Tips for Investing in Hawaii Real

Here is an email that I recently wrote to one of my students in my Agent Core Education classes.  I thought it would be useful to you folks as well.  If you want to learn more about investing in Hawaii, let us know.  We have a lot of experience in this area and have helped our clients do quite well.

Hi,

Buyer’s closing costs are typically 1%-1.5%
Seller’s closing costs are typically 7%.

In terms of calculating, I don’t think you calculated it correctly.
Or at least that’s not how I would have done it.

How long do you plan on holding this property?
Just as a note, if you hold it for less than 6 months, you will lose the relationship with the lender that gave you the loan.  Lenders lose money if someone sells before 4-6 months.  People do it all the time, but just know, you will burn that bridge with that mortgage broker.  So be aware of that.

Here is something that I used with a previous client that was paying cash.  I put in your numbers:
Resale    $280,000.00
Resale Closing    7.00%
Resale Closing    $19,600.00
Resale Proceeds    $260,400.00

Purchase Price    $270,000.00
Closing Cost    1.00%
Closing Cost    $2,700.00
Renovation    $15,000.00
Total Purchase Costs    $287,700.00

Net Profit    -$27,300.00

or the more aggressive purchase price:

Resale    $280,000.00
Resale Closing    7.00%
Resale Closing    $19,600.00
Resale Proceeds    $260,400.00

Purchase Price    $240,000.00
Closing Cost    1.00%
Closing Cost    $2,400.00
Renovation    $15,000.00
Total Purchase Costs    $257,400.00

Net Profit    $3,000.00

Now if you add in the expense of carrying costs (mortgage/taxes/insurance for the length of time you hold the property) your margin gets worse.
In terms of carrying time, I personally think you have to give at least 1 month if you use a professional contractor, plus 3 months to sell it.  That is the a very aggressive timeline, in my opinion.

In this market, fix and flip for new investors is even more risky than before.  We are in a declining market with uncertain interest rates and ever-tightening lender restrictions.  What that means is that your pool of buyers gets smaller, demand decreases, and puts pressure on lowering your price.

The only way to make fix and flip work, is if you can buy the property at an incredibly reduced price.
Also, banking on future sales price is risky.  Especially in this market.  I personally think we are in for another price drop in coming months as interest rates rise and lender restrictions increase.  And that may last a few years.

I think you should be looking at developable properties.  Those are properties that can be subdivided or CPR’d.
Also, look for properties that can cash flow.  For your amount of down, cash flow properties might be in Makaha.

Keep in mind, good investments will be a challenge to find.  Not impossible, but a challenge.

I highly recommend you start learning more about investing.
Read/listen to:

-Millionaire Real Estate Investor
-Choose to be Rich by Robert Kiyosaki
-What ever else you can get your hands on.

Since you are looking to invest, I highly recommend increasing your knowledge a little bit more and not be in so much of a hurry.
There are lots of different strategies for real estate investing:  lease options, holding paper, subdividing, condo conversion (CPR), fix and flip, buy and hold, buy/fix/hold, land contracts (Agreement of Sale in Hawaii), etc.

Not all work well in Hawaii.  And not all work well in this market.  I personally think lease option, CPR, and subdivision can work well in Hawaii.  I believe holding paper and Agreement of Sale will become good investment strategies in the coming years in Hawaii as well.

I don’t remember, are you paying rent right now?
If you are, you should seriously consider buying your personal residence before buying investment property in Hawaii.  You are paying someone’s mortgage, it might as well be yours.

Just my thoughts.

BTW, it took me a few years to learn all of this, and I’m still learning.
I am an expert in CPR and have structured a few lease option deals.

Thanks and good luck.

Jeff Orig, RA
Abe Lee Realty

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