Things You Should Know When Considering a Second Home on Oahu

Hawaii is a popular location for second homes in a wide variety of lifestyles - from high-rise penthouses in Waikiki to fee-simple homes in private neighborhoods. After all - owning a second home means owning a permanent vacation spot, and where better to vacation than in paradise?

But even if you’re in the market for a second home in Hawaii right now, there are a few things you should know. It’s not quite as simple as pulling up the most popular real estate websites and clicking ‘buy’ on the house that you think looks best. Every community is different. Make sure that you’ve experienced the area and are working with a real estate agent you can trust to find a community that fits your lifestyle.

Related: What Is The Best Hawaiian Island To Live On?

A second home is a specific term, different from a primary home purchase or an investment property. They come with different tax and mortgage rules, both federal and specific to Hawaii. Some second homemortgage terms restrict properties from being rented out. Be aware that even if the mortgage terms allow it, renting out your second home might not be possible due to various regulations on rental properties in Honolulu County.

What Is A Second Home?

A second home is defined by Fannie Mae as a single-unit dwelling that is occupied by the owner for some portion of the year. In general, the term “second home” denotes that a property is being purchased for personal use, rather than as an investment property. An investment property is one that is explicitly being purchased as a way to generate income.

Second homes differ from investment properties in a few ways. Investment property loans often have higher interest rates than second home mortgages. Second homes also can’t be subject to any timeshare arrangements or be managed by management firms. They must also be suitable year-round for occupancy by the owner.

Looking to buy a second home in Hawaii? Check out our services!

Now, to be clear, a second home can be an investment. Home prices in Hawaii are generally stable - appreciating annually on average by 4.7% for homes and 4.5% for condos since 1985. This is due to the limited amount of land available for new home development in Hawaii. If you already spend your vacations here, a second home is a little piece of real estate in paradise, all to yourself.

Best Neighborhoods For Second Homes On Oahu

The best neighborhood for your second home depends on what you want out of the lifestyle. As with primary homes, many people overlook this simple aspect. Hawaii is an incredibly diverse state, and Oahu is filled with mini-cultures that make every neighborhood different. When you spend time at this property, what kind of community do you want to wake up in?

Do you want a beach cottage in Lanikai or Beachside Kailua? Or do you prefer the lush privacy of Tantalus, filled with the scent of eucalyptus and tropical flowers? Or maybe the dramatic views of one of my favorite ridge communities, Waialae Nui? There are so many options to choose from, for all types of lifestyles.

Related: Best Neighborhoods for Surfing on Oahu

Once you have a community in mind, you can start ballparking the price range. Ideally, you should spend significant time in or around the neighborhood prior to settling on a second home purchase. This can help reduce the chances of buyer’s remorse and regret after the fact.

Can I Afford A Second Home In Hawaii?

This isn’t a question that can be answered with just a few lines of text - it’s a major financial decision.

Every homebuyer has a different financial situation. Before jumping into a big purchase like this, finances need to be examined with a fine tooth comb. This means tallying up assets, debts, credit scores, and examining it all with a critical eye. Try looking at the situation as a lender would.

Some homeowners may attempt to offset expenses by renting out their second homes when not in use. This could violate second home mortgage terms, resulting in penalties. Additionally, vacation rentals in Hawaii have specific restrictions that vary by county.

Related: Are There Downsides To Owning Oahu Vacation Rentals?

Are Your Finances Ready For A Second Home?

A good place to start is starting to build up a cash reserve in case of sudden loss of income. This means having enough cash on hand to pay for living expenses for at least two and preferably six months, including monthly payments on both home mortgages. The size of this reserve can be a qualifying factor in a second home loan.

Once that reserve is built up, add in other costs that would go into the purchase. These include down payment, closing costs, monthly utilities at the property (both while in use and while vacant), property taxes, insurance, maintenance costs, HOA fees, and other unforeseen costs. To help tackle the unforeseen costs, add a buffer into the reserve.

Don’t forget travel fees as well, especially if you’re still trying to find your perfect community before you buy.

Second Home - Mortgage or Cash?

Again - every situation is different. That said, buying a second home in cash is usually the best way to go. It gives you the upper hand, especially in a market like todays that is flooded with buyers. Of course, buying a second home with cash is also the much more difficult option of the two. Most prefer to take out a second home mortgage.

Related: Buying a Luxury Home vs. Luxury Condo

Second home mortgages differ slightly from primary home mortgages. The down payments required for a second home mortgage is usually higher than primary, with a higher interest rate as well. Loan terms can vary widely, so be sure to talk with multiple lenders and do your research before signing.

Second Home Taxes In Hawaii

Out of state residents selling their second homes in Hawaii are subject to HARPTA, or the Hawaii Real Property Tax Act, which is a withholding. They must withhold 7.25% of the sales price and then you file atax return or N-289 form determining the amount of capital gain you owe and the State would send you any refund due.  The withholding is meant to help make sure the state collects the tax on the gain of the sale. This withholding is paid directly to the state at closing.

Additionally, FIRPTA, or the Foreign Investment in Real Property Tax Act, is a federal tax law that may apply if you are buying property in Hawaii from someone who is not a U.S. Citizen. It requires the withholding agent (usually the buyer) to deduct and withhold a tax of 15% of the total amount realized by the foreign person. The withheld funds must be sent to the IRS no later than 20 days after closing.

This should not be considered a replacement for the advice and counsel of a licensed tax advisor or attorney. These are just general guidelines, and should not be taken as hard rules on taxes for second homes. Each situation requires specific examination of the circumstances before recommendations can be made.

Next Steps To Owning A Second Home On Oahu

For more information and listings in different neighborhoods in Honolulu and throughout Oahu, check my Neighborhoods page here. But if your eye is more set on new condo and high-rise developments in Honolulu - check out my New Developments page here!

Already been to Hawaii dozens of times over the years, know the communities you enjoy, and know the neighborhood you want to live in? Reach out now!

Contact me, Scott Startsman, by phone at 808-291-5441, by email at [email protected], or by filling out the contact form below. I’ve lived in Hawaii for 20+ years, and have spent those years gaining experience and knowledge in the Hawaii real estate industry - sales, construction, relocation, and more. With over 20+ years of experience, we specialize in helping people find their dream homes in Hawaii. We've also helped clients from the mainland and across the globe transition into their new life in Hawaii and would love to help you through the process too.

Related: 5 Things to Know About a Neighborhood Before You Move In