Real estate anywhere in the world is arguably the most potent investment channel anyone can imagine. Mention the name Hawaii, and most envision a land of sun and sea, iconic natural features, and spectacular vistas. Residences in high-rises and single-family homes perched on hills have expansive ocean views. This even goes for locations inland such as Mililani, not to mention the high-end developments in Kailua or Hawaii Kai. Everything about the Hawaiian image seems to scream “luxury” and “up-market.” Price escalations according to Zillow have been nothing short of mind-boggling, which conceals another side of the market: Indeed, there are neglected properties all over the islands and mainland in a run-down state. These “opportunities” are begging for fix-and-flip or fix-and-rent investors to step into the breach.

Our focus in this article is to guide would-be entrepreneurs interested in Hawaii’s real estate opportunities. The scope of the discussion weighs the benefits of investing directly and controlling selected properties in defined verticals versus favoring a private real estate fund and leaving it to seasoned professionals. Naturally, there are pros and cons on both sides of the conversation.

Investing in Hawaii Income Property as a First Time Investor

The thing with Hawaii is this: Investors who know how to “thread the needle” do the best. You have to be selective and understand how to avoid the pitfalls that can unsettle those charging into the arena without forethought. For example, in some cases, an eye-popping luxury home with every bell and whistle may be the outstanding option. In contrast, a similar house in another neighborhood pales against the opportunity to take on a whole-house renovation.

As a first-time investor in Hawaii with steady income in mind:

• Zone in on high rental areas where the property attracts tenants fast. 
• Look for assets that call for minor renovations to avoid high carrying costs. 

On the other side of the coin, selecting luxury real estate opportunities trends more toward capital gains with rental deficits between purchase and sale in most cases. Let’s put it this way: it’s crucial to look at the landscape without getting caught up in the emotion of the picture-perfect lifestyle. Instead, think through the numbers – it’s an investment property, after all, not your personal residence.

Why Investors Should Expand Their Real Estate Portfolio as Much as Possible

Hawaii’s proven track record indicates that all property appreciates steadily as long as you can hold it. The only spoiler is miscalculating leverage pressures. The data confirms that long-term real estate investors in even the most expensive real estate remain on a steady ride. You can expect the latter to sustainably yield double-digit returns (without leverage effects in the calculation). In a nutshell, exorbitant prices don’t seem to inhibit the appreciation formula. Our tip, therefore, is:

• Trust in Hawaiian real estate appreciation as a given – no matter how high the starting value. 
• Favor the highest-priced options as long as the financing arrangement makes sense. 
• One can spend the same time and effort navigating around a $300,000 investment as you do a $1 million dollar home. If both yield a 25% IRR, the $1 million option wins hand down – as long as you can afford and finance it.

So, Why Invest in Hawaii?

1. Cashflow

Indeed, it’s a rare event where real estate on the islands will be the best on rental income and capital appreciation. Choose your flavor and stick to it. Did you know rentals in the state are reputedly right up there on the highest-ranking list? Sure, so are home prices measured in dollars per square foot (see above). Finding the right balance between capital appreciation and projected rentals is integral to your strategies. Again, we emphasize that if rental is the driving force, focus only on vibrant areas. A good start is a suburb/district near town – possibly a busy place like Waikiki.

The one thing first-time investors forget is the operational costs of real estate, rented out or not. 

• There’s always maintenance, repairs, and insurance costs (hurricanes and third party liability), as biggies. 
• A good property manager should be in your corner for those living out of state or considering many acquisitions – and they don’t come cheap. 
• Then there’s the issue of tenants moving in and out, and the holding costs with no rental income in these instances. 
• Also, take HOA fees, deposits for damage, and, of course, property tax into your calculations. 

Like any business, there are overheads you can’t avoid.

Tax Deduction Awareness in Hawaii

Every expense in an investment property is tax-deductible. So if you’re flying in from another city  to deal with business (for example), claim it as a write-off. All closing costs on a mortgage fall into that category as well. When getting into verifiable deductions, we advise that a CPA is your best counsel to bring things like depreciation and other government investor concessions – flying under the radar – into focus.

Leveraging Effect in Hawaii

Circling back to the mortgage, it’s here where you can establish considerable gains in your investment. The leveraging effect multiplies your investment significantly. Think about it this way:

Scenario A

• Suppose you invested $1 million of your own money in a luxury home, and rentals and expenses broke even over five years.
• In the fifth year, you sell the property for $1.7 million, a 70% gain on your investment over the period. Nothing to be sneezed at, but you can do a lot better.

Scenario B

• Same property, but instead, the bank lends you $700,000 to fund the original investment (i.e., the standard 70%). Your stake is, therefore, $300,000.
• Let’s assume that holding costs (with the loan interest thrown in) break even against the rent.
• When you sell it, after paying back the bank’s $700,000, the pretax profit of $700,000 is calculated on your $300,000 commitment (not the total $1 million as in the previous example). It more than doubles your capital with a massive multiplier or leveraging effect.

How About a 90-degree Real Estate Investment Diversion in Hawaii?

From everything provided above, it should be evident that there’s a tremendous burden on individual investors – especially if they live elsewhere in the country. They’re thinking through the rental/capital appreciation options, getting the balance worked out, monitoring repairs and renovations, dealing with tenant issues, and negotiating with regional lenders. It’s enough to make your head spin. Some love the action, but most don’t want to get into the weeds. 

There has to be a more streamlined way of entering an exciting real estate venture in Hawaii, and there is. Consider letting a reputable private real estate fund managed by seasoned real estate professionals do it all for you. They incorporate all property management responsibilities seamlessly into their everyday duties, execute renovations and building, select locations – everything, on an organized and expertly driven schedule. Simultaneously, you don’t lose the right to all the tax benefits as a partner participant in a 506 C arrangement. If the fund decides to leverage its holdings, you’ll benefit from that as well.

Where to Find Income Property in Hawaii

Kona Development Partners, LLC, is currently offering real estate opportunities to specific accredited investors that may be interested in joining the Kona Real Estate Investment Fund. 

• You can get into this luxury single-family program with as little as $50,000 and practically acquire as many units as you like. They only offer this to accredited investors.
• It’s a massive development, projecting returns of 27% IRR plus, without taking into account your capital gains benefits (and other tax breaks your CPA can lead you to)
• The fantastic thing is there’s no loan help initially (i.e., 100% equity-financed). Also, the sponsoring partners take no benefits until investors get back their initial capital through distributions. The terms and conditions, for the most part, underline the confidence the sponsors have in the project.
• The investing memorandum spells out all the key considerations, including exits, management latitude, number of other investors, and more,
• The expansive project checks all the boxes on best-location, thus plugging into the expected Hawaiian appreciation formula (see above). Investors prepared to stay the course should see exceptional returns.
• You can also read about the general partners’ $1 billion success history executing similar developments over the years. 

As an investor in Hawaii, this is an enterprise-class option. It competes with almost anything else you look at managing as a landlord and sole operator. It has the pedigree, certainly, but more than that, the numbers jump off the page with little downside. For a uniquely equity-funded program, you won’t find better on the islands.

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