When I was 25, I had no job and no idea what I was going to do with my life. My prospects for employment were slim, but by the grace of God I met a loan officer who believed in me and introduced me to real estate and finance. This was in the 90's, during a slow time in the market, before the huge boom in Hawaii real estate investment began.
Fast forward 5 years - I had closed several hundred home loans and helped many clients buy and sell their Hawaii homes. I have also bought a few investment properties, and then the Hawaii real estate market boom started.
Buying Hawaii real estate has been the best financial decision I have ever made, and I would think for most people, nothing else will return anything close. Over the past 20 years, I've seen many people make millions investing in Hawaii real estate. That's because real estate makes you money in 7 different ways.
When you buy real estate using a mortgage, you're using someone else's money, while reaping all the benefits of the appreciation on that investment. If you put 20% down on a $500,000 home, your $100,000 down payment is working as though it's $500,000. If the home goes up 10% ($50,000) you have just made 50% on your $100k down payment.
In order to make 50% in the stock market, you would likely have to invest very carefully for about 7-10 years, or get super lucky. But a 50% increase over your down payment on real estate is actually very common. In fact, the less you put down, the higher your return.
If you put 3% down on a $500k home, that's only $15k. If the home goes up 10%, you've gained $50k, so your $15k down payment just went up 333% (and you still have your $15k in there.)
When was the last time a $15k investment in stocks produced you a $50k profit? Maybe never? But I see these kind of returns in Hawaii real estate investments all the time. In fact I've literally seen INFINITE return. How? Because I've had many clients use a VA loan to buy a house in Ewa Beach or Kapolei with zero down, with the seller or lender paying the closing costs. Then a few years later, they sell the home and make $250,000 profit on their zero investment. That's a return of INFINITY.
The largest deduction on a tax return is usually the mortgage interest. Even with the new tax reform that may pass soon, the mortgage interest deduction will remain, and in fact will be one of the only deductions available!
This means that the government is subsidizing your Hawaii real estate investment. The mortgage interest can be deducted on your federal tax return, and as of now, Honolulu city and county property taxes can be deducted also.
For example, let's assume the beginning mortgage balance on your Hawaii home is $500k at an interest rate of 4%. In the first year you pay $19,810 in mortgage interest, and if you are in the 20% tax bracket, you would save somewhere around $3,962 in taxes.
So while your mortgage payment was $2387 per month, you saved about $330 per month in taxes. So your net cost is about $2056 per month. Your house just saved you tax dollars.
And if you use your home for business, you may be able to deduct some other expenses too.
**Talk to your CPA about all tax issues. The above are just examples that may or may not apply to you and I'm not a tax adviser. Also, in Hawaii our property taxes are very low compared to the rest of the nation, so it's not nearly the same impact as states like California, where home owners pay over 5 times the property taxes that Hawaii homeowners do.**
When you buy a house, you are enrolled in an automatic savings account, called equity. You accumulate savings by paying your home loan down a little bit each month, even if your home never goes up in value. Even if, by some crazy chance, your home is worth less in 30 years than it is today, you will have at least no house payment.
So even if your home never appreciates one penny, you still gain equity every month by paying down your home loan. If you never do anything else with real estate, in 30 years you can have your home paid off and live rent free! If you rent for 30 years, you know what you get? Nothing.
One of the saddest days in my career was when I watched an elderly lady move out of her rental after over 30 years. She said, "I should have bought a house when I was young, but the rent was so cheap that I thought it would bad to buy." Her rent went from $1000 per month to over $2000, when she could have owned that property outright by that time and had zero rent.
Speaking of rent, in 30 years, do you think rents will be higher or lower than today? If the alternative to buying Hawaii real estate is renting, then you should expect your rent to increase every year, pretty much forever. A fixed rate mortgage payment will be the same monthly payment for 30 years, and then it will be zero.
If you have a $3500 mortgage payment today, that may feel like a lot, but in 20 years, that same $3500 will feel pretty small, because inflation will make that money worth less. Who knows, if we have hyper inflation, $3500 could be a loaf of bread. That actually happened in Iceland a few years ago, and in Germany in the 1920's.
So as inflation occurs, how much will your rent be in 10 or 20 years? Triple? Quadruple?
Also, as a renter you may be forced to move if your landlord decides to sell the house. Even if you have a great house rented in Hawaii Kai, you may find yourself without a home next year! Owning a home means you can stay there as long as you can make the payments.
To me, rental income is like free money. You put some money down on a Hawaii real estate investment, then someone else pays off the mortgage for you. If I could own 100 rental units, I would! Even if a rental doesn't have any positive cash flow, the tenant is still paying off the mortgage while the property value appreciates, and while rents increase annually, all while you're getting the tax benefit. It's almost hard to believe, when you think about it as someone else paying for your investment.
Home owners in Hawaii find that home improvement is a great way to increase the value of the home. Just installing new floors and remodeling your kitchen and baths will often increase the value of a home on Oahu by $100,000 or more. In other parts of the country, $100k might be the entire value of the home, but in Hawaii, that won't even pay for a tiny vacant lot in a slum.
As a renter you're limited on how you can improve your home or make changes. You can't just change the floors if they get old and dirty, because it's not your flooring! Even if your landlord was to allow you to make improvements, you're only going to enjoy the improvements as long as the lease is good. You've just given your landlord free new flooring.
I've remodeled several homes now, and each one has been a challenge, but the financial rewards have been more than worth those trials. I've purchased foreclosures, brand new homes, a 60 year old home, and a lot of things in between. Each time, by doing a little (or a lot) of work, the value of the real estate has increased by far more than the investment, even in down markets.
I put this last because it's the most obvious. The price of Hawaii real estate has appreciated tremendously over the past 50 years. We have seen years of 20% appreciation and years of about 15% decline. The amount of the appreciation can vary from neighborhood to neighborhood, and region to region, but if you take the entire Hawaii real estate market over the past several decades, it easy to see that appreciation has been tremendous even after the bubble burst in 2008.
Even when the Hawaii real estate market has been soft, it's still been better than almost anywhere else on the planet. It's common to see sellers making $200k on a sale, sometimes even $1 million of profit. Even people who bought their homes at the height of the market before the 2008 "crash" have made money now, as long as they didn't sell.
I currently have a seller who is about to close on a $1,070,000 sale. They bought this home in 2012 for $659,000. That's right, they made $400,000 in 5 years - and they used a VA loan with zero down.
Are you ready to invest in Hawaii real estate? What are you waiting for?