  Reach out at 1-(808)-745-1602 or fill out the form below to request a consultation and we'll get back to you as quickly as we can.

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