Hawaii is the one of the safest places to invest in real estate with some of the consistently highest appreciation rates. While there are markets that offer better cash on cash returns, depending on the investment class, few produce the overall yield provided by Hawaii real estate. Hawaii offers many types of investment property to fit just about every investor’s portfolio strategy.
Every investor has different goals for each investment. Most focus primarily on minimizing risk while maximizing yield. Some investors are very focused on specific goals such as appreciation, cash flow, safe haven for funds, tax efficiency, or user needs. Hawaii is a diverse market with properties that can help every investor achieve their specific goals.
In general, real estate is considered a lower risk investment when compared to other investments such as equities, currency, or any other investment fad out there like bitcoin or beanie babies. All investment alternatives are impacted by local and worldwide external variables such as general condition of the economy, politics, conflict, or a worldwide pandemic. Real Estate is also affected by these same factors. However, Real Estate is a tangible asset and even in some of the historical worse case scenarios has retained at least some value or continued to provide income, business use, or shelter.
WHY WOULD YOU INVEST IN HAWAII REAL ESTATE?
Historical appreciation is one of the main reasons my investor clients have invested in Hawaii real estate. As we all know, historical performance is no guarantee of future performance. Some of Hawaii’s unique characteristics are pretty good indicators that real estate in Hawaii will continue to appreciate.
Land and space are finite in Hawaii. As population grows and demand increases, we can’t just increase supply by developing further and further from population centers. At some point, the ocean makes it pretty challenging and costly to continue developing. Hawaii, especially Oahu, is an area with one of the highest concentrations of military population in the US, with major facilities for all the branches of the military. Given the current geopolitical environment, it is highly unlikely that Hawaii will lose the strategic importance that requires the major military presence to continue. Hawaii is also a world-wide brand name that people know, trust, and aspire to.
The increasing demand and limited supply drive up not only values, but rents that people and businesses are willing to pay for the space. With some of the highest rents in the nation, cash flow from properties in Hawaii is attractive.
[The data reference from FEDERAL HOUSING FINANCE AGENCY]
The higher acquisition cost does negatively impact the cap rates we see in Hawaii, but when including appreciation in the total yield analysis, Hawaii real estate investments often come out on top when compared to other real estate markets. I caution investors to look closer than just the cap rates when considering Hawaii real estate.
Some of my investor clients have a hard time understanding why other investors would accept lower returns when seeing prices paid for properties and income generated. As I mentioned before, every investor has their own hurdle rates or goals for each investment. I have to remind clients that they are not only competing with other US investors, but investors from all over the world who may just be looking for a safe haven for their money.
The United States, in general, is regarded as a safe place to invest because of the relative economic and political stability. Hawaii is a well-known brand that enjoys the same economic and political stability, especially with the military presence mentioned before. Some international investors are just happy to get their money out of their unstable home economy and sitting in a safe asset that will not lose value. Any revenue generated is a bonus for these investors.
Other investors may have specific tax advantaged situations that make a Hawaii property more attractive. For a time, the Japanese tax code made properties built before a certain year with wood framing very attractive. That caused some Japanese investors to pay higher than normal prices for properties in areas of Hawaii that were not traditional areas for Japanese investors.
I’ve also seen investors doing a 1031 exchange pay a higher price for a property because they needed to find a place to put their money before their time ran out and they faced high tax penalties. Other investors have bought Hawaii properties so they can claim a portion of their annual vacation as an expense to inspect their investment. This isn’t a huge tax advantage, but for some investors it is reason enough to invest in Hawaii real estate.
Finally, some investors are looking for a property that they can also use for their business operations. The Hawaii market features a variety of properties that will work for just about any kind of business, whether that is industrial warehousing or operations, office space, or retail. Some of the segments are more limited than others, but all are available in the Hawaii market. Some local developers have already started to focus on the unique needs of future business operations and building to meet those needs.
Please feel free to contact me if you would like to discuss your specific needs and opportunities here in Hawaii to address those needs. Hawaii is a great place to live and invest!