If you’re thinking about investing in real estate on the Big Island of Hawaii, you’re in for an exciting opportunity. Did you know that condos in Kona gained an average of $97,000 in equity over the last 12 months? On top of that, the Big Island is known as one of the most investor-friendly locations across all of Hawaii. This blog will dive into why the Big Island is a prime spot for real estate investments, the rules surrounding short-term vacation rentals, and how to make the most out of your property.
Why is the Big Island So Investor-Friendly?
The Big Island has unique, investor-friendly guidelines compared to other Hawaiian islands like Oahu, Maui, and Kauai. Because of this, many investors from these islands come to the Big Island to take advantage of opportunities like the 1031 exchange, which allows you to defer capital gains taxes when you reinvest in a similar property. Whether you’re considering buying your first rental property or expanding your portfolio, the Big Island offers real estate advantages that are hard to beat.
But with this growing demand, you might wonder if it’s still worth investing. Will there be room for your property to thrive, or is the competition too steep? Let’s take a look at the current market trends and short-term rental guidelines to help you make an informed decision.
Understanding Bill 108: The Short-Term Vacation Rental Guidelines
In 2018, Hawaii County passed Bill 108, which established guidelines for where and how short-term vacation rentals (STVR) can operate on the Big Island. This law directly impacts where you can host short-term rentals, whether they are hosted or unhosted.
The key takeaway is that there are designated zones that are STVR-friendly, meaning properties in these zones can apply for permits to run short-term rentals. If your property falls within one of these zones, you’re allowed to rent out your home or condo for short-term stays, as short as one night if you choose. You just need to follow the local laws and pay taxes on your rental income.
Speaking of taxes, there are two primary taxes to be aware of in Hawaii:
- GET (General Excise Tax): This is essentially a sales tax on your rental income.
- TAT (Transient Accommodations Tax): This tax applies to short-term stays.
To navigate the various rules, it’s crucial to work with a knowledgeable realtor who understands the ins and outs of the zoning laws and tax regulations. This will help you avoid costly mistakes and ensure your investment is compliant with local laws.
Grandfathered Properties: A Unique Opportunity
Some properties on the Big Island have what’s called a non-conforming permit, which means they were grandfathered in under the rules that existed before Bill 108 was passed. These properties were already running short-term rentals before the new law and were paying taxes on their income, allowing them to continue operating despite not being in an STVR zone.
This gives these properties a distinct advantage because they have the legal right to rent short-term while neighboring properties might not. Owning a property with a non-conforming permit can add significant value, especially if it’s a single-family home. Homes with these permits can often sell for $150,000 to $200,000 more than comparable properties without them, making it a highly desirable feature for investors.
Condos and HOA Rules: What You Need to Know
If you’re considering purchasing a condo to rent out as a short-term vacation rental, you need to be aware that the HOA (Homeowners Association) can overrule Bill 108. Even if the condo is in a legal STVR zone, the HOA might have its own rules that restrict short-term rentals. In some cases, HOAs may ban short-term rentals entirely or set strict limitations, like requiring a minimum stay of 30 days or more.
This means that before you buy a condo, you need to thoroughly review the HOA rules to understand what’s allowed. Some HOAs will only permit rentals if they meet certain criteria, and others will impose rules that make it difficult to operate a vacation rental profitably. For example, some HOAs may require that units be rented out for a minimum number of consecutive days, while others may restrict the total number of rental days per year.
A good realtor can help you navigate these rules, ensuring that you choose a property that aligns with your investment goals.
Key Takeaways for Real Estate Investors
- STVR-Friendly Zones: If you’re looking to do short-term rentals, ensure that your property is in a zone that allows STVRs and get the proper permits.
- Taxes: Be prepared to pay both GET and TAT on your rental income. Understanding these taxes will help you manage your cash flow.
- Non-Conforming Permits: If you can find a property with a non-conforming permit, it’s a golden opportunity to own a rare and valuable asset that legally allows short-term rentals.
- Condos and HOAs: Always check the HOA rules before investing in a condo, as they can restrict your ability to do short-term rentals, even in STVR zones.
Pros:
- High Demand for Rentals: With tourism booming and condos gaining equity, there is a strong demand for short-term rentals on the Big Island.
- Investor-Friendly Rules: The Big Island offers more flexible and investor-friendly guidelines compared to other islands like Oahu and Maui.
- Opportunity for Appreciation: Properties in Kona and other areas are gaining equity quickly, making this a solid investment for both short-term income and long-term growth.
Cons:
- Complex Zoning Rules: Navigating the different zones and regulations for short-term rentals can be confusing and requires expert guidance.
- HOA Restrictions: Even if your property is in an STVR-friendly zone, the HOA can impose additional restrictions, making it harder to generate rental income.
- Competition: With many investors flocking to the Big Island, the competition can be tough, so it’s important to choose the right property in the right location.
The Big Island offers incredible opportunities for real estate investors, especially when it comes to short-term vacation rentals. With condos gaining equity and the island’s investor-friendly rules, there’s definitely room for you to make money. However, it’s important to be aware of the rules and restrictions surrounding short-term rentals, especially with zoning laws and HOA regulations.
If you’re thinking about investing, I highly recommend working with a knowledgeable realtor who can guide you through the process and help you find the perfect property to fit your investment goals. So, whether you’re looking to buy a condo or a single-family home, the Big Island could be the perfect place to build your real estate portfolio.