If you’re thinking about investing in Hawaii real estate, there are several different methods, each with its advantages and disadvantages. Deciding your goals in advance and being aware of the different investment types can maximize your profits and avoid financial disaster.
Many traditional real estate investors have built substantial cash flow with rental properties. However, this option is not as popular as it used to be for several reasons. First the day-to-day management issues can be overwhelming, especially if you own multiple properties. You can hire a property management company for a percentage of the rent, but you will still need to oversee their activities. Non-payment of rent and damages to the property are significant risks. You can work with Section 8 and rent to low-income tenants with the bulk of the rent paid by the government agency; however, the rent you will receive is often lower than market value, and the property will be subject to stringent annual inspections.
Some real estate investment guides tout the procedure of “mortgaging out” to increase profit from rental investments. In this process, you obtain two mortgages for a total amount greater than the price to buy the property. In reality, such deals are rare. Mortgage standards are tougher for investment properties.
“Flipping” often appears to be a real estate investment tactic that offers quick, maximum profits. However, you must be careful that the property you choose doesn’t have expensive structural problems or hidden problems with wiring or plumbing. You will need to work with licensed contractors to make sure repairs are up to code, and you will need to be familiar enough with procedures to adequately supervise their work. Profits will not be “instant”—if you flip the property less than six months after purchase, you will pay capital gains tax on the full amount of profit. If you hold the property more than six months, you will only owe capital gains tax on 50% of your profit.
Tax sale certificates are sometimes touted as a method for purchasing property below market value. However, most properties are either redeemed by the owner or the lien holder will place a bid high enough to ensure that their interest will be protected. You need to be prepared to pay the full amount of your bid with 24-72 hours of acceptance, and the registered owner may have up to two years to redeem the property. During that time, you will not have physical possession of the property.
Foreclosures and short sales are two other sources of real estate bargains. Properties may be damaged by vandals after sitting vacant, or may be subject to problems from deferred maintenance the former owner could not afford to perform.
Investing in real estate can be profitable. It can also be challenging. It is important to consider both the challenges and the potential profit when planning your real estate investment strategies.