Though the principles of real estate investing are common throughout much of the world, there are differences in the areas of buyer demographics, property type, financing and tax law which affect where a person may choose to invest. Hawaii is no different. These same principles of investing apply to residential real estate in paradise. Whether you are a domestic or international investor, it is good to understand how these principles work for you.
In this article we will look at buyer demographics and how this affects where you consider purchasing in Hawaii. It is segmented according to volatility, appreciation, and cash flow.
Volatility
Understanding who your buyers are will determine how volatile your real estate prices may be. Generally speaking, if your buyers are local and live in the properties they purchase, they will be less likely to sell when there is a downturn in the economy. This creates a more stable environment for housing prices in this area. The opposite of this scenario is when there is a high percentage of investors or second home buyers in an area. When there is a downturn in the economy the owners of these properties are more likely to sell, therefore these areas have less stable housing prices over the course of a real estate cycle.
When looking across the Hawaiian Island chain, Oahu has historically seen more stable housing prices in the down markets. This is because most of the buyers are local and live in the properties which they own. Another reason may also be that the economy on Oahu is more diversified and therefore if there is a drop in tourism, there is a smaller percentage of property owners who are affected as a whole. Here are charts for Oahu, Maui, Big Island, and Kauai.
When comparing Oahu to other major cities of the US, we have a lower amount of volatility in the down markets because of our high demand and low supply of housing inventory. Here is a chart of the Oahu housing market to other cities in the US.
Appreciation
The greater the demand to live in a certain neighborhood, the greater the potential for appreciation in value. As an investor you want to look at the reasons why it would be desirable to live in a certain area. In many cases, being able to live close to work is a major factor in desirability. Other factors might be proximity to good schools, markets, medical facilities, shops, entertainment, and scenic features such as the beach or marina.
When looking at the island of Oahu, there seems to be a strong desire to live closer to metro Honolulu because of the proximity to most jobs which are in the urban core. This is why housing prices have increased significantly in these areas. There is also demand in specific neighborhoods which have good schools that are in East Honolulu, Moanalua or Mililani. Demand is also considerable in many scenic areas of Kailua, East Honolulu, or Diamond Head/Kahala. This charts shows a historical comparison of equity gained in Honolulu versus the US over the past 10 years.
Oahu as a whole has experienced an annual appreciation rate of 5-6% over the last 40 years. This is a good rate of appreciation that may be attractive when compared with many parts of the US and the world. The overall US appreciation rate is just over 4%. It is not uncommon to see appreciation rates in other world cities of only 2-3% per year.
Cash Flow
Understanding the strength of the rental market will help to determine the best cash flow situation for your investment. As a non-occupant real estate investor, you want to be in an area with a high demand for rentals. Typically, the same criteria of housing demand that affects appreciation will also affect your rental market. These are proximity to jobs, good schools, markets, medical facilities, shops, entertainment, and scenic features such as the beach or marina.
Rental rates seem to follow housing values in neighborhoods. Therefore, whenever you have an increase in housing prices, you typically see an increase in rental rates. Click on this chart to see a historical trend of rental rates on Oahu. Those same areas in which we have observe high demand for home purchases are also areas in which we have higher rental rates.
Generally speaking, if you were to get a rate of return on your investment of 4-6% on Oahu this would be an acceptable cash flow scenario. A simple calculation which only compares a snapshot of your rate of return is called a cap rate. A cap rate is calculated by taking your annual NOI (net operating income) and dividing this by your purchase price. Your NOI is your gross annual rent minus all your expenses of operating your investment property over the course of the year. Oahu’s cap rates are lower than many places on the mainland US because we have higher property prices relative to our rents.
In our next issue of How to Invest In Hawaii we will be looking at the various property types and what kind of property will be right for you. For more information on investing in Hawaii please contact us.
