Investment Property Options
The Oahu real estate market is experiencing a broad move upwards across all sectors of both residential and commercial real estate. The median single family price has recently reached a new high of $700,000 and retail rents rose to an average asking price of $3.69 per square foot. Industrial rates have increased to $1.06 per square foot and availability is at it’s lowest level since 2008. The office market is still volatile but the vacancy in the suburban markets has decreased and rates are holding at around $1.66 per square foot island wide. The multi-family apartment market also continues to do well despite the slowdown in the number of sales since 2014. Rents are beginning to catch up with sales prices but has more room to grow.
So with all this good news some investors may ask about different options when it comes to real estate investing. If you are interested in properties other than residential, what kind of properties would you purchase? The answer to this question first comes with understanding your goals and capacity as an investor. If you are an investor with a good sum of cash then it may be possible for you to invest in commercial real estate where you can take advantage of the appreciation of larger assets and improve the return on the property through improving the infrastructure of the property to increase rents over time. Larger institutional investors will target malls, hotels, well situated properties with a reputable anchor tenant, or larger class A or B office buildings. However, if you do not have the benefit of a large balance sheet but have cash funds of $1,000,000 or more then you might look into the possibility of purchasing a multi-family apartment building or smaller commercial property.
Multi-Family Apartment Buildings
As a smaller investor in Hawaii, multi-family apartment buildings are a stable investment that provides good appreciation over the long run. Residential rentals are in high demand across the island and it is not too complicated to understand the general maintenance required to upkeep a property of this type. What you would be looking for are apartment buildings which are in a good location that may attract multiple pools of renters whether it be young professionals, visitors to Oahu, medical professionals or students. Consideration of parking requirements for the type of renter will also be important. You also want to properly evaluate the maintenance required to either remodel or maintain the property. There may be concrete, plumbing or electrical repairs that go unnoticed which you want to account for when budgeting for your maintenance expenses. Lastly, you will want to look at the current rents versus market rents in the area to determine if there is any potential for increasing your return over the next few years. Typically, a higher net income from a property will produce a higher value.
Small Commercial Buildings
Smaller commercial properties on Oahu may include an office building, retail or industrial properties. Buyers of these properties typically fall into two categories: owner-user and investors.As an owner-user, your goals both as an investor and business owner may be realized when you decide to purchase a property which your business can be located in. As an owner-user you have the benefit of housing your business, having a fixed cost for your rent, and benefitting from appreciation of your real estate. If you are a pure investor you are typically concerned with cash flow and appreciation. A typical cap rate for an investment property in Oahu is between 4-6% depending upon location and quality of the property.
In either case, the difference between purchasing commercial versus residential property is the financing involved. With commercial financing, your loan will be primarily based on the income generated by the property rather than your ability as an individual investor. For this reason, a larger amount of down payment may be required to make the lender’s ratios work.
For more information regarding specific property types or a property you’re interested in please contact us.