Tuesday, February 10th, 2009

A client asked me this question yesterday, I thought I would post my response in case it might help others.

In my first post I mentioned that the Centex will be lowering their prices 25% - 35% or more from their last published price at the final sales even on June 6th - 7th. Their goal is to sell 100% of the remaining villas, (about half, or 125 villas) and are planning to lower their prices enough to achieve this goal. We'll see.

Hi J,

Here are my thoughts: (Sorry for the long email again, it's just what came off the top of my head from experience)

1 - The Real Estate Market in Hawaii:
Buying when the market is down is an almost a sure way to make money in Hawaii Real Estate. In Hawaii, real estate always rebounds. Always. It's cyclical just like every where else and everything else but here, the up is pretty much guaranteed. There is only so much beach to go around. I grew up here. The worst down turn was the 1982 cycle when the Japanese economy tanked. It took about eight years to turn around but it did with huge gains for the people who purchased on the down side. Here's how I learned my lesson and the reason I finally jumped into the Hawaii Real Estate market.

My dad purchased our beach house in Haleiwa on Oahu for around $37,000.00 in the early 60's. He sold it for $300,000.00 in the mid 80's thinking he got a good deal. Subsequently, a local realtor picked it up in foreclosure for $600,000.00 several years later and today they still own it and at last count it is appraised for $4,400,000.00. That's over four million dollars! I have always wanted to buy it back but my earnings have never been able to catch up with the appreciation.

My mom purchased a couple of apartment's here about five years ago, she purchased the 1st one at $179,000.00 and then the next one a couple of years later for $300,000.00. They are both exactly the same floor plan in the same building! She almost doubled her money on the first purchase. With the downturn she is still in the "plus" column with both units.

She and I looked about six years ago when they were building Kai Lani at the entrance to the Ko Olina resort. We looked at an ocean front condo for around $600,000.00. We thought it was too much for what it was and passed, (the interiors felt like they were only a little nicer than an apartment interior). Today you can purchase it for $1,200,000.00. So we kicked ourselves and said we wouldn't let it happen again.

My wife and I looked at purchasing at Coconut Grove in Kapalua, Maui around eight years ago. Unfortunately, we didn't have the $1,200,000.00 - $2,000,000.00 to make the purchase back then. We love Coconut Grove and would love to purchase here still today. Unfortunately the $1,200,000.00 units now sell for $3,600,000.00 and the $2,000,000.00 units now sells for $5,300,000.00 - $6,300,000.00. So there is no way we can afford this. The new Ritz Carlton Residences being built next door start at around $4,000,000.00 and go up to $12,000,000.00

Sufficed to say, we have gotten tired of getting priced out of the market.

2 - The Beach Villas:
The Beach Villa's in my personal opinion are the best opportunity that have come along in my budget range. I believe this enough that I have purchased two villas. It is the perfect combination of what I was looking for.
    a) Something upscale that would make my wife happy but at a price point I could afford. She didn't like the Kai Lani units at all, too apartment like. The Beach Villas have travertine floors, Sub Zero and Wolf appliances, etc. so it was appealing to her. What it doesn't have is size. The Coconut Grove units are twice as big as Beach Villa Ko Olina property.
    b) The size of the units and the purchase cost however make the perfect real estate play for the rental market. Where as Wailea Beach Villas in Maui sell for around $4,000,000.00 - $12,000,000.00 each and rent for around $1,200.00 - $2,500.00 per night. Here for a $1,000,000.00 purchase I am receiving nightly rates of between $400.00 - $700.00 per night. So when you look at the purchase cost to nightly rates, the Beach Villa's are a better investment.
    c) With the down turn, the guests we cater to which are the same who purchase, doctors, lawyers, owners of business, etc. are looking for value. These people are now older and have children and where as they would have stayed at the Ritz Carlton or Four Seasons in the past now they need the added space along with value. With children and the need for more than one bedroom, a $400.00 - $700.00 per night spend is much easier on the pocketbook than $1,500.00 - $2,500.00 per night suite at the Ihilani. So in this recession, we can hit the sweet spot with a great value in a luxurious surrounding.

3 - What to buy:
1 - Ocean Front will alway appreciate faster than Ocean View, the back row will not appreciate as much as the front row. So rental income and property appreciation are opposites. If you buy low, you will have better income but less appreciation. If you buy a better view, you will have better appreciation with more enjoyment but less income.

4 - Negative Factors:
Because homeowners are able to rent on their own, prices are all over the place. I spend most of my time working on Beach Villa related items and have managed to keep my rates up where they should be. However, you will run into homeowners who would not be able to make their mortgage payment without rental income, these people will price things at prices that are way under market and who are leaving a lot of $'s on the table. One of my strategies is to let them book up first so that I can receive rates that are fair. The amount of work it takes, the wear and tear, etc. at some price level, we just tell guests no thank you.

Half of the property is sold, when the other half sells, it will put a lot more units on the market for rental which will put downward pressure on prices. However, with Disney moving in and opening in 2011, with their marketing machine, it will rebound. The biggest problem we have in Ko Olina is no one knows about this place. It just depends on if you are willing to ride it out somewhat until the market turns around.

Will you have any choices? On the day of selection, by the time it gets to your turn, there may be nothing left to purchase. The other alternative is that they don't receive enough reservation deposits and they cancel the sale.

5 - Positive Factors:
Kapolei is growing, Disney is moving in, more restaurants and shops are being constructed in Ko Olina. One day, this place will be like Ka'anapali and it will cost a lot more to own here.

Regarding covering your monthly expenses, my personal experience and belief is that this place cash flows better than any other real estate investment I have looked at so far in Hawaii.

We already receive spill over business from people who have stayed at the two Marriott properties in Ko Olina or from word of mouth from others who have stayed in Ko Olina and recommended it to friends. When Disney opens, there might be a temporary sucking sound as they scoop up all of the guests but after that, it will be of great benefit to Ko Olina and our own rental business. I look forward to the Disney addition.

Even after Disney opens, I believe we will continue to be the most luxurious property in Ko Olina.

6 - HOA dues
The HOA dues in our three bedroom are around $1,700.00 per month since it is the largest floor plan. Other 3br are around $1,400.00 - $1,500.00 I believe. The two bedroom runs around $1,200.00 per month. The cable bill is $79.00 which covers phone, cable & internet. The electric bill runs around $350.00 in the two bedroom when the unit is occupied. It runs around $480.00 in the three bedroom when the unit is occupied. I don't know what it runs when it is unoccupied as we have never had a month where we didn't have paying guests.

7 - Management Fees
Typically a management company takes 50% of the revenue albeit at usually high occupancy rates. Here the fees will run much less. However, it will take us longer to achieve high occupancy rates since we don't have a name like "Ritz Carlton" etc. but some day when we are staying full week after week, you'll be keeping most of the $'s which is a good thing.

So:
Keep more of the rental revenue with a higher take off the top = Less money to other people, more $'s in your pocket. This is why we purchased here.
Lower monthly HOA fees = Less money to other people, more $'s in your pocket.
Your purchase price will be around 25% - 35% less than what I paid. Again, less money to other people, more $'s in your pocket.

So, if you wish  to purchase Hawaii Real Estate, from everything I have shopped, the Beach Villa's cash flow the best.

I don't know what the economy will do as I don't have a crystal ball, however, if you can afford to purchase here now, it won't be affordable later based on my own personal experience. (As you can see from my personal Real Estate experience above.)

Conclusion:
Last year, I made my purchases here at the Beach Villas based on my past personal experiences and past lost opportunities without any known hard facts about the property. It was an educated decision. Now the place has been open for a year, hard facts are available and the price is going to drop another 25% - 35%, maybe more. It is much easier to make an educated decision now than when I purchased.

I know the Beach Villa's property like the back of my hand and I know what our hotel guests are seeking.

Mahalo Nui Loa,

Alfred--

--

Please allow me to represent you as your buyers agent on selection day. There is no cost to you and your purchase price is exactly the same. What you select and how much you pay will make a big difference in your profitability; both from an appreciation standpoint and if renting, covering expenses. Afterwards, we can also work together to "get heads in beds".

(All of the thoughts expressed in this blog are my own personal opinion, they are no guarantee that you will achieve similar results, it's just me sharing my own experiences and what has happened in my own situation. I cannot know what will happen in the future.)