5 Benefits of Investing in Hawaii Real Estate

Investing in real estate is a great way to obtain cash flow and/or capital gains while you have someone else pay your mortgage, but there are also other benefits that you may not have thought about when investing in real estate.

1. Cash Flow

Cash flow is the income that is generated from the rental income after expenses have been paid. This is money going directly into your bank account every month — like an extra pay check.  This can increase over time as rent goes up with the market. Historically rental rates have gone up in Hawaii, so potential exists for your monthly cash flow to increase over time as rental rates rise.

2. Capital Gains

Capital gains or appreciation is the increase in the value of the property over time. We have seen prices double in Hawaii a couple of times in the past and all you have to do is to own the property to take advantage of this increase.  This is an added benefit of owning a real estate investment.

3. Leverage

Using leverage to invest in real estate is a benefit that cannot be attained with other investments. For example, when purchasing stocks it will cost you $200,000 to buy $200,000 worth of a particular stock.  When purchasing real estate, you could purchase a $200,000 investment property but only need to pay cash for 20% ($40,000) of the total property price. If prices go up 5% in this scenario, the increase in value to both the stocks and the property is $10,000, but with a real estate purchase, your only cost is an upfront investment of $40,000 to have the property value increase by $10,000, whereas with the stocks it cost you $200,000 to make the same $10,000.

Even if real estate is a high-cost investment, less out-of-pocket is usually required to purchase an investment. This all depends on your borrowing qualifications with a financial institution.  The amount of cash that each individual buyer needs to have on hand to purchase a property all depends on their personal borrowing qualifications with a financial institution, and the best thing to do is to talk to a loan officer to find out your buying power and to set out your options.

4. Inflation Resistance

Since your monthly mortgage payment is fixed, there is inflation resistance with real estate. Goods and services go up in price, but your monthly mortgage payment does not.  You may actually increase your income when you raise the rent over time for your renters and not for you.

5. Tax Incentives

The not so obvious benefits are the tax incentives: depreciation, business expense deductions, investing tax-free with self-directed IRAs and my favorite, the IRC (Internal Revenue Code) 1031 Exchange.  In an IRC 1031 Exchange, an investor is able to sell their investment and buy other, like-kind investments, tax deferred.

An example of this is a client of mine who had a free and clear property that was in the family since the 1960s and had been rented out for years. If they sold the house and tried to take the cash, they would have been liable for huge capital gains since the property was originally bought for $60,000 and would sell for over $1,000,000 in today’s market. They would have had to pay taxes on the $940,000 capital gains, minus any improvements and monies that went into the property throughout the years which would have hurt any bank account, big time.

Instead, the investor took all of the cash and invested it in a few other properties, tax deferred, to not only raise their monthly cash flow but to diversify their real estate portfolio and position it to take full advantage of long-term appreciation.

You may have a similar scenario — or a totally different one.  If you would like to better position your real estate portfolio to take better advantage of the next, up and coming market, let me help lay out your options using my experience with real estate investments and knowledge with 1031 Exchanges.

Have questions about Maui’s real estate market and need expert advice?  For all of your Maui real estate services, please contact Michele Muir White R(S), ABR, SFR Coldwell Banker Island Properties, Wailea 808.298.8448, e-mail: michelewhite@hawaii.rr.com  Access the Maui MLS www.Maui RealEstateGuru.com

October 2012 Maui Real Estate Stats

There were 95 homes sold during October with a median price of $489,000. Last October, there were 74 homes sold at a median price of $482,500. This is a 28% increase in volume and a 1% increase in median price when comparing this October to last.

94 condos have sold during October with a median sales price of $482,500. By comparison, there were 77 condos sold with a median price of $351,495 in October 2011. This means we saw a 22% increase in sales volume and a 37% increase in median price compared to last October.

Land sales remained slow on island last month with only 7 sales reported with a median sales price of $345,000. This was slightly lower than October 2011 activity when 8 sales were reported at a median price of $465,000.

There were 16 bank owned properties sold last month.  Most were single family homes. By comparison, there were 40 bank owned properties that closed in October of 2011. This is a 60% drop in bank owned transactions. Limited bank owned inventory means that we will continue to see fewer bank owned sales.

October was the busiest month for single family home sales during 2012 and it was the slowest month of the year for land sales. There were 25 short sale transactions that closed in October. There were 33 short sale transactions that closed last October.The highest sale for a home this month was $3,142,730 for a 5,126 sf home on 2.35 acres in the Kapalua Plantation Estates. This was one of 3  sales in Plantation Estates. This is considerable since there were only 19 sales in the subdivision since 2003.

Overall Luxury sales were slower this month. The three home sales over $2M was below the seven sales over $2M last October. There was only one sale of $1.5M in the luxury condo market. By comparison, there were five over $1.5M during October, 2011.

We saw slower activity for luxury  home and condo sales this month. The lower luxury sales volume reflects the continuation of a trend in the Maui luxury property market over the course of 2012. For the year, there have been 35 homes sold over $2M. This compares to 44 sold last year over $2M for the same period. That is roughly a 20% dip in activity. For the Maui luxury condo market, there have been 31 condos sold year to date over $1.5M. This compares to 60 sold during the January through October 2011 period. This represents a 48% dip in activity. While the overall Maui market appears to be trending up, the luxury market is lagging. While there are still some luxury buyers willing to pay a premium, many are still seeking value above all else.

The decrease in bank owned inventory has been part of a general decrease in inventory.

Of the most notable numbers from the October stats is that home sales were higher than any other month of the year. While condo sales weren’t as notable, they still showed quite a spike over the September numbers. Inventory remains low.  Well priced properties are seeing multiple offers.  What does this all mean for buyers and sellers? Buyers are continuing to find good values, but constrained inventories among many property types require buyers to obtain pre loan approval. Buyers need to remain proactive so that they can submit offers quickly when the right property comes along. Get pre-approved before you start looking. It will determine your budget and give you a strong position when you submit an offer.

Sellers will need to closely analyze their property segment when determining current market prices.  Sellers need to price well. Well priced properties are getting interest. Overpriced properties are languishing. Contact Michele Muir White R(S), ABR, SFR, Coldwell Banker Island Properties (808) 298.8448, michelewhite@hawaii.rr.com if you need assistance buying or selling Maui real estate.