Condominium Ownership on The Big Island

Condo ownership on the Big Island for vacation rental purposes is very popular on the west side of the Big Island. From north to south, vacation rental condos are located in the Mauna Kea Resort, the Mauna Lani Resort, the Waikoloa Beach Resort, Waikoloa Village, Kailua-Kona and Keauhou Kona. If you do not reside on the Island where your vacation rental is located, State law requires you to have on-island property management. Since Kailua-Kona is a retirement destination of many (and has been for years), and also because there are many mainland investors buying property in hopes it will appreciate in value, property management has become a big business over here. I don’t like to recommend any particular company because nobody I have ever talked to is completely satisfied with the company they chose. The best thing to do is call a few and ask to see copies of their management contract so you can compare them and look for hidden charges. There are 45 property management companies listed in the phone book under Real Estate Management. Please email me for additional information on vacation renting condominiums on the Big Island.
The question I am asked the most about condos is whether they will at least break even. That all depends on the size of the down payment you make (because mortgage interest is your biggest expense). No one has a crystal ball, so I can’t say for sure that you are going to make a profit, go in the hole or break even every month, but based on my clients past experience, you need to put down at least 30% to 40% to just break even. This is something you should have an accountant figure out for you. Since rents don’t go up proportionately with the cost of a condo, more expensive condos would require a larger down payment. Paying cash is the only sure way to make a profit on a vacation rental condo.

As an investment, however, even if you have to put a few hundred dollars in every month, name me another investment where someone else pays $500 to $1,500 of your investment costs per month. As an example, let’s say you took out a $250,000 equityline on your present home and used that money to buy stock; you would have to make that entire mortgage payment yourself. But if you take out a mortgage to buy a vacation rental, the renters are paying a portion, if not all, of your monthly mortgage costs, maintenance fees, insurance, etc., thus adding to your equity in the property. So even if you sold the unit for what you paid for it, you would still make a profit from all the accrued equity over the years. But odds are, over the long haul, that whatever you purchase on the Big Island now, will be worth more someday in the future. Over the last 50 years prior to the current financial crisis, even though the market fluctuated up and down every ten years or so, in the long run, prices have steadily increased. So you could make an additional profit from the appreciation on the property someday; although you might have to wait ten years to do so.

What is covered by the monthly Condominium Association of Homeowners maintenance fees varies greatly from one complex to the next. The maintenance fee is the same whether you live in the unit or rent it out. The maintenance fee is determined by vote of the Association of Apartment Owners for purposes of paying all the bills of the Association. Most cover basic hazard, hurricane and liability insurance for the buildings and common areas. However, you need insurance for fire, theft and liability within your unit. It’s called Condo Owner’s Insurance. For a quote, call any of the larger insurance companies listed in the phone book. Most Association maintenance fees also cover, water, Association management, landscaping, pool maintenance, roofs and exterior painting and repairs to the common areas as well as common area property taxes. These things are pretty standard. Anything else that is covered varies greatly from complex to complex depending on what the Association of Owners has voted to authorize. Other inclusions could be basic cable, air conditioning, garbage pick-up, resident manager, and in rare cases, front desk service, electric, propane and solar hot water. Since the people who set the fees are all the condo owners, you can be sure they are trying to keep costs to a minimum, and a majority of the owners approved the budget. And of course, no one is making a profit. Any excess fees collected go into the Association’s Reserve Fund to cover future, unexpected, expenses. From time to time, if the treasurer reports that the reserve fund is running short, or expenses are rising due to inflation, the association may vote to increase the maintenance fee or charge a special assessment. This could be every two or three years or even longer; or it could be two or three times a year depending on the need.

Property Management for the Association is different from Vacation Rental Management. The Association’s property management company is paid by the Homeowners Association to take care of the day to day business of the entire condominium complex. They hire & fire maintenance workers and write their checks, pay the Association’s bills, hire the accountants to keep the Association’s books, etc.. The Association pays for this service from part of the monthly maintenance fees charged to individual unit owners. The company the Homeowner’s Association hires to manage its affairs is totally separate from the company you hire to vacation rent your condo.

Vacation Rental Management for your individual unit is done by a company you hire for this purpose. Some complexes have on-site vacation rental management available, usually by a franchise resort company like Castle Resorts or Outrigger. But for most condo complexes you will have to choose from one of the 45 off-site companies listed in the phone book. For off-site management, commission costs can range from 20% to 35% of the total gross in bookings. The vacation rental management company hires the cleaners between tenants but sends the bills to you for payment. Some companies may pay the cleaners but the commission is then higher. That’s why it pays to interview several different companies. On-site management usually takes 40% to 55% of the gross but includes daily maid service just like a hotel. Because on-site management companies can rent by the day, even though their commission is higher, your monthly net can be about the same as it would be for off-site management. Your rental manager should also take care of emergencies inside the unit like a burned out microwave or stopped up toilet, and bill you for the cost of repair, etc. They justify their percentage by advertising your unit, booking it, making sure the tenant gets keys and they get the keys back, keeping records of bookings and sending you checks for your share less expenses. Advertising is Vacation Rental Management’s biggest contribution. If they have a great web page and advertise in mainland magazines, then they will keep your unit full. The nightly or weekly rent you can actually get for your unit will depend on whether it’s a studio, one, two or three bedroom, what complex it’s in, how close to the ocean it is and how great the view is.

Some complexes have a Resident Manager. This is a person who usually gets free rent at the complex so he can oversee the goings on and make sure no one breaks the rules, etc. He may do light maintenance or gardening, field complaints, answer phone calls and generally make sure things run smoothly around the complex. He doesn’t collect rents or deal with your vacation renters except to tell them to quiet down after 10PM and stop their kids from running around the pool.

Speaking of pool, as discussed above, some complexes have national or international hotel chains running a front desk. Individual unit owners who do not want to contract with their own Vacation Rental Management company can simply sign up with the in-house vacation management company. If you get only the rent that your personal unit pulls in, then you are NOT in a rental pool. A true rental “pool” is when ALL the rents from ALL the units are “pooled” and then divided evenly among all the pool members. As far as I know, only Kona By The Sea is operated as a true rental “pool”. The Condominium Association By-laws at Kona By The Sea requires all owners to join the pool and forbids them from hiring outside vacation rental management.

When you purchase a condo on the Big Island, in Kona, Kohala or Hilo, or any property for that matter, you have time to investigate all pertinent facts (usually two weeks). For a condo, within the first 10 days of escrow, you will receive all the condominium documentation including minutes of the last couple meetings of the Association and Board of Directors, the reserve study and all the public reports, house rules, insurance summary, etc. You then have a week to go over this material, show it to an attorney if you like, and decide if you want to go ahead with the purchase. If you decide not to proceed, then the escrow is canceled and you get your deposit back.