Maui Rentals: Long-Term vs. Short-Term Properties

Maui Rentals: Long-Term vs. Short-Term Properties

  • Mick St John
  • 05/19/23

Many individuals aspire to own rental property in Maui. This article will explore different scenarios to help make informed decisions when entering the Maui rental market. We will examine the distinctions between Long-Term Rentals and Short-Term Rentals.

 

Long-Term Rental Condos

Defining Long-Term

A Long-Term rental refers to a lease agreement lasting a minimum of 6 months. If a condominium complex is not authorized for Short-Term rentals, it automatically falls under the category of Long-Term rentals.

In condominium complexes designated for Long-Term rentals, the Homeowner's Association is prohibited from allowing owners to rent their units on a Short-Term basis. Such violations would be subject to significant fines imposed by the County of Maui.

Consistency

With Long-Term Rentals, property owners or managers have a clear understanding of the monthly income and expenses throughout the rental term. This facilitates accurate forecasting and budgeting. Furthermore, having a tenant under a one-year lease ensures full occupancy for the entire year.

Utilities

Typically, tenants in Long-Term leases are responsible for paying their own utilities, such as electricity, cable, telephone, water, and sewer. However, in some cases, specific utilities may be included in the monthly rent.

Utilizing Your Property

If an owner intends to purchase a rental property in Maui and also spend time there themselves, careful planning is necessary for Long-Term rentals. For instance, if you own a leased condo, you would need to arrange your stay between the end of the current lease and the commencement of the next lease. Some owners have properties both on and off Maui, alternating their residence between the two locations for six months each. These owners seek tenants willing to commit to a 6-month lease.

Another possibility is for an owner to reside in the unit for a period of 1-3 months after the lease term expires and subsequently rent out the unit upon their departure. Various combinations are permissible, as long as the lease term for a Long-Term property is a minimum of 6 months.

Financing

For many lenders, a minimum down payment of 25% is required for Long-Term rental properties under an "Investor" loan. It may be useful to determine the breakeven point of positive cash flow when considering the down payment amount. The following spreadsheet provides an example:

The above illustration demonstrates a scenario where a down payment of $188,000 covers the mortgage amount, resulting in a neutral cash flow.

If the lender's minimum down payment requirement is 25%, the down payment would be $125,000, resulting in negative cash flow for the above example. This might justify a higher down payment than what the lender mandates for an investment property.

 

Overview of Other Spreadsheet Items:

Property Taxes

Currently, long-term rental properties are categorized as "B. Apartment," with a tax rate of $6.31 per thousand dollars of assessed value.

GET

GET stands for "General Excise Tax," which currently amounts to 4.00% of the gross revenue from rent.

HOA

HOA represents the monthly maintenance fee charged by condominium and subdivision associations, also known as AOAO (Association of Apartment Owners).

10% Commission

A fee typically charged by Long-Term Rental Management Teams. If you reside on Maui, you can choose to manage the unit yourself. However, if you live off the island, an "On-Island Contact Person" is required, someone the tenant can reach out to in case of any issues. It is generally recommended to engage the services of a professional management team if you live off the island. They handle tasks such as advertising, applicant screening, tenant selection, rent collection, remitting net rent to the owner, conducting lease-end checkouts, and verifying unit condition.

Interior Insurance

Since Homeowner's Insurance is generally included in condominium association fees, it is advisable to obtain Content or Interior Insurance. This coverage protects your personal belongings in the unit, such as appliances and furniture.

Cap Rate

Cap Rate, short for Capitalization Rate, measures the return on investment in terms of rental income. It is calculated by dividing the net yearly rent by the purchase price. Mortgage payments are not factored into Cap Rate calculations.

 

Short-Term Rental Condos

Defining Short-Term

A Short-Term rental refers to a lease agreement lasting less than 6 months. These rentals are commonly used for vacations and are often booked through platforms like Airbnb, VRBO, and travel agents. Short-Term rentals can also be leased on a long-term basis.

Consistency

With Short-Term Rentals, owners or managers have a clear understanding of monthly income based on reservations received. However, expenses fluctuate depending on occupancy and rental income. Forecasting and budgeting are approached on an annual basis rather than a monthly basis. While income from short-term rentals can be higher, expenses and occupancy levels can also vary from 75% to 90% throughout the year. As a result, short-term rentals may exhibit less consistency compared to long-term rentals.

Utilities

In the case of Short-Term rentals, the property owner typically covers utilities such as electricity, cable, telephone, water, and sewer.

Utilizing Your Property

Many owners enjoy the flexibility of booking their own units when visiting Maui. However, owners must adhere to specific rules and regulations concerning the use of short-term properties. It is advisable to consult with a CPA and/or attorney to ensure compliance.

Financing

For many lenders, the minimum down payment for a short-term rental property can range from 25% to 30% or even higher, depending on the specific complex. Determining the breakeven point of positive cash flow can be helpful when considering the down payment amount. It's important to note that short-term rental properties are typically evaluated on an annual basis, rather than monthly, as in the case of long-term rentals. The following spreadsheet provides an example:

The above example demonstrates a scenario where a down payment of $263,500 covers the mortgage amount, resulting in a neutral cash flow. This down payment represents approximately 55% of the purchase price.

Overview of Other Spreadsheet Items:

Property Taxes

Currently, short-term rental properties are classified as "K. Short Term Rental," with a tax rate of $10.75 per thousand dollars of assessed value.

TAT

TAT stands for "Transient Accommodation Tax," which currently amounts to 10.25% of the gross revenue from rent.

GET

GET stands for "General Excise Tax," which currently amounts to 4.00% of the gross revenue from rent.

HOA

HOA represents the monthly maintenance fee charged by condominium and subdivision associations, also known as AOAO (Association of Apartment Owners).

20%-40% Commission

An amount typically charged by Short-Term Rental Management Teams. This fee is included in the difference between the Gross Rent Per Year and the Net Rent Per Year. If you reside on Maui, you have the option to manage the unit yourself. However, if you live off the island, an "On-Island Contact Person" is required, someone the tenant can reach out to in case of any issues. It is generally recommended to engage the services of a professional management team if you live off the island. They handle tasks such as advertising, applicant screening, tenant selection, rent collection, remitting net rent to the owner, conducting lease-end checkouts, and verifying unit condition.

Interior Insurance

Since Homeowner's Insurance is generally included in condominium association fees, it is advisable to obtain content or Interior Insurance. This coverage protects your personal belongings in the unit, such as appliances and furniture.

Cap Rate

Cap Rate, or Capitalization Rate, measures the return on investment in terms of rental income. It is calculated by dividing the net yearly rent by the purchase price. Mortgage payments are not included in Cap Rate calculations.

 

In conclusion, if you're ready to take the next step in owning long term or short term zoned real estate in Maui and exploring the exciting opportunities it offers, now is the time to act. Whether you're interested in long-term or short-term rentals, our team is here to guide you through the process and help you make informed decisions. We have the expertise and knowledge to navigate the Maui real estate market and find the perfect property that aligns with your goals. Don't miss out on the chance to own a piece of paradise and experience the benefits of investing in Maui real estate. Contact us today to start your journey towards owning your dream property. Together, we can turn your vision into a reality.

 

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