Author Topic: Is Buying a Home in Hawaii Stupid?  (Read 9455 times)

Dragonstrike

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Is Buying a Home in Hawaii Stupid?
« on: May 17, 2016, 10:41:06 PM »
Hey again everyone.

So some life changing things coming down the pipeline for me soon.  I'm still military, and soon I will be getting married to my girlfriend, which will then entail us getting a place together and living off post finally.  With that being said, I'm divided on several things. My current options are as follows, and I need you guys to be the voice of reason for me when it comes to living on my own and at our own place for once:

Option 1) Using BAH ($2600/Month till end of next year) and then BAH from benefits of GI Bill, going back to college for a finance/business degree for another 2-3 years while in school time only, buy a nice townhouse/condo/single family home (few options on the latter one) in Oahu, hold for several years, sell if necessary but properly with cash flow saved up for down period during sale.  That being said, using BAH I will pay off the mortgage of the home along with a VA Loan at a 2.7 and up interest rate.  As well, get 2-3 other roommates for the other bedrooms we don't use and have them pay off the mortgage every month while we save the money or pay off the house faster.

Option 2) Don't get a house, same BAH rules as before, and rent out an apartment or townhouse, while banking a thousand dollars after rent every month.

Option 3) Find the cheapest home on Oahu and over the next several years begin to remodel and flip it in order to up the resale value.

Our goals are to live here in Hawaii after I'm finished with military.  IF not, as she wants to go military as well and may have BAH to add to that, then we move off island back to mainland, and from there that is a toss up.

I'm trying to do everything for a justice of the peace wedding as cheap as possible as she is in line with my idea of saving money for retirement.  I just don't want to put money into something I don't get a return on in some way, hence I abjor renting.

Any ideas?

Daleth

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #1 on: May 17, 2016, 11:20:31 PM »
What is BAH?

I'm guessing that long term, #1 would make you more money than #3 because you come out of that plan with both Hawaii real estate AND a marketable college degree. And if you've never done it before, do NOT underestimate how stressful remodeling a place is, especially if you're living there while remodeling.

Johnny Aloha

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #2 on: May 18, 2016, 12:52:10 AM »
Buying a home in Hawaii may or may not be stupid.  As always, it depends.

Lots of questions when I read your original post.  So, after you are out of the military, you are going back to school?  Keep in mind UH is a bottom tier school and job prospects in the civilian sector may or may not be strong, depending on what your military experience looks like.  If you were in IT, you'll probably be fine.  Salaries in Hawaii are very low in relation to the cost of living.

Not saying you have a bad plan, just be aware you might be paying the paradise penalty.

I don't recommend buying the cheapest place you can afford.  As you probably know, buying in Kalihi or Waianae probably isn't a good decision.  If you want to have a chance at appreciation, you'll need to be in a pretty decent area.

Having roommates is a good way to ease into ownership.  Make sure you have leases that are enforceable, in case you need to. 

For lots of people buying in Hawaii has been an excellent decision.  It's also burned some people, so make sure you do LOTS of research and understand the market.

Best of luck!


kinetic

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #3 on: May 18, 2016, 01:54:00 AM »
my vote is for #1 as well.  two for the price of one.

we bought a duplex 6 yrs ago in an area with limited housing options (but lots of folks who want to buy). we were the first bid and there were 10 others that came in after ours on the same day. according to zillow's median estimate, our property has appreciated 22% in that time.  in order to make it here, we had to have a rental so getting roommates and using your BAH to pay down your mortgage is a great idea. 

i would not recommend getting a fixer-upper because the fixing that has to be done along with the wear and tear to an island home (humidity, salt air, etc if you live somewhat close to the ocean) will probably keep you pretty busy (unless you want that kind of busy).

one thing we did well was buying a legal duplex.  one thing we didn't do so well was buying a legal duplex.  we tried to refinance last year and got lowballed in the appraisal because there are little to no comparables in our area.  yes, we have a unicorn.  my advice would be to not find one yourself in case you want to sell any time soon.

so buying in a desirable area would be a good idea.  making sure you can refi or sell the house eventually is even better.  i don't think we'll be upside down in a refi or the sale of our place.  we just have to be savvy about what is selling around here so we have a gauge with which to measure appreciation.

i blab. this may or may not help.

Dragonstrike

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #4 on: May 18, 2016, 12:53:26 PM »
Lol, so to clarify things:  BAH is Basic Allowance for Housing.  It is a benefit while being of a certain rank or married while in the military.  It enables you to live in your own home off post or on post, which provides a rate which is equitable to the market in the area you are stationed.  So here in Hawaii, it is currently at $2600 a month.  After I get out after next year, and if I choose to go back to school, the rate will be at an E-5 with dependents rate, so pretty much the same if not more money "for the time I am in school"= does not count break periods, which a cash cushion will suffice for that down time.

I'm open to option one, but also may look into getting a smaller, more affordable condo purchase between 120-200k, and if my soon to be wife decides to go military as well and gets stationed elsewhere, then we will move back to the mainland and find something more affordable as well while having tenants pay off the first place.  That way, we will own two properties, and when it comes time to determine what to hold and what to live in, we will go from there.

I'm a red panda

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #5 on: May 18, 2016, 12:55:22 PM »
I have a number of friends who are stuck with properties when they couldn't sell when they PCSed.
Do you have a strong plan in place if this happens to you?

Villanelle

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #6 on: May 18, 2016, 01:06:28 PM »
Do you *want* to be a long-distance landlord? 

It's not something I'd choose again.  Financially, keeping our house when we PCSed OCONUS was a very sound decision.  While we were loosing money on it at first, we are now cash flow positive (not a ton).  But more importantly, it has appreciated about $150k, if not more, in 6 years.  But it has been frustrating and stressful and great property managers have proved allusive, even with multiple recommendations.  If the prospect of landlording doesn't excite you and is only something you'd do because you have to, I'd probably rent as far below BAH as possible (keeping in mind high utility bills, and commute costs if you have to live far away in order to get something cheap) and if I could do that and truly bank a significant amount, that's what I'd do, even if I could bank even more by buying and having roommates.

And one other thing... when planning to use the GI Bill BAH, keep in mind that while technically the rate is the same as E-5 BAH, you only get that when you are in school.  A week off for spring break?  You get 7/30ths less that month.  A month gap between Fall and Spring semester?  No BAH.  A lot of people get burned because they budget based on the monthly rate x12, as they would with active duty BAH, but that's not what they get. 

Nords

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #7 on: May 21, 2016, 05:03:27 PM »
Option 1) Using BAH ($2600/Month till end of next year) and then BAH from benefits of GI Bill, going back to college for a finance/business degree for another 2-3 years while in school time only, buy a nice townhouse/condo/single family home (few options on the latter one) in Oahu, hold for several years, sell if necessary but properly with cash flow saved up for down period during sale.  That being said, using BAH I will pay off the mortgage of the home along with a VA Loan at a 2.7 and up interest rate.  As well, get 2-3 other roommates for the other bedrooms we don't use and have them pay off the mortgage every month while we save the money or pay off the house faster.

Option 2) Don't get a house, same BAH rules as before, and rent out an apartment or townhouse, while banking a thousand dollars after rent every month.

Option 3) Find the cheapest home on Oahu and over the next several years begin to remodel and flip it in order to up the resale value.

I'm open to option one, but also may look into getting a smaller, more affordable condo purchase between 120-200k, and if my soon to be wife decides to go military as well and gets stationed elsewhere, then we will move back to the mainland and find something more affordable as well while having tenants pay off the first place.  That way, we will own two properties, and when it comes time to determine what to hold and what to live in, we will go from there.
The only parts of this question that are "stupid" would be buying real estate (1) at the top of the seller's market when (2) you don't know how long you plan to stay in it.

I get this question 5-10 times per year from my readers, both on Oahu and transferring here from elsewhere.  Today's Oahu real estate prices (both single-family homes and condos/townhouses) are the stupidly highest I've seen over the last 15 years.  We would not be able to afford to buy either our home or our rental property at today's prices. 

I'd recommend option #2.  Rent within your budget, and if you can sublet a room or two then you'll save up even more money for a future down payment fund.  That way if you guys decide to move after less than five years then you'll be mobile and liquid.  I would not buy a home when either of you are on active duty because you won't be stationed there long enough to make a profit after the transaction costs of buying & selling.

You can actually save more of your BAH as renters than as owners.  BAH will cover most of your rental costs, of course.  It's never been intended to pay for maintenance, repairs,  property insurance, property taxes, and replacement roofs/landscaping/appliances.  When you buy a property you're making a bet that you'll be able to leverage more equity in a short time than you'll spend on upkeep and realtor's commissions.  Do the math on how much equity you'll build during the first three years of the principal payments on a mortgage, and you'll probably find that it won't even cover the 3% realtor's commission.  The sad fact is that the leverage can wipe you out even more quickly than it can enrich you.  There's no reason to take that degree of risk with your savings when you could be investing in equities (long-term for after active duty in 10+ years) or CDs (short-term for a down payment).

While you're renting, research the real estate markets and start going to Sunday open houses.  You'll learn what neighborhoods you like (and which ones to avoid) and you'll also learn your preferences in home size & features.  You'll be amazed at what different real estate priorities & preferences you and your spouse-to-be might have, and the open houses will help you learn how to quickly recognize a bargain.

While you're doing that, read any of the following resources:
(1) Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions),
(2) Landlording by Leigh Robinson (7th edition or later),
(3) Rent vs Own by Jane Hodges,
(4) Frank Gallinelli's "Real Data" website (free analysis tools),
(5) Brandon & Heather Turner's eBook "The Book On Managing Rental Properties".  He's a co-founder of Bigger Pockets.  I like the eBook format because it's much easier to search and highlight and bookmark.
(6) Josh Dorkin's & Brandon's "Bigger Pockets" website & forums.
(7) Paula Pant's "Afford Anything" posts on real estate.

Let me clarify what makes a VA loan a VA loan.  It's a guarantee to the lender by the VA for 25% of the loan's principal.  It has nothing to do with the term or the interest rate or the down payment.  When you start searching for a loan I'd recommend using a mortgage broker who can work with multiple lenders to find the right combination.  You may find that a conventional loan with a 20% down payment is a better deal than a VA loan guarantee.

Don't get a VA loan until after you've received your VA disability rating.  If you have a high-enough rating then you're also eligible to have the VA waive the funding fee on your VA loan.  That's a significant four-figure sum.  This is another reason to hold off buying a property.

Finally, I'd suggest joining and reading the Facebook group "Military Landlords".  It's full of active-duty families who bought a home at a duty station and then couldn't sell it when they moved.  The vast majority didn't buy the home as a rental property, so it rarely cashflows.  They're at the long-distance mercy of property managers and tenants, and they don't know how to screen or select either one.  They don't understand how to run it like a business, and they're emotionally involved with the decor and landscaping.  There are a few competent and experienced landlords in that group, but it's largely filled with schadenfreude, drama, and the occasional meth lab.  Hopefully the experiences related on that group will discourage you from buying a home while either of you are on active duty.

http://the-military-guide.com/dont-buy-home-active-duty/
http://paycheck-chronicles.military.com/2015/12/04/should-military-families-buy-houses/
http://paycheck-chronicles.military.com/2015/06/16/the-hidden-costs-of-home-ownership/
http://paycheck-chronicles.military.com/2016/02/04/plan-landlording-strategy-buy-house/
http://paycheck-chronicles.military.com/2016/05/19/why-buying-a-house-doesnt-save-on-taxes-anymore/

freeat57

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #8 on: May 21, 2016, 07:13:43 PM »
 Today's Oahu real estate prices (both single-family homes and condos/townhouses) are the stupidly highest I've seen over the last 15 years.  We would not be able to afford to buy either our home or our rental property at today's prices. 

Hello Nords.  Do you have any speculation as to why prices are up so much?  I haven't seen that credit is flowing as easily as it was back in 2006-7, so what's the driver?  Asian money??  The same seems to be true in several mainland cities also.

 




Nords

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #9 on: May 21, 2016, 08:17:10 PM »
Today's Oahu real estate prices (both single-family homes and condos/townhouses) are the stupidly highest I've seen over the last 15 years.  We would not be able to afford to buy either our home or our rental property at today's prices. 

Hello Nords.  Do you have any speculation as to why prices are up so much?  I haven't seen that credit is flowing as easily as it was back in 2006-7, so what's the driver?  Asian money??  The same seems to be true in several mainland cities also.
Part of it is the 15-year recovery from Hawaii's real estate recession of the 1990s, which hit an air pocket in 2008-11 but has since gained momentum.  Two-income families, multi-generation homes, relatively inexpensive mortgages, lots of "accessory dwelling units" or flat-out illegal rentals.

Part of it is the distortion in condo prices caused by recent high-rise sales in Kakaako.  That area is undergoing a revitalization (or gentrification).

Part of it is speculation around the route of the light-rail system being built from the Ewa plain to Ala Moana.  "Transit Oriented Development" is going to drive up property values within walking range of the rail stops.  TOD is a very good thing for sustainable development, and maybe it'll be a good thing for renters, but it's not so good for people who want to own property around there.

Part of it is a huge housing shortfall.  Depending on whose numbers (and politics) are credible, we're short on residences for 30,000-66,000 people out of an Oahu population of about a million.  Two prime agricultural areas (Ho'opili and Koa Ridge) have just been rezoned and approved for development after literally a decade of litigation (and appeals).  This trend has been going on for over 40 years.  Agriculture is going to have to become much more efficient (which is achievable with today's tech) and neighborhoods are going to have to be more urban/walkable rather than suburban sprawl.  After the new homes in those two areas come on the market, I suspect that the rest of the island's real estate prices will level off or even drop.

And finally, the economy is growing.  People are re-discovering that this is a nice place to live, as long as you can get a job!

There are a number of thumbrules and ratios on determining whether it's better to own or rent.  On this island, it's far better to commit to owning a residence for more than five years (because of the transaction costs) and to spend months learning the neighborhoods.  There's no hurry to buy if you can wait for the opportunity.  While people are waiting to buy they can invest their savings in equities (>10 years) or bonds/REITS (5-10 years) or CDs (<5 years) to build a bigger down payment.  All of these asset classes (except for CDs) will appreciate at least as fast as the real estate market. 

Then the renters are ready to buy when interest rates spike, or a recession hits, or a desperate homeowner (in their desired neighborhood) has to sell.  All of that cash will make it easier to negotiate a lower price and a better mortgage, which will validate the homily that "Real estate profits are made when you buy, not when you sell."

Just to give an idea of the eye-watering scale of the prices here, in 1989 we bought our first home at the peak of the Japanese-fueled market for $277K.  4BR/2BA 1875 sq ft on a 5400 sq ft lot in horrible neglected rundown condition.  Today it's assessed at about $675K and would appraise/sell for over $700K.  However over 27 years that works out to an average annual growth rate of 3.5%.  The CPI over that time has been about 2.5%/year.  My numbers don't include commissions, maintenance, repairs, sweat equity, and other expenses over the years which would probably reduce our actual growth rate to the CPI.  In other words we should've rented and invested our excess money in the stock market instead of in real estate equity.  That property is now our rental.

In 2000 we found our "dream home forever":  4BR/2.5BA 2400 sq ft on a 15,600 sq ft lot in terrible condition.  Good design/layout but neglected, decrepit, and filthy.  The parents had died three years earlier, the trustee was thoroughly disgusted and seeking an escape, the neighbors were regularly calling the police about the residents, and the teenage heirs just wanted to cash out for college tuition.  In retrospect it was the absolute bottom of the Hawaii real estate market after a decade of dropping prices, but all we knew is that it was a huge financial risk on the DIY opportunity of a lifetime.  We snagged it for $405K (mainly by virtue of being local buyers) and we've poured in at least another $150K over the last 16 years.  The epically gnarly sweat equity has practically been a part-time job requiring 10-20 hours per week for the first decade after the purchase.  (The yardwork is now known as "functional fitness".)  Today it assesses at over $950K, appraises even higher, and we could probably incite a bidding war to achieve a seven-figure sale price.  It's by far the best home purchase we've ever made (or ever will make) in our lives.  Yet again it's appreciated at less than 3.2%/year and we could've done way better by investing in equities instead of in real estate equity.

These numbers may be impressive by themselves, but they have to be viewed in the context of someone who's lived here for 27 years.  Nobody can expect to achieve those results in three years.  It might be easier to win the lottery.

And for you parents, yes, our adult daughter (and her spouse) could afford to rent here but would not be able to buy until they leave active duty.  They'd carry out the same research process I described in my earlier post above and they'd have to be confident that they'd hold it for decades.  We parents could help with the finances, but maybe it'd make more sense for them to live just about anywhere else on the Mainland and buy plane tickets out here a few times per year.  That's an ongoing discussion which will probably take another decade or two to sort out.

aFrugalFather

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #10 on: May 22, 2016, 10:25:47 PM »
You stationed in Hawaii now?  There was a podcast on Biggerpockets about a couple that bought homes everywhere they were stationed and made good money renting them out that way, might be worth looking in the archives to see if that strategy interests you. 

adamcollin

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #11 on: May 23, 2016, 03:56:52 AM »
I would recommend going for the third option as the property value may increase after a few years and fetch you a higher return from your investment

freeat57

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #12 on: May 23, 2016, 12:30:06 PM »
Thank you for the wonderfully detailed analysis, Nords!  You helped me frame the issue much better.  I have been a real estate owner only in more stable market areas.  It is a different game in highly volatile markets.  I owned a house in a historic Indianapolis neighborhood for 19 years. (15 year mortgage @ 3.4%, paid off early.)  Very low property taxes and insurance.  The way I estimated it, I made no profit from selling it, but essentially lived for free for 20 years.  Not too bad, I'd say.

freeat57

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #13 on: May 23, 2016, 12:41:54 PM »
To the OP, it is really a gambling game to buy real estate if you may need to sell in just a couple of years.  My latest experience was owning a very attractive house in what turned out to be a pretty flat market for three years.  Because of the attractiveness and the fact that I had time, I was able to sell it myself (FSBO).  After closing costs, I banked about $4K less that I bought it for.  Perhaps, if I had been in it a few more years, I could have had a slight profit.

Dragonstrike

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Re: Is Buying a Home in Hawaii Stupid?
« Reply #14 on: May 24, 2016, 10:25:16 AM »
Wow everyone, than you for the awesome advice.

Yes, I am currently stationed in Oahu right now.  Granted a lot goes into the decision making here when it comes to buying real estate, but right now I'm playing with the idea. 

I'll be getting married soon, and depending on what fiancée decides, she and I could either be living here, or if she joins the military and can't be here, then somewhere back on the mainland where it will be cheaper to live.

As well, what kind of degree I should pursue again after I get out next year via the GI Bill, if I can land a good paying job somewhere, how I can translate Japanese and Korean intermediate language skills over in a civilian job market with a Bachelors in Criminal Justice and a Associates in Korean Studies on hand, etc.

I appreciate all your great advice and would love to hear more on how I can potentially make living in Hawaii possible.  I've utilized the basics that MMM suggested, but as far as buying a home that's my endgoal.

I just can't see putting away thousands of dollars every year into rent for something I will not get a return on.  I'd rather knock down the house cost first and then sell after 5 years to regain that balance and then some if cards are played right.