Tips For Purchasing Rental Property on Maui (Part 1 of 4)

This blog series will focus on our personal journey purchasing four properties on Maui.

Having lived in Hawaii from 1978 till 1983, I was very familiar with how exciting it is to live on Maui. It was necessary for me to move back home (upstate NY) in 1983, and work in the family log home business.

In 2011, both of our children graduated from college, and we decided to take a trip to celebrate. I had told them all of their lives how beautiful Hawaii is, and we made Maui our trip destination.

We had always considered purchasing property on Maui, but it always seemed to be a goal that was out of our reach. With the trip being planned approximately 6 months in advance, my wife and I decided to investigate the possibility of purchasing rental property.

Step #1: Familiarize Yourself with Maui Real Estate

The first thing we did was to find a real estate Broker to help us. One of my friends on Maui referred us to a Broker he knew. Next, we found a website that would help us become familiar with property and pricing on Maui. After spending some time becoming familiar with Maui property, we came up with several goals to help us narrow down our search:

1. The property would be newer
2. The property would need to be rentable
3. Rental income from the property would need to provide positive cash flow

 
Our Realtor had put us in touch with a mortgage Broker who helped us determine our budget, and he pre-approved us for a mortgage. Having an idea of what our budget was in terms of a mortgage helped us to narrow down our search.

We were also able to determine what price range tenants were paying in rent for properties in our price range. As we were looking to purchase a property to rent out, we found we were able to utilize approximately 70% of the net appraised rental income to help us qualify for the mortgage. We had determined to look for properties that qualified as “long term” rentals, which means the lease has a minimum of 6 months in lease term.

Step #2: Obtain a Down Payment

The next issue was where to obtain down payment funds. Since we were looking to purchase a property to rent out, the financing at that time required a 30% down payment. At this point, we re-visited and refined our three previously stated goals:

1. (Newer) It would appreciate in value
2. (Rentable) Someone else would be paying for the property
3. (Positive Cash Flow) We would need an appropriate down payment

 
We made the decision to put down approximately 50% (rather than the required 30%). Not only would this provide better positive cash flow, but would also provide a buffer to handle potential market/economy fluctuations.

The decision was made to target a budget between $300,000 and $350,000. In order to obtain the funds for the 50% down payment, we decided to look at re-financing our existing home in upstate NY. We realized that interest rates had dropped considerably, and when we looked at the re-fi process more closely, we found that we could cash out the required down payment, and have just about the same payment because of the difference between our old interest rate and the new rate.

Now we were armed with a good sense for the Maui market, where we stood with financing, and availability of down payment funding. It was time to go to Maui!

Step #3: Find Your Ideal Property

After arriving on Maui and meeting our Realtor, we looked at several properties. We decided to write an offer on a unit at Kai Ani Village in Kihei. It is a 2 bed, 2 bath condominium with a 1-car garage. It was brand new, and we were purchasing directly from the developer. The purchase price was $322,400, which was right in the middle of our projected budget range. The offer was subject to our being approved for a mortgage for the property, as well as being subject to the refinancing of our existing loan back home.

We had taken the time to be pre-approved from both lenders. Being pre-approved means that an application was actually filled out and submitted to both lenders. This differs from being “pre-qualified”, which is generally information conveyed without an actual application being submitted. Being pre-approved by your lender carries much more weight when submitting a purchase contract to a seller.

We closed on the Kai Ani Village property in about 4-5 weeks. The resulting numbers are as follows:

• Purchase Price: $322,400
• Approximate Total Monthly Expense: $1,623.00
• Approximate Monthly Rental Income: $2,350.00
• Approximate Positive Cash Flow: $727.00

More Information

Be sure to read my blog “Purchasing Rental Property on Maui – Part 2” to see how we structured our second purchase on Maui! For more information regarding real estate on Maui, contact:

Rick Wyffels, Realtor-Broker
808-495-6092
rickwyffels@hawaiilife.com