Buying a house in Hawaii (appointed, real estate, renters)

[abbymm]

It's been my desire to buy a house in Hawaii; not for me but for my parents who lives there. They have been renters and they cannot really afford much. Right now they are renting a converted garage for $500/month. They are 62 and 58 years old.

I'm posting to see if buying a house there is even a possibility considering the expenses involved. First, I cannot buy one in cash. lol. So I would need their "rent" to cover the mortgage. I know you're not supposed to mix money and family but I guess this situation is not too bad???

Why am I considering this? They have expressed desire to have their own space (and a more decent space) then looks disappointed because they cannot really afford one. The other concern they have is the place they are renting now. There's no guarantee that they can rent for $500/mo forever.

One scenario I have in mind is buy a house in my name, then have my parents cover the mortgage, insurance and taxes. My problem with this are the taxes and insurance. Since it's not my primary home and I'm not a Hawaii resident, I am assuming the taxes would be sky high. Can anyone tell me if this is true? How can I find out taxes/insurance?

Second scenario, I buy the house with my name and my parents name. I'm guessing wih this scenario, the taxes/insurance would be much less especially with taxes.

At the moment, there's a house I would consider for them. It's listed for $232k, 3BR 2BA. I think it's a decent house. I'm shooting for a mortgage of $150k which means the mortgage would be around $700/mo. But not sure how much the taxes/insurance would add to that. I don't think they can afford more than $800/month total. If anyone can tell me about taxes/insurance (in both scenarios), that would be very helpful.

Thank you.

[OpenD]

Originally Posted by abbymm

At the moment, there's a house I would consider for them. It's listed for $232k, 3BR 2BA. I think it's a decent house.

Personally, I would say that's too much house. If they're happy now renting a converted garage, why go to something much bigger, and much more of a chore to take care of? Typically when people retire they downsize from the kind of house they raised a family in anyway.

You didn't say what island and area you're looking at, but currently there are far less expensive houses available all over the Big Island. Instead of looking at what is the maximum you could afford, which leaves you no cushion, I'd look for something in a much more comfortable price range.

[WaikikiBoy]

Like OpenD said, some of the answers to your questions will depend on the Island you are considering, even with respect to taxes. However, I would not expect taxes to be very high, especially compared to some areas on the mainland.

At a $232,000 purchase price I would guess your taxes to be around $70/month on Oahu as long as it's not a vacation rental property.

There are a number of differences to consider between putting the property in your name only and renting it to your parents -vs- putting it in both your name and your parents name.

First, with respect to taxes, if the property is owner occupied there is an $80,000 discount applied to your assessed value for property taxation. So that presentes some savings (maybe about $25/mnth on Oahu).

Also, if the property is owned by you and rented to your parents, technically they are paying you "rent" and you should pay the State GET Tax on the rental income. That's 4% to 4.5% depending on where the property is. If your parents are on the Mortgage, then their portion of the payment would not be "rent" and it would just be the mortgage payment.

Further, if your parents are not on the mortgage, you would also need to declare the "rent" as income on your own personal income taxes and then write off the other expenses.

So there are a number of things to consider. You could talk to a tax planner to see which route is best. But also don't forget to factor in things like inheritance. For example, if the house is in your parents name and they pass away and you have other siblings and they don't have a will that gives you the house, you could have a problem.

You could set the house up so that if one person passes, the full interest in the house automatically goes to the others on title. I think it's called Joint Tenancy with right of survivorship.

One other thing to consider: Would your parents be willing to leave Hawaii and move to the mainland ? Assuming you are living on the mainland now. They could likely get a nicer place to rent (or buy) for their money. But I guess it depends on where you live.

I'd also consider a single level townhome type property to remove the issue of yard care. But that's just me.

Good luck.

[HiloDiver]

They also need to factor cost of utilities into the monthly cost. Even if they are paying their own right now, they are in a small place and the house will surely have a higher power bill.

[alex7777]

I would definitely have it put in their name, with a formal written agreement that the house is left to you in a new will, and that they can't borrow on it for any reason without approval from you.

I also think a 2 bedroom townhouse or condo would likely make more sense for them, unless you're also thinking down the road for yourself.

Ultimately, it will probably be a good investment, in addition to helping your parents.

[abbymm]

Thank you for the feedback.

After reading all the replies, further research and thinking through the options, I think I would only do it if I buy the house in my name and rent it out to my parents.

Originally Posted by OpenD

Personally, I would say that's too much house. If they're happy now renting a converted garage, why go to something much bigger, and much more of a chore to take care of? Typically when people retire they downsize from the kind of house they raised a family in anyway.

You didn't say what island and area you're looking at, but currently there are far less expensive houses available all over the Big Island. Instead of looking at what is the maximum you could afford, which leaves you no cushion, I'd look for something in a much more comfortable price range.

OpenD, the reason I would consider a 3/2 is for better return on investment. The only island I'm considering is Kauai since that's where everyone lives (grandparents, uncles, aunts, cousins, siblings, etc).

Originally Posted by WaikikiBoy

Like OpenD said, some of the answers to your questions will depend on the Island you are considering, even with respect to taxes. However, I would not expect taxes to be very high, especially compared to some areas on the mainland.

At a $232,000 purchase price I would guess your taxes to be around $70/month on Oahu as long as it's not a vacation rental property.

There are a number of differences to consider between putting the property in your name only and renting it to your parents -vs- putting it in both your name and your parents name.

First, with respect to taxes, if the property is owner occupied there is an $80,000 discount applied to your assessed value for property taxation. So that presentes some savings (maybe about $25/mnth on Oahu).

Also, if the property is owned by you and rented to your parents, technically they are paying you "rent" and you should pay the State GET Tax on the rental income. That's 4% to 4.5% depending on where the property is. If your parents are on the Mortgage, then their portion of the payment would not be "rent" and it would just be the mortgage payment.

Further, if your parents are not on the mortgage, you would also need to declare the "rent" as income on your own personal income taxes and then write off the other expenses.

So there are a number of things to consider. You could talk to a tax planner to see which route is best. But also don't forget to factor in things like inheritance. For example, if the house is in your parents name and they pass away and you have other siblings and they don't have a will that gives you the house, you could have a problem.

You could set the house up so that if one person passes, the full interest in the house automatically goes to the others on title. I think it's called Joint Tenancy with right of survivorship.

One other thing to consider: Would your parents be willing to leave Hawaii and move to the mainland ? Assuming you are living on the mainland now. They could likely get a nicer place to rent (or buy) for their money. But I guess it depends on where you live.

I'd also consider a single level townhome type property to remove the issue of yard care. But that's just me.

Good luck.

On the property taxes, I found a site that said $9.10 per $1k of assessed value. That sounds a lot! But now, I really don't think I like the idea of putting my parents name on the house with/without mine even if it saves $$ in property taxes.

Thanks for the info on the State GET Tax. I didn't know such tax exist.

I really don't think my parents want to move from Kauai to mainland. Kauai is where most of our relatives live and they are comfortable there. If they move, they will move back to Philippines.

Originally Posted by alex7777

I would definitely have it put in their name, with a formal written agreement that the house is left to you in a new will, and that they can't borrow on it for any reason without approval from you.

I also think a 2 bedroom townhouse or condo would likely make more sense for them, unless you're also thinking down the road for yourself.

Ultimately, it will probably be a good investment, in addition to helping your parents.

The main reason I would not even consider their name on the house if I'm buying the house is medicaid. That means I would lose the house if they get on medicaid or any government assistance that requires one to use their assets first.

Yes, I'm hoping to move back to Kauai in retirement. But that can easily change.

[OpenD]

Originally Posted by abbymm

After reading all the replies, further research and thinking through the options, I think I would only do it if I buy the house in my name and rent it out to my parents.

Since this is a significant purchase, with a lot of complicating factors, I strongly suggest you speak to a real estate attorney about the available options. I think there are several you have not even considered, like having to declare their rent to you as income, and the 10% State Capital Gains Tax if you sell the property as a non-resident. There's a lot to it.

Originally Posted by abbymm

OpenD, the reason I would consider a 3/2 is for better return on investment.

Just my opinion, but I think it's unwise to buy more house than you need. If you buy too big a house it could be a problem to maintain it properly, and that could lower the value. Plus maintenance costs, property tax, etc. are higher on a bigger house. And if you max your budget on the mortgage and all to begin with, that leaves you no cushion in case of major repairs, or an interruption in your income, etc. Consider a 2 bedroom, so there's a spare bedroom for when you come to visit. That should be plenty big for them, without being too much to take care of.

And to restate the obvious, there is no assurance you'll get ANY return on your investment, so I wouldn't make that a priority. Look for a house where your parents will be comfortable, possibly considering whether you might be comfortable there when you retire (remembering that most people downsize in retirement), IF you retire there.

Originally Posted by abbymm

On the property taxes, I found a site that said $9.10 per $1k of assessed value. That sounds a lot! But now, I really don't think I like the idea of putting my parents name on the house with/without mine even if it saves $$ in property taxes.

It's less than that. Here is the tax rate chart you should be looking at: Kauai County Real Property Tax Rates

Originally Posted by abbymm

The main reason I would not even consider their name on the house if I'm buying the house is medicaid. That means I would lose the house if they get on medicaid or any government assistance that requires one to use their assets first.

I'm not sure that is correct. My brother bought a house WITH my mother, for her to live in, same thing you're talking about, and when she went on medicaid they did not have to divest the house. Again, another question for a real estate attorney.

Originally Posted by abbymm

Yes, I'm hoping to move back to Kauai in retirement. But that can easily change.

OK, now you have listed three different reasons... providing your parents with a better home, as an investment, and as a retirement home for yourself. You need to prioritize those or you'll drive yourself crazy.

[abbymm]

OpenD, thank you very much for the additional thoughts/advice.

I recognize that buying a house in Hawaii has financial risks. I really want to help my parents, but at the same time I need to think about my own family. Right now, I'm trying to see if it's worth the risk. I admit after thinking about this more that a potential financial gain has to be there for me to do it; helping my parents is not enough.

I'm considering no smaller than a 3/2 house since that's the size I would want to live in if I retire in Hawaii. It will be a downsize.

Thanks for the link on the property taxes!

Good to know that your brother and mom did not have to sell the house. I would definitely check this with a RE attorney.

This definitely seems very complex. Ahh, lots to think about.

Thanks again for the info.

[soarswitheagles]

I'm not familiar with Hawaii rental laws but here's my 2cents. Do you own a second home or vacation home? Do you visit Hawaii? If yes to the above you could probably buy it, have your parents live there and treat it as a vaca home. Even if they pay all the expenses your should be under the gift tax exemption each year. Like I said above, I'm not familiar with Hawaii rental laws but it seems that there are probably exemptions for related party transactions.

[OpenD]

Another oddity of Hawai'i law to consider... non-residents who rent out property in Hawai'i are required to hire a local property manager. I have NO idea what the ramifications are if the people you rent to are your parents. Again, ask a lawyer.