Investing in a Vacation Rental on Oahu - what about permits? (Honolulu: real estate market, renter)

[Gavinski]

I am new to this board, and I searched for an answer to this, but no luck. So I figured I'd start a new post.

My wife and I have been visiting Hawaii over the past twenty years and are thinking we may relocate there some time in the next 5-10 years. To give us a foothold in the Hawaiian real estate market, we are looking into buying a vacation rental that we could rent out and use ourselves when we visit the island.

After doing some research I discovered that in 1989 the Oahu planning committee passed a law requiring a permit to operate a short-term rental property (i.e., with terms of less than 30 days). All existing rentals were grandfathered in, and a moratorium was put in effect on new permits. So in the past 23 years, many of those original permits have expired, reducing the number of permits to quite a small number (just 200 outside Waikiki). A quick search on VRBO.com shows that there are WAY more than 200 vacation rentals outside of Waikiki, meaning that a lot of people are either finding ways to skirt the permit requirements, or simply ignoring the law altogether. Apparently, if you do get busted, the penalties are quite severe, but it obviously isn't enough of a deterrant.

I know we can go for a long term rental, but that would severely limit our options in terms of using the property ourselves. We could also offer month-long lease, but that is not ideal either.

So I'm curious. Are there any vacation rental owners on this board? What has been your experience with the permit issue? What advice can you offer for those considering making this type of investment?

- Gavinski

[Dreaming of Hawaii]

I don't know if Oahu is different than the neighbor islands, but we had a vacation rental on the Big Island for five years and never needed any kind of permit. What you do need is to register with the state because you have to pay transit accommodation and general excise taxes. You collect them from the renter and pass through to the state. Also, if you are in a community with HOA restrictions, you need to check to make sure that vacation rentals are permitted.

We did exactly what you are considering. We built our house in 2005 and operated as a vacation rental until we moved into the house when we retired in 2010. We like doing the short-term vs long term because there's a lot less wear and tear from someone who's on vacation, and it gets cleaned between rentals.

If you don't get any good answers on this forum, I suggest calling the planning office and asking them directly.

[PacificFlights]

I thought the ban in Honolulu County was based on short term rentals in established residential only neighborhoods, not a ban on short-term rentals? So short-term rentals are allowed but if your place is in an existing established residential area, those folks shouldn't be subject to the disruption short term rentals bring due to your "future investment" desire. You will want to check what areas still permit shrt term rentals without that permit ban in place.

[whtviper1]

Here is a relevant article

City and County of Honolulu pursues illegal vacation rentals

[Gavinski]

@PacificFlights - That's a good point about residential only neighborhoods. In my reading I recall something about that topic, but my take was that it didn't matter where it was located - that this was in fact an island-wide ban. But I could be wrong - I'll certainly look into it. We are considering the North Shore, which is most likely defined as a residential zone.

@ Dreaming of Hawaii - The taxes are another consideration, and that information is relatively straightforward. Since you have already done this, I'm curious to know how this strategy worked out for you and if you'd recommend it as a way to transition to Hawaii?

[WaikikiBoy]

My understanding is that it boils down to zoning. Most of the Island is zoned to allow only long-term rentals (30 days or more).

Some area's have specific zoning that allows short-term rentals. Waikiki is the largest area I know of that has short-term zoning. And even within Waikiki not all buildings are zoned short-term.

My point is that the "permits" are really non-conforming use permits for homes & condo units zoned for 30-day rentals where owners want to use the property in a way that does not conform to existing zoning. And those permits are not being approved currently.

If short-term vacation rental usage is really what you want, you'll find most of them in Waikiki area.

Depending on your budget, another option could be a house with a small guest cottage. Rent the house monthly and use the guest cottage when you want.

Another idea I have used is to rent a unit (furnished) on a monthly basis. And then just schedule your vacation for a month each time you are in between tenants.

Anyway, good luck with your search. The North Shore is a great area.

[Dreaming of Hawaii]

Gavinski, our house is in a rural area of the Big Island, so it was for a variety of reasons that we chose to do vacation rentals instead of long term. Some place closer to an employment center may be a better choice for someone thinking of doing long term rentals.

We were fortunate that the period of time that we were in the vacation rental market -- 2005 to 2010 -- experienced good tourism. There was one year that our house was rented over 250 days. When we were doing our planning, we looked at the rental calendar of other vrbo houses in our neighborhood to get an idea of what to expect. While we knew we weren't going to make money, it at least provided a big portion of our mortgage. As the owner, you are also responsible for paying for all of the utilities, which you wouldn't do with a long term rental.

We were extremely lucky with our renters, some of whom returned every year and came to think of our house as their own. We never had any damage done and while some minor things disappeared (like beach towels) other things showed up, including a set of golf clubs.

Having the house already bought and furnished helped a lot with our transition and cut down on the amount of "stuff" we needed to bring with us from the mainland. And spending lots of vacations in the same place helped us meet people and get to know our area.

[rhood151]

We did exactly what you are proposing to do quite by accident. We bought a vacation rental in Waikiki in 2006 at the height of the market (great timing) and have rented it out ever since. We weren't specifically looking for it but stumbled into a property with an existing permit.

There are no new permits being issued so the property you purchase has to have one. Sure you could do short term renting without the permits but if you are caught the consequences could be quite severe. The Honolulu Department of Planning and Permitting (DPP) is not at all efficient in finding these unpermitted rentals but is it worth it? If they shut you down you have no income to pay the mortgage.

You also have to pay the Hawaii taxes collected from your guests. Two taxes are collected. General Excise tax and Transient Accomodations Tax. For some reason the Honolulu DPP hasn't caught on to the idea that they could use the tax collection information to shut down the unlicensed rentals. But then again it's revenue to the government and we all know how politicians love revenue, from legal sources or otherwise.

Then there's advertising, maintenance, cleaning staff, bookkeeping and the day to day quotes, keys and security deposits / refunds to consider.
Bank financing is also a problem. I can't refinance because it's an investment property. You may have a problem getting a mortgage.

All in all it's worth it to have a place in Hawaii that someone else is helping to finance. If you can do it - go for it.

See my site at www.alohawaikikigetaway.com and good luck.

[PacificFlights]

Originally Posted by rhood151

For some reason the Honolulu DPP hasn't caught on to the idea that they could use the tax collection information to shut down the unlicensed rentals.

I think that is the probelm that many do not pay the taxes even if they collect it. I also understand that there is something in the way the rules were written about taxes that makes sharing hard for one agency to get tax information to enfoce rules of another agency. Kinda like the property tax apprasals don;t get shared with planning.

[KauaiHiker]

Funny how I started bringing up this issue (permits for vacation rentals) in a few threads, and now people are getting a reality check.

BTW, Kaua'i is like Oahu: there are "visitor destination zones" (Princeville, coastal Kapaa, and Poipu) where transient (<30 days) rentals are allowed, and all the rest require a non-conforming use permit that was grandfathered to all the "illegal" rentals (as long as they were paying taxes), but no new ones.

There are activists on the island who are fighting the creep of tourist lodging into residential neighborhoods and agricultural zones. If you look at it from a resident's perspective, a few visitors in a neighborhood aren't a problem, but a large percentage would be. The biggest issue is that running a business in a home drives up the value of the property, and thus inflates the real-estate market for everybody (even those who just want a house to live in).

It sounds like the BI doesn't have these restrictions, what about Maui?

From that real-estate blog that whtviper1 linked to, you can see that anything less than 180 day rental could be considered transient by law. For example if you do 31-day rentals, but don't use a standard lease, then it's pretty obvious you're running a lodging, not long-term rental.