House will be close to paid off this year, need advice on moving to the Big Island (Hilo: renters, condo)

[chadyo]

It's been my wife and my dream for the past few years to move to Hawaii. We were there in 2011 for our honeymoon and she lived there for 4 years and we fell in love with it there.

I think our situation is a little bit unique, so I'm hoping I can get some good advice, here's some info about us.

- In our early 30s
- House will be paid off later this year or early next year
- We can probably sell it for around $130-140k
- I'm a programmer and might be able to work remotely. (will need reliable internet access)
- My wife is self employed hoop dance teacher for kids and has some passive income

We've worked so hard the last 4 years paying extra on our current house, I just don't want to get into a bad financial situation or wait and end up buying in another housing bubble, so I'm getting the feeling we should get the ball rolling soon. So if you were in our situation, what would you do? Buy land soon before prices go up any further? Pay off the house and save, save, save and buy the place of our dreams in a couple years? Buy a place with a legal Ohano and rent it on AirBnb or VRBO for extra income?

Also, what areas would you recommend? I think we want to rule out the east coast of the big island due to the rain and mosquitos. We don't need anything big but want some land for a garden.

Ideally, we don't want a mortgage at all which is why we've been paying extra on the house for a while. If we move sooner and get a mortgage we would want some kind of rental income that covers the remaining mortgage in case I'm no longer employed.

Thanks in advance!

[whtviper1]

Hmmm, well - mortgages are a very smart thing to have so I'd rethink the no mortgage strategy.

Interest rates are still at near historic lows. So you can park money elsewhere that has a greater return. And the interest is deductible. A $3,000 mortgage at 20% tax rate yields nearly $600 back from from Uncle Sam each month.

[hotzcatz]

For most folks on the Big Island $3K a month is their entire income or even more than that, I think you're thinking of Oahu mortgage, WhiteViper. So how does this mortgage thing work? Money paid on a mortgage doesn't count as income? This seems suspiciously like my mom's method of "spending money to save money". I never did quite figure out her financial genius although I did like her method of hoping to win the lottery to pay everything off. So, all kidding aside, how does the mortgage saving money thing work? And what if you're the one holding the mortgage? The money paid in would definitely count as income, wouldn't it? Guess I should go find a tax person and ask silly questions. It's that time of year, though, where most tax folks are too busy to bother.

Well, Chadyo, you have a lot of options at the moment. Since you have so much equity in your house now, there's almost no reason why you'd have to wait if moving to Hawaii is something you're going to do. Would it be possible for you to rent your house and use the money from the rental to rent in Hawaii for awhile? Then you'd be able to select exactly where you'd want to live instead of having to pick a house without being real familiar with the territory. (Although, technically we are a state now. ((sorry, couldn't resist)). Once you found the house you wanted in Hawaii you could put a "contingency" offer on it, that would be contingent to selling your mainland house. Or sell the mainland house and then buy the Hawaii house.

Having a rental is always good, although you're gonna pay more for for a house with an ohana unit. Which, technically, is supposed to be only for family members anyway. A true "ohana" unit won't have a kitchen in it since the idea is all the family members will eat together in the main house.

On AirBnB you'd be able to rent a room in your house if you needed to make a mortgage payment, it doesn't have to be a separate unit. IMHO, VRBO is more of a situation where the separate ohana unit would be good.

$130K to $140IK is a lovely amount for a down payment, so you'll probably be able to get a small mortgage to cover the remaining amount. Even just $100K would make the rest of the mortgage quite low. If you bought land somewhere, the $130K to $140K would probably be enough to build a small house on it, depending, of course on how much you spent on the land and how big of a house and if you build it yourself or have someone else build it. That does take a lot of time to get done, though. Figure at least a year before you get settled.

Fast internet is pretty common on the Big Island now. You can get it in many areas. Honokaa town is putting in town wide wi-fi, so you'd be able to sit in front of the People's Theater (which has become a coffee cafe during the day) and do your work. Although I dunno if you'd be able to get much work done while chatting with the folks passing by, but the coffee would be good.

For gardening, anywhere between Hilo and Waimea has lovely soil and adequate rain. There's lots of micro-climates to choose from, too, many of which are dependent on elevation.

[99burt]

Not a place for financial advice, but...
If you can rent your house here use that as passive income in HI, then if you don't like HI you have a soft landing upon your return, a lot of people (myself including) go to HI and leave after a couple of years for various reasons. We are trying to get back for what it is worth but are not finding the situation ideal.
If you like it you can sell your mainland house in a year or 2 and use that to move forward in HI, HI property is expensive but property taxes are not by comparison to most mainland places. The islands very so much by location that I don't think most would recommend buying for at least a year, so you know the area you like/lifestyle, weather, etc. I thought for sure our first place was going to be a home run, but it wasn't for us and luckily we were only on a month to month so we moved to an awesome place, a bit harder if you buy.
Interest rates and home prices "seem" to be headed for a continual rise so that is your decision on timing. With all of my BS advice, if we move we are selling our house to take the equity but there is no way I could rent it, we have a condo we rent that for $1275 that is worth about 100k but we are underwater. 2 Renters, both great had it rented out in less than week both times, we only make $90/month and keeping it only until it is profitable to sell which should be by this summer. If you own your current place I imagine you could make 300-400 per month. A lot can go wrong with renters but I would investigate with care and diligence. In MI the rental rule of thumb is 10% of the value of the house you should rent it for, if you can't rent it for $1300 in your assumed value then sell, also I rent a condo that is suited for a single professional, no pets, no yard etc, if your demographic is a family that can be rough on a house.

Best of luck, we are hoping to figure a way to make it work ourselves, lived on Maui for 2 years, came back for family and really miss HI.
Never visited the BI but I would also recommend seeing how the V-og affects you and yours, I have no experience with but some folks have an issue, it would suck to buy in an area in paradise that does not have the air quality you seek. Every area is vastly different.

[whtviper1]

Originally Posted by hotzcatz

For most folks on the Big Island $3K a month is their entire income or even more than that, I think you're thinking of Oahu mortgage, WhiteViper. So how does this mortgage thing work? Money paid on a mortgage doesn't count as income? This seems suspiciously like my mom's method of "spending money to save money". I never did quite figure out her financial genius although I did like her method of hoping to win the lottery to pay everything off. So, all kidding aside, how does the mortgage saving money thing work? And what if you're the one holding the mortgage? The money paid in would definitely count as income, wouldn't it? Guess I should go find a tax person and ask silly questions. It's that time of year, though, where most tax folks are too busy to bother.

Well, a $3K mortgage won't get you much on Oahu - certainly not a median home price.

What I meant was:

Let's say I have $160K burning a hole in my pocket and I can't wait to buy a house in Hilo.

Option 1: I buy a $160K house with cash. A few problems with this: You've lost liquidity, if you have an emergency or another need, you have to get a bank loan anyway - or sell the house. You have no mortgage interest deduction on your taxes. It is just a very poor use of cash.

Option 2: Buy a $200K home and get a mortgage of $160K. Since I've put 20% down, I won't pay for PMI. I've got a nicer home. My mortgage rate is 4%, so my payment is a modest $760 or so. Nearly $9,000 of interest is tax deductable (money in my pocket from the Federal Government - at a 20% tax rate, that translates to about $1,800). I've got $120K left - I invest it. Let's be conservative and say we get 8% on our investment. That's $9,600 year 1 which is greater than the sum of my mortgage payments (and lets not forget about my $1,800 in tax refund). And, my money is liquid, if I have an emergency, I have access to cash.

[oregonwoodsmoke]

The only place you can buy a house for $130,000 is around Puna. (if that southwestern corner HOV area is not in consideration. That's where the cheapest prices are)

I don't think you can get one with a rentable Ohana for that price.

Interest rates are low, but you can't take out a mortgage without a good steady income. Also, there us something to be said for no mortgage payment.

[OpenD]

Originally Posted by chadyo

Buy a place with a legal Ohano and rent it on AirBnb or VRBO for extra income?

As I just mentioned on another thread, ohana rentals are not legal on the Big Island. That's the whole point of the "no kitchen" restriction on ohana dwellings, to try to make them unrentable, so that only "ohana," or extended family can live in them, eating together with the others in the "big house."

People being people, this rule is broken all the time, because enforcement is lax, and people do all kinds of work-arounds, like renting with a hotplate or microwave instead of a stove, and calling it a kitchenette. That's actually a pretty good tipoff in a Craigslist ad... a microwave kitchenette and a shared electric bill. Typically they are not on a separate electric meter and can't have a separate mailbox, in areas where mail is actually delivered (many areas of BI it is not). The more nefarious owners move a stove in after inspections are complete.

But the point is they are not legal for rental, and somebody with an axe to grind could turn you in, so that's a consideration. Do you want to take that risk or not?

[hotzcatz]

Back to the money mortgages thing; if you have to pay $9K in interest to get the $1.8K back that doesn't seem like a good deal. Wouldn't it be better to just buy it outright and pay no interest at all? Then you could invest the $9K in Hawaiian Electric DRIP stock (that's my favorite at the moment) which pays 4.8% (where do you get an 8% return these days?) You'd only make about $400 per year, but it's better than paying out.

Or take the $750 per month and invest it in something instead of paying a mortgage. If you have that much extra per month, you'd not really have to worry about liquidity after stashing some away each month for awhile.

Or, if you have $160K, buy two houses with a big down payment and rent one for more than the mortgage to help pay for the other.

Burt has a good idea about renting the mainland house to subsidize the Hawaii move and give a place to return to if the Hawaii thing doesn't work out.

[scgali]

We live on Kauai but had the same concerns as you as far as housing bubbles with Hawaii. So we saved and bought land first in our ideal location. We could not afford to buy a house there anytime soon but wanted a certain area and decided owning the land there was most important. Then we saved for a while longer until we could afford to build a modest home on our land. This took 6 years of hard work & saving but there is no way we would have been able to afford the location we wanted any other way. And buying the land first secured that. Then we didn't feel in as much of a rush since we knew we had our little piece of paradise waiting there for us
It was definitely worth the wait to be where we are especially seeing prices going up around us. I don't know about big island but land here lags a little behind housing prices so we were able to get a better deal on the raw land.

[davephan]

Originally Posted by whtviper1

Hmmm, well - mortgages are a very smart thing to have so I'd rethink the no mortgage strategy.

Interest rates are still at near historic lows. So you can park money elsewhere that has a greater return. And the interest is deductible. A $3,000 mortgage at 20% tax rate yields nearly $600 back from from Uncle Sam each month.

I disagree with the strategy that keeping your long term mortgage debt is a good idea, depending on your circumstances. Some people do believe that holding a long term mortgage and putting money in the market is wiser than paying off the mortgage. The market goes both up and down. Last week, we saw the market take a crash. Although over a longer term, such as 5, 10, or more years, the market is likely to rise. You need enough money out of the market to live on besides your money that may be tied up for 5 or 10 years in the market, waiting for the market to rebound. If you keep the mortgage as long as possible, you'd get a 30 year or longer mortgage. You may end up paying for your house three times. While the mortgage deduction is nice with a higher tax bracket than 20%, it is not a panacea. In the long term, the mortgage deduction may go away. There's been talk about it for years.

I believe in paying off the mortgage early if possible. We paid off a 15 year mortgage in 10 years while saving a lot of money for retirement. After the mortgage was paid off several years ago, we are saving even more for retirement. It makes a big difference to live debt free, giving you peace of mind.

IT is a great career path to be gainfully employed with a high paying job. You chose a great career path! Both my wife and I work in IT. Besides paying off your mortgage, have you also been saving a lot of money and have no credit card debt, car loans, school loans, or any other debt? You said you 'might' be able to telecommute. There is a big difference between 'might' and 'can' telecommute. I telecommute part time now, but I don't know if I could telecommute full time.

Your income and net worth might be a little low to live comfortably in on the Big Island from what you have mentioned. Although, you might be able to live in the Puna area. Are you sure you could make enough money to live comfortably on the Big Island and simultaneously saving a lot of money for retirement? Is there any way that you could increase your family income? Your wife's career doesn't sound like it has high wages, especially if there isn't much demand for those job skills on the Big Island. Perhaps your wife could get training in IT or nursing where you live now to increase your family income. Then in several years you will be in a better financial position to consider the move. I made the career change from low paying customer service to IT at age 40. It's really tough to make that life changing transition at age 40. It would have been much easier to do at age 30. I've been working in IT now for about two decades. I wasted my young years working for peanuts.

If you can both work at good paying jobs, live below your means, and save a lot of money, then you can build up your net worth which put you in a much better position in life in the long run. The better financial position will give you the freedom to move to Hawaii.