Kailua Background
Kailua is a bay town on the east side of the island of Oahu. Oahu is one of the smaller Hawaiian Islands comprising 600 square miles of the state of Hawaii’s 6,400 total square miles. Although it is small, Oahu is the clear economic center of Hawaii. The capital of Hawaii, Honolulu, is on Oahu. Oahu is also home to 2/3 of Hawaii’s population – 950,000 of Hawaii’s total population of 1.4 million.
The town of Kailua boasts an amazing three mile stretch of white sand beach and turquoise green water. The land then rises gently briefly before rising sharply into lush green mountains with tall waterfalls.
The beauty of Kailua has made it the vacation place for President Obama when he vacations in Hawaii with his family. Kailua also has a military base just north of the Kailua Bay. Kailua is less than a half hour drive to the state capital, Honolulu, the airport, the University of Hawaii, and world famous Waikiki. Even so, Kailua has a small-town feel in part because the city does not allow large scale hotels.
Investment Opportunity
An investment in property in Kailua has the potential to earn large dividends on several fronts:
- Increase in property value.
- Principal Equity earned.
- Rental Income.
Property in Kailua appears to steadily go up at a rate conservatively estimated at 20% every five years. In 2015 Kailua property value rose 8.4 %.
http://www.bizjournals.com/pacific/news/2015/12/15/honolulu-property-values-rise-6-1-in-2015.html
How does investment work?. Let us take a real listing for instance, a four bedroom, 3 bath house with a pool that sells for $940 K.
With a standard 20 % down payment plus closing costs, it would take approximately $200,000 to make the down payment. This would require a bank loan of $740,000 to finance the property. The conventional loan amount limit in Oahu is $625,000. Any loan above that is considered a “jumbo loan” and requires a higher down payment of 25 % and reserves in the amount of 20 % of the loan amount. Therefore, the down payment for the jumbo loan would be approximately $250 k including closing costs. The reserves would be 20% of $700,000 which equals $140,000.
If we stick with the conventional loan, we would need to make up the difference in the down payment to keep the loan within $625 K. Therefore 940 k – 625 K equals a $315 k down payment. We would also need reserves in the amount of 6 months times the mortgage payment. The mortgage payment on $625 K at 4% would be about 3300/month multiplied by 6 equals 20K in reserves. The jumbo loan path would require less out of pocket spending but more money in reserves. The conventional loan path would require slightly less total capital, but about $70 k more out of pocket spending. Let’s use the jumbo mortgage path going forward hypothetically.
Once the house is purchased with the $250 K down payment, the monthly mortgage payment will be approximately $3300 plus taxes and insurance of about $400/ month for a total of $3700/ month. A house like this can easily and conservatively command a price for a long term rental of $5000/month. Rentals in Kailua are difficult to find and the price is quite high. Furthermore, the military base adds a significant population of renters who receive a $5000/ month stipend from the federal government earmarked for rent. This drives up the rental market in Kailua. The rental income can easily cover the mortgage payment, taxes and insurance with some profit left over.
Even more exciting than long term rental income is the profit potential of vacation rental. Because the city of Kailua does not allow hotels, the only way to vacation in beautiful Kailua is to rent a house. This creates a demand for vacation houses and increases the price. A quick look at Airbnb.com shows there are very few four bedroom houses available in Kailua. In fact there is nothing in Kailua that could accommodate ten guests for less than $1000/night. The few places that could accommodate 8 guests are 3 bedroom houses and the prices begin at over $400/night. Conservatively speaking, the specific house we are analyzing should command $300/night very easily and rent 20 nights out of the month. This results in a monthly income of $6000 which could be much more if the nightly price was higher and the rental month was full. $400/ night at 30 nights would equal $12,000 / month. Therefore a range of monthly vacation rental income could be said to be between $6000 and $12,000.
Conservative Dividends:
- Property Value: At the conservative estimate of property value increasing in Kailua at the rate of 20% every five years, the $940,000 property should increase $188,000 over five years or $37,600/ year. Again these are conservative gains. The 8.4 % increase in property value in 2015 would render a gain of $79,000 in the year.
- Principal Equity: Having the mortgage paid by the rental income each month gains the investor the principal equity in the house. Each month on a $3300/month 30 year fixed mortgage, the investor gains principal equity in the amount of approximately $13,000/ year for the first five years. Every year, of course, the principal equity paid on the mortgage goes up as the interest goes down. In year 10 of the loan the principal equity paid would be $19,000 in the year and in year 20 in would be $28,000.
- Rental profit. There is somewhat of a wide range of potential profit from rental income. A long term rental at $5000/month would render a profit of $1300/month or $15,500 per year. Vacation rental at the conservative $6000/month would render $2300/month income or $27,600 year. Taking the median between the conservative $6000/month and the ideal $12,000 / month, which is $9000/month, this would render a rental profit of $5300/month or $63,600/year.
Taking the three revenue streams: property value increase, principal equity, and rental profit together, an investor can expect to see on his/ her $250,000 investment a conservative return of $37,600/year + $13,000/ year (initially) + $27,600/year for a total of $78,200 per year! 31 % ROI.
Using less conservative but still reasonable numbers, $79,900 + $13,000 + $63,600 an investor could potentially be looking at $156,500 return on a $250,000 investment! 62% ROI.
Kailua – The Perfect Storm
Kailua possesses a number of key factors which make it the ideal spot to invest in real estate. First, it is close to a major thriving international city, Honolulu, where the large hotels generally rent for $400 and up. Even so, Kailua maintains its small town feel by placing a moratorium on hotels. Kailua also therefore, drives up the rental market, particularly the vacation rental market. The military base and its large population of transient but employed citizens drives up the long term rental market. While many places can boast beaches and mountains, the beaches and mountains of Kailua are exceptional – so much so that President Obama chooses to vacation there. The president is nearing the end of his time in Washington, and if he chooses to move to Kailua permanently, which is a distinct possibility since he is from Hawaii originally, the prices in Kailua could soar sky high to account for him and all of his entourage. For all of these reasons, Kailua property investment represents the “perfect storm” of real estate profit potential.