April to June 2016 Quarterly Newsletter

Oahu median sales prices for single family homes and condos surged to new records in June. The median price for single family homes rose to $760,000 (8.6% higher than June 2015) and the median price for condos climbed to $405,500 (19.8% higher than June 2015). Demand remained strong and the supply continued to be limited. There are currently 3.0 months of inventory for single family homes and 3.1 months of inventory for condos. Competition for more “affordable” properties should remain intense since only 39% of the available single family homes and only 43% of available condos are asking less than the current median sales price.

 

The Economic Research Organization at the University of Hawaii (UHERO) predicts that Oahu’s economy should continue to grow incrementally over the next couple of years. Construction enjoyed a strong year fueled by Kakaako condos, rail, and commercial projects and is currently near its cyclical peak with job counts climbing past its previous record. Personal income grew about 3.5% last year and is expected to grow by another 2% in 2016. UHERO predicts that private health care will be one of the strongest industries over the median term as Oahu’s population continues to age. Tourism should experience incremental gains as a strong U.S. economy will help offset a struggling Japanese economy and slowing Chinese economy. A strong U.S. dollar will put more pressure on foreign spending. Budget pressures will limit state and local government’s job growth. The largest challenge that Oahu currently faces is the rapidly rising price tag of the Honolulu Authority for Rapid Transportation’s (HART) struggling rail project.

 

Tracey Stott Kelley was recently recognized as only one of 15 real estate agents in Hawaii for remaining in the top 100 selling agents over the last ten years. Thank you to all of our clients who helped make 2015 another successful year.

 

A Mixed Plate of Talk Story

 

An iconic radio partnership ended on May 15th after 33 years on the morning airwaves as Hawaii’s top rated program. Larry Price announced that he will be leaving the “Perry & Price Morning Show” and launch a new sports show with Rick Hamada on FOX Sports 990. Michael W. Perry will continue hosting the morning radio show solo.

 

Hawaii’s tourism industry received another boost as Virgin America started daily flights between Los Angeles International Airport (LAX) and Honolulu International Airport on May 5th. Additional flights between LAX and Kahului, Maui began on June 14th.

 

Hawaiian Airlines is offering a new and innovative way for passengers to upgrade to first-class for less money. Bid Up, Hawaiian’s new program, allows passengers whose itinerary includes a leg between Hawaii and North America to bid for available first-class seats. Eligible fliers will receive a Bid Up e-mail about 10 days prior to their departure and the winning bidders will be notified 48 hours prior to their departure.

 

Hawaii Gas, the state’s only regulated gas utility, has reduced its estimate for a new liquefied natural gas (LNG) terminal by 1/3 to $200 million. An 18-month study showed that Oahu electricity customers would have saved $132 million in fuel costs by switching from oil to natural gas. The Hawaii Public Utilities Commission recently approved Hawaii Gas’s application to increase LNG deliveries from one LNG container a month to two LNG containers per day. Hawaii Gas recently announced that it saved Oahu customers about $50.8 million in 2015 by using gas energy instead of electricity generated from oil. Oahu would have needed approximately 861,000 barrels of oil for electricity to generate the same energy that was generated from synthetic natural gas and propane. Synthetic natural gas and propane are cleaner burning fuels and the production process is about 85% efficient versus the 32% efficiency from electricity generated from oil. Governor David Ige has argued against the money saving projects because he feels that the efforts would distract the state from his goal of providing 100% of the state’s electricity from renewable sources.

 

Hawaiian Electric Company’s (HECO) response to some vocal proponents of increasing roof-top photo-voltaic (PV) system caps would make a classic case study in the social costs of state sponsored monopolies. Hawaii regulators, who capped the net metering regime for rooftop solar to current customers, concluded that customers without PV subsidized the cost of maintaining the grid for customers with PV. Alan Oshima, president and CEO of HECO had several enlightening quotes during a Pacific Business News panel discussion. He describes people without PV as “stranded customers.” He goes on further to state that “everyone in this space has to contribute to a 100 percent future. Let’s change the conversation if we truly are working together. We have to understand that. I don’t think there’s an understanding of that. The clean energy initiative put the onus on the utility to get to 100 percent. We all have the responsibility, not just the electric utility.” Since HECO is the only game in town, Oshima does not need to figure out how to integrate the customer’s choice of power generation, just limit it. He is simply able to tell his critics to toe the line because the state of Hawaii has put the renewable energy burden on HECO’s shoulders. Oahu’s customer base is witnessing first-hand how a state sponsored monopolist limits the supply of a popular power generation alternative (PV) to protect its profit margins. Maybe the state should take a look at closer look at separating the electrical distribution business from power generation, open the maintenance of the grid to competitive bidding, and open the power generation market to the most efficient providers (in this case, individual households).

 

Hawaii businessman, Duane Kurisu, will team up with the state of Hawaii and the City and County of Honolulu to develop and operate an affordable housing project of 200+ units, named Kahauiki Village, on reclaimed land off Nimitz highway between Keehi Lagoon Park and Sand Island. The Board of Land and Natural Resources (BLNR) has approved a plan where the city takes ownership of the 13 acres of land and will lease it to Kurisu for ten years with an option to extend the lease for another ten years. The land rent will be $1 per year. The homes, a collection of single-family-homes and duplexes, will be rented to families in need of shelter for $500 per month and the families will be responsible for utility costs. The wife of former Gov. Ben Cayetano, Vicky Cayetano, will offer all adults living at Kahauiki Village employment at her company, United Laundry. United Laundry is only a few minutes away on foot from Kahauiki Village. Duane Kurisu will take all financial risks for the project and his foundation will be in charge of the village’s operations.

 

Political drama surrounding the Honolulu Authority for Rapid Transportation (HART) reached a fevered pitch in April with Ernie Martin, Honolulu’s City Council chairman, called for the resignation of HART Board Chairman Don Horner and HART Executive Director Dan Grabauskas for failing to contain cost overruns associated with the struggling rail project. Don Horner, a volunteer, decided that he no longer needed the negative attention and resigned days afterwards. In his resignation letter to Mayor Kirk Caldwell, Horner stated, “too often in politics, the focus becomes shooting the messenger of unpleasant news rather than collaboratively working on solutions.” Former U.S. Representative Colleen Hanabusa was named Don Horner’s replacement and then announced that she would step down a month later to run for the Congressional post vacated by Mark Takai. A financial audit released on April 15th to the Honolulu City Council was extremely critical of HART by saying that the agency was using outdated financial figures and that the latest estimates of how much over budget the project is most likely too low and will climb as time goes on. Mayor Kirk Caldwell has failed to distance himself from the project.   Hawaii columnist David Shapiro reminded newspaper readers that Caldwell made himself the “point person” on rail when serving as Mayor Mufi Hanneman’s managing director. Kirk Caldwell led the campaign to convince wary taxpayers that the project should be approved with unrealistic cost projections and construction timelines.

 

Mayor Kirk Caldwell is in full panic mode as the election season started heating up in June and the over-budget rail project continues to dominate the headlines. He is currently trying to compound the problems with the project by proposing that it end several miles short of the planned Ala Moana destination, essentially making the rail system a useless white elephant. The City and County of Honolulu and HART could not have orchestrated a bigger mess if they tried. The first, and possibly fatal mistake was to start the project out in Kapolei versus Ala Moana. Had the project started in the other direction, and the transit route had to be shortened, commuters could have boarded rail to avoid the heavily congested downtown Honolulu commute. Now, commuters who would want to take rail will essentially follow a more complicated option than what The Bus already offers. At this point, cooler heads would help see the project through as planned even though taxpayers will face a much higher bill. Voting does have its consequences.

 

We attended an event held by Pacific Business News on June 17th titled Windward Oahu Means Business. The event featured five panelists who answered questions from the moderator and from the sold out audience. The most sought out member of the panel was Alexander & Baldwin’s director of asset management who announced that Lau Hala Shops, a collection of shops and restaurants, should be completed in late 2017 in the downtown Kailua building that Macy’s vacated. A & B expects new tenants to move into the complex in early 2018. Other topics included the highly contested vacation rental debate, challenges associated with the homeless, and the thriving feral chicken population in downtown Kailua. Tracey and Tim even admired a gorgeous looking feral rooster on our way back to the office from the event.

 

The State of Hawaii Department of Land and Natural Resources recently updated its hawaiitrails.org website which also has a mobile-responsive design. Tim briefly navigated the site and it looks pretty useful for locating and planning hikes. So next time you are in Hawaii and someone tells you to “Take a Hike,” you know which website to visit.

 

Solar Impulse 2, the solar powered plane that arrived from Japan on July 3rd of last year departed Honolulu on April 21, 2016 and arrived at Moffet Field in Mountain View California on April 24, 2016. The pilots, Bertrand Piccard and Andre Borschberg, have logged over 317 hours in the air and traveled over 24,000 km in their quest to travel around the world using the sun’s energy. The plane stayed in Hawaii over the winter to repair the batteries and to wait for longer days before making the trip to California. The plane then completed the next leg of their flight from Mountain View, CA to Phoenix, AZ on May 2nd and 3rd.   You can continue following the pilots’ around the world quest at www.solarimpulse.com.

 

Have you ever wanted a pet donkey? The Humane Society and Big Island residents are rounding up the last 50 of approximately 500 wild donkeys that have been living off the land (golf courses, residents’ yards, etc.) since being released from Hawaii coffee and agricultural plantations decades ago. The feral donkey herd went unmanaged for about 40 years when drought conditions forced the donkeys into residential areas in search of water. The animals wandered on roads, tore up golf courses, and drank from swimming pools. The Humane Society has found adoptive homes for about 450 of the animals and about 40 of the remaining 50 have already been spoken for. The donkeys must be adopted in pairs or have another animal to keep them company because they are very social animals and need a friend. Doesn’t everybody need a friend?

 

The local alcoholic beverage industry continues to be a bright spot in Hawaii’s business community. Maui-based Kolani Distillers signed a contract to stock Hawaii Wal-Mart shelves with their Old Lahaina Rum this summer. Kolani Distillers was the only company from Hawaii to win a contract from Wal-Mart’s Open Call for U.S.-based products. Kauai-based, Koloa Rum Company, won four gold medals at the 2016 Miami Rum Renaissance Festival for its Kauai White Rum, Kauai Gold Rum, Kauai Dark, and Kauai Spice Rum. It won a “Best in Class” gold medal for its Kauai Coffee Rum. Maui Brewery Company recently redesigned their beer cans through a collaboration with a Polynesian tattoo artist who created new icons for their beers, raised their brewing capacity to 100,000 barrels per year, and is on track to brew and sell 45,000 barrels in 2016. The company plans on expanding its offerings to include sodas, ciders, and meads. Maui Brewery Company’s recently renamed Coconut Hiwa Porter is one of Tim’s favorite beers. The developments continue a trend of strong growth in Hawaii’s local brewery, wine, and spirits industry.

 

Looking for great pizza and beer during your next visit to Oahu? J.J. Dolan’s, a downtown Honolulu pub, continues to rack up awards for the best tasting pizza in the state. Not in the mood for pizza, try Me’s Bar-B-Que, a Korean barbecue restaurant in Waikiki. It just landed on the culture website Thrillist’s 2016 list of “The 33 Best BBQ Joints in America.”

 

Hawaii fun fact: On average, each person in Hawaii consumes five cans of SPAM per year. Seven million cans of SPAM are sold in Hawaii every year, making the state Hormel’s #1 market for SPAM. The Waikiki SPAM Jam was held on April 30, 2016 to celebrate Hawaii’s continuing love affair with the canned meat.

 

Odds & Ends

 

Multi-Generation Homes: Hawaii has historically had a significant number of homes with adult children living with their parents. This type of living arrangement is becoming more common throughout the United States for economic reasons that have prevailed on the islands for decades. The Pew Research Center analyzed census data and reported interesting and for some, alarming data concerning the living arrangements of young adults.

 

For the first time on record, living with parents is the most common arrangement for people ages 18 to 34. Nearly one-third of all millenials live with their parents, a slightly higher percentage than those adults that live with a spouse or partner. It is the first time that more young adults live their parents than those that live with a spouse since statistics were first tracked in 1880.

 

The most common reasons cited by economists may sound familiar to Hawaiian households. Higher housing prices and escalating rents coupled with stagnant wages have “forced” young people to move back home and save enough money to start out on their own. Additionally, young people are waiting longer to get married as they place education and careers ahead of raising a family. Today, the average women gets married at 27.1 years and the average man marries at 29.2 years (compared to 20.1 years for women and 22.5 years for men in 1956). Part of the reason that older adults have not sold their family homes to downsize for retirement is that they still have adult children living with them. Approximately one-fifth of homeowners age 55 to 64 still have adult children living at home.

 

Looking forward to an empty nest? Statistical trends suggest that you may have to wait a little longer than you initially planned.

 

Revisit Hawaii Property Goals: We have talked to many owners over the years that have decided to rent or sell after realizing that the original reason for owning their Oahu property no longer applied. The reasons for owning property vary from holding onto a piece of paradise after moving in the hopes of returning to buying a 2nd home. In some cases, these properties are left vacant.

 

What holds for financial best practices can also be applied to real estate since real estate can be used for more than just holding a roof over our heads. We recommend evaluating the value that your Oahu property provides every couple of years to make sure that the property’s current use still applies to the your short and long-term goals. Value can be emotional in addition to financial. For example, some people continue renting an inherited childhood home because it reminds them of fond memories and provides a connection to the Hawaii that they want to hold onto. If a quick assessment confirms that the property still aligns with your goals and desires, then stay the course.

 

Some people discover that they no longer visit as often as they used to because of work or family. Others realize that they will not retire on Oahu. Still others, are not quite sure what the right answer is. If you find yourself in one of these situations, then we can provide market information to help with a decision. Armed with that information, you can then decide if holding onto a vacant property makes more sense than generating funds for new ventures.

 

One client decided that she wanted to sell her condo and use the cash proceeds to pay for family vacations with her children and grandchildren. Other clients decided to start renting a property that they no longer visited and wanted to generate cash flow for their children’s education. Please call (800-922-6811) or e-mail (home@stott.com) us if you would like our assistance.

 

Property Management Guidance

 

Background: Stott Real Estate, Inc. conducts business as Stott Property Management for managing residential rental property. The two divisions have separate staffs and share the same office. Tim Kelley is the Principal Broker of Stott Real Estate, Inc. and runs Stott Property Management. Karen Texeira is the senior member of the staff and has been with the company for over 20 years. Stott Property Management currently manages approximately 415 rental units on the island of Oahu.

 

There are many superb Property Managers (PMs) on Oahu. Any negative comments made in this article are not directed at PMs as a group. That being said, many of our clients had previously used another PM before hiring us. The article discusses common errors made by Owners and/or their PMs. The article is designed to help Owners increase their rental income by learning from the mistakes of others.

 

Absentee Owner Managing Property: By far the biggest mistake that we witness on a regular basis is an Owner trying to manage a rental property while living thousands of miles away. The Owner does not typically have a good understanding of the Landlord-Tenant Code (Hawaii’s laws governing residential real estate), must rely solely on the tenant to maintain the property, and does not have the time and resources to address problem tenants. The attorney that we use for evictions states that most of the difficult and expensive legal problems that he is hired to help solve involve Owners acting as a PM that are not familiar with the Landlord-Tenant Code and property check-in/check-out procedures. Tim Kelley and Tracey Stott Kelley do not even attempt to manage their mainland rental properties despite their years of experience. They have two PMs managing their investment real estate portfolio.

 

Additionally, The State of Hawaii requires an absentee owner to obtain an on-island representative to manage the property. We have witnessed a number of knowledgeable tenants create expensive headaches for Owners that have tried to manage a property themselves.

 

Poor or Inadequate Tenant Screening: The best way to deal with problem tenants is refusing to allow problem tenants to move into a property. Stott Property Management requires every adult applicant to fill out an application and then checks the following: Credit Score, Employment, Previous Landlord References, and State of Hawaii Court Records. By carefully screening tenants, Stott Property Management helps minimize tenant caused problems and protects their clients from arbitrary discrimination complaints. Failure to properly screen tenants can result in several months of lost rent and thousands in legal fees to correct the situation.

 

Improper Check-ins and Check-outs: The State of Hawaii requires a Tenant to return the property to the Landlord in the same condition that the property was in at the time the Tenant checked in minus normal wear and tear. “Normal wear and tear” does not include dirt. One common pet peeve of Investment Property Owners involves being charged for cleaning when a property is being made ready for the next tenant. If a property was clean at the time of check-in, then any cleaning required after the tenant checks out should be paid for by a portion of the tenants’ security deposit. The only time an Owner should pay a cleaning bill would be if light cleaning was required because maintenance was conducted in a vacant property, or if a property was vacant for more than a month.

 

The Landlord-Tenant Code requires that the Landlord must obtain a signed Property Inventory and Condition Form from the tenant at the time of check-in in order to withhold any funds for tenant caused damage after the tenant checks out. If the Landlord withholds all or a portion of the funds, then the Landlord must mail the prior Tenant a letter stating the charges, provide copies of estimates or bills from contractors, and provide a check for any remaining funds within 14 days of the check out. Stott Property Management has witnessed the small claims court judge order a Landlord to return the security deposit in full for failure to have a signed Property Inventory and Condition Form or meet the 14-day requirement even though evidence of tenant caused damage was presented in court.

 

Failure to Conduct Routine Inspections: A quote that is often used in leadership also applies to rental properties. “It is not what you expect, it is what you inspect.” Stott Property Management has taken over many rental properties that were not inspected because a “great tenant” was living there. It appears that the definition of a “great tenant” to a few PMs and/or Owners is a tenant that stays for an extremely long time and pays their rent. The Owner is then shocked to find out that these tenants trashed their property when they did finally move.

 

Landlords must regularly inspect properties in order to maintain the properties in good condition. Over several years, normal wear and tear will turn a clean and desirable rental property into a run down looking home that fails to attract good tenants. Failure to identify and address regular maintenance items like painting, replacing worn out flooring, and repairing small leaks can and will lead to lost rent and more expensive repairs in the future.

 

Failure to Charge Market Rent: In general, rent will increase over time at the rate of inflation. One common mistake that Owners make is charging below market rent to friends and family. One common misconception that some Owners have is the thought that the tenant will be grateful for being able to rent a property for several hundreds of dollars below market rent every month. These very same Owners are then dismayed when their financial situation changes and they must either sell the property or ask the Tenant to move and the Tenant becomes a problem. Instead of receiving gratitude for their charity, the Owners receive scorn for taking away a rental subsidy. If you feel compelled to help someone out, we recommend writing a friend or family member a check for an amount you are comfortable with. You will enjoy the benefits of providing a gift without the liability of offering a subsidy for an indefinite period of time.

 

Another common mistake that some PMs and Owners make involves failing to increase the rent that a long-term tenant pays when market rents have risen. Stott Property Management has seen some tenants paying half the market rent for a property because a PM or Owner has failed to raise the rent on a tenant that has lived in a property for ten years or more. Stott Property Management compares the actual rent to the market rent every time a lease is about to expire and then makes recommendations to their clients when, in their opinion, a rent increase is warranted.

 

Tenant Repairs: Asking or allowing a tenant to conduct repairs on a rental property in lieu of rent almost always ends up in failure. The reasons behind the problems include failure to define and document the scope of the work for the agreed upon rent credit, the tenants lack of skill in completing the repair, failure to inspect the final work product, or a combination of these reasons.

 

We have witnessed some Property Managers make the same mistake as Owners. We have even spoken to one Owner who allowed a “handyman” to move into his property to conduct repairs and then had to evict this same “handyman” who lived in the property without completing any work over the span of several months. The Owner had to bear the costs of an eviction for a tenant that never paid any rent.

 

Befriending Tenants: Some Owners make it a point to become “personal friends” with their tenants. As a result, they tend to stop treating their rental property as a business and end up losing money by failing to make difficult decisions that negatively impact their “friends.”

 

Asking Above Market Rent: One of the biggest myths in investment real estate is the idea that a property will attract better tenants by simply raising the asking rent. In most cases, the best-qualified tenant prospects are also the most informed tenant prospects. In order to successfully compete for well-qualified tenants, a landlord must offer a competitive asking rent. Typically speaking, the only tenant prospects that apply for a rental charging over market rent are those people who have limited options due to poor credit and/or poor rental references.

 

Instead of attracting the best tenants in a reasonable time frame, the landlord ends up with longer than normal vacancy rates, lower quality tenants, and typically higher turnover. Since vacancy periods, problem tenants, and turnover expenses cost landlords more than standard repairs, overpricing a rental should be avoided.

 

Fully Furnished Apartments: Unless an owner lives in a property for part of each year, or the property is located in a high-end tourist destination, furnishing an apartment makes it more difficult to attract quality long-term tenants. Most people looking to rent long-term have their own furniture. The additional costs and headaches involved with maintaining the furnishings typically result in lower cash flow.

 

Pets: Allowing pets will increase the number of prospective tenants and often enables an owner to get a higher rent while retaining carpeting that otherwise would need to be replaced. Recent changes in Hawaii’s statutes regarding comfort animals and pet deposits increase the incentives for allowing pets. Tenants with pets will often agree to pay the higher rent and live with the old carpeting if the owner will allow pets.

 

Remodeling: Location and views have the largest impact on market rent. In general, tenants look for clean and functional square footage in neighborhoods that meet their needs the best. Installing granite countertops, high-end cabinetry, hard wood floors, high-end appliances and bathroom fixtures do not provide a sufficient return on investment. Since the State of Hawaii limits a security deposit equal to one month’s rent, one careless tenant could end up causing thousands of dollars in damage to a high-end remodel.

 

If your property shows signs of wear and tear, a coat of fresh paint and decent rental grade carpeting should be sufficient to attract quality tenants. If you don’t want to replace the carpet every five to seven years, then consider installing ceramic tile. Don’t replace “dated” cabinetry and countertops unless they exhibit major functional problems (i.e. stuck drawers, rotten wood, broken hinges that can’t be repaired).

 

Discrimination: Federal and State Laws prohibit turning down a potential tenant due to race, color, national origin, religion, sex, familial status, or handicap. Some owners of high-rise condos have voiced concerns over the safety of small children and the risks of falling. Even though those concerns may be valid, turning down an applicant with small children for that specific reason violates the law.

 

The U.S. Department of Housing and Urban Development (HUD) has extended protections to handicapped people with assistance animals. “Conditions and restrictions that housing providers apply to pets may not be applied to assistance animals.” A landlord must allow a service animal if a disabled tenant applies and qualifies for rental that does not allow pets. In the latest wrinkle, HUD has effectively eliminated the landlord's right to refuse renting to convicted felons. Under disparate impact, HUD has decided that refusing occupancy based on criminal background checks unfairly impacts certain races since they make up a disproportionate percentage of inmates.

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