8 Steps to Buying a Home in Hawaii

Buying a home in Hawaii may probably be the closest thing you can do to living in paradise. The warm weather and beautiful people make it more attractive to jump on a plane and cross the Great Pacific. However, as enchanting and majestic a place the Aloha State is, buying a house in Hawaii is not as easy as it seems. 

We have outlined specific steps and some important things every buyer should know about buying a home in Hawaii. If you’re looking at owning property in Hawaii, you came to the right place. 

Guide to Buying Property in Hawaii

There is a lot to be said about the Hawaii housing market, and one of them is it is expensive. Under normal circumstances, owning a home in Hawaii is already a huge investment. The pandemic has somehow shifted the already-expensive Hawaii real estate market into overdrive. This year alone, it is not uncommon to see ten or more buyers competing for the same properties. Bidding has become the name of the game, with cash buyers getting the upper hand on their competitors. 

As of December 2021, the average days on market (DOM) of a Hawaiian property is 87 days, with houses from Pearl City selling a lot faster with only 34 DOM. In contrast, homes in Lihue in Kauai stay for as long as 214 days on listings, but perhaps this is due to single-family home median prices on the island breaking the million-dollar threshold. 

Economists and real estate professionals say that while the Hawaii housing market is bound to hit these markers in three years anyway, the pandemic has definitely sped things up. When asked what other factors affect the soaring prices, these are the three that have been commonly brought up: 

• Decongestion from mainland US caused by companies offering full-time remote work arrangements. Employees and workers are now free to relocate and work anywhere in the world, including Hawaii; 
• A huge spike in the demand for real estate property from folks who are taking advantage of low mortgage rates; and
• Dwindling supply given the increase of demand

Given all the different factors affecting the prices of real estate in the tropical state, we will discuss some of the most important things any real estate investor needs to know before buying in Hawaii. This guide will help any potential investor and buyer come up with the soundest real estate investment strategy and get the most optimum return on investment. 

Things to Know Before Buying Real Estate in Hawaii

Buying a home in Hawaii is exciting but far from simple. The process isn’t as easy compared to buying property in the mainland US. For one, the geographical location makes it harder for most folks to physically view prospective properties. Going to and fro is quite expensive, and frankly, highly impractical, even if we’re not in a global health crisis. 

Two, as we already mentioned, houses on the Hawaiian market are quite expensive which was only made worse by the home-buying frenzy ignited by the pandemic. Experts are already predicting a 6.6% sales increase in the housing market come 2022, with a 2.9% spike in home prices. So unless you have enough money lying around for a cash purchase or a down payment, affordability will pose as one of the greater challenges of anyone looking to own a property in HI. 

So before anybody goes off buying a home in Hawaii, here are a few things folks need to know about it: 

Seller Disclosure

The state law of Hawaii declares that no residential real estate property may be sold in the state without a written and signed disclosure statement. The document should be signed and dated by the seller within six months before the sale of a property and within ten calendar days of the buyer’s acceptance of the contract. It should also be delivered to the buyer within the same ten calendar days. 

Upon receipt of the signed and dated statement, the buyer has a full 15 calendar days to go over and examine the document and decide whether to rescind the purchase contract or move forward with it. 

The disclosure statement should accurately and fully disclose all material facts that have to do with the property for sale. These facts may include any defects and conditions that are both visible and invisible to the naked eye (past and present) that could greatly affect the property’s market value. 

If the buyer decides to rescind the purchase, he or she must submit a written notification within 15 days. Failure to do so implies the acceptance of the Hawaii Seller’s Disclosure statement. 

Real Estate Lawyers

Due to the unique nature of the real estate market in Hawaii, the state has certain special laws in place for real estate transactions. Its island setting has a great effect on its real estate market that it is highly recommended for all parties involved in a transaction to prepare contingency plans for unusual scenarios. Having a real estate lawyer on board can help address many concerns and questions and handle different legal matters that could arise from any transaction. 

Presence at Closing

Because the pandemic has caused certain travel limits and restrictions, folks who are seriously considering buying a home in Hawaii would often ask if they are required to be physically present during closing. 

One, the real estate industry is already used to working in a virtual environment over the past decade. It is one of the industries that have already made the digital transition way before the pandemic started so they have already utilized digital platforms and devices in transactions. 

Two, the great thing about buying in Hawaii is it is an escrow state. Meaning all the necessary documents and funds are processed by the escrow department of the title company you’re working with. Both buyer and seller do not have to be physically present at the time of signing. This makes buying a home in Hawaii a lot easier for mainlanders. 

Now that we already know some of the more important things about real estate investment in the Hawaiian islands, let’s talk about how to buy a house in Hawaii. 

8 Steps to Buying a Home in Hawaii

Once you get past all of that and you’re intent on owning a property in the sunny Aloha State, here are some practical steps to get you on your way. 

Step 1: Know Your Financial Status and Capability

Owning a property is a dream come true for a lot of people but let’s face it, that dream will only come true if folks learn how to face reality. And that reality is buying a house will require a lot of money. Before people go out and start property-hunting, they should get their finances in order first. A person’s financial situation will greatly affect his or her buying options, especially in a state like Hawaii where real estate does not come cheap. 

Listed below are the things one has to consider in buying a home in Hawaii: 

Stable income within the last two years

Buying a house is not done on an impulse. It takes months of careful planning and years of thoughtful saving. It pays to have a stable source of income to help finance most of the housing expenses that will be incurred with the purchase of a property. Those who want to take out a loan for their investment need to present proof of income stability either from their employers or by providing verifiable documentation of business income. 

Credit Score

A steady source of income is just a small piece of the puzzle. Even if you have a stable income stream over the past two years but you’re lousy at handling your finances, it is going to significantly affect your credit score. The credit score is one of the main numbers lenders look at to determine whether a person is eligible for a loan or not. 

Qualifying for a mortgage requires a minimum credit score of 620. The higher the score, the better the chances of approval. 

Payment History

On top of a stable income source and good credit standing, lenders also take a look at a buyer’s payment history. One may have a well-paying job and outstanding credit score but if he or she is a habitual late payer, lenders might give the buyer a hard pass. To increase one’s chances of approval, he or she should ensure that all the bills have been consistently and promptly pay off for at least twelve consecutive months. 

Debt-to-Income Ratio

Another financial factor that lenders consider in approving a mortgage is a person’s ability to make monthly payments. They do this by looking at one’s debt-to-income ratio. The debt-to-income ratio is the sum of one’s recurring monthly debt payments (including the estimated mortgage) that is divided by gross monthly income. If you’re looking at applying for a loan to purchase property in Hawaii, your DTI should not exceed 50%, otherwise, you will have a hard time looking for a lender that will approve your loan application. 

According to Statista, the median income for Hawaii in 2020 is $80,729, or $6,727.42 per month. If an individual is making monthly payments of $128 for credit card debts, $200 in student loans, $310 in auto loans, and $1,872 in a mortgage, his or her total monthly debt is $2,550. 

Take $2,550, divide it by $6,727.42, you will get a DTI ratio of 37.9%. 

Delinquent or Excess Debt

Now let’s say that your DTI goes beyond the 50% threshold – or delinquent debt – we highly recommend paying them off first and lowering your DTI ratio before applying for a loan. 

Down Payment

When it comes to purchasing real estate property, a huge chunk of money is often needed to make a down payment. It is one of the ways lenders offset their risks and protect their business. Conventional loans typically ask for a 20% down payment. Government-backed loans, such as FHA and VA loans ask for far less with FHA loans requiring only 3.5% and VA loans not asking for anything at all. 

So when you’re shopping for loans, always consider your options before pulling the trigger. 

Closing Costs

Just because a buyer has already secured money for the down payment doesn’t mean that his or her financial obligations are done at closing. Anyone who has ever closed a real estate transaction is fully aware that it costs a lot of money to finish the process. Investors should expect to pay for additional costs such as appraisal fees, property taxes, title insurance policies, government fees, and a whole lot more.

On average, buyers should prepare 2% to 5% of the total purchase price.

Renovation, Rehabilitation, and Maintenance Costs

Additionally, buyers should also set aside 1% of the property’s value for repairs, upgrades, and upkeep. Rehabilitating a property will make it more attractive to potential guests and tenants. 

A wise investor will always see if the math checks before making any final decision regarding a property. If you’re unsure how to go about making all the computations for your investment property analysis, check out Mashvisor’s investment property calculator. It is the best and easiest way to crunch the numbers without using any confusing spreadsheets. 

Jumbo Loans

Given that Hawaii is one of the more expensive states when it comes to the housing market, it is highly likely that a typical loan amount just won’t cut it. The Federal Housing Finance Agency, or FHFA, has set certain limits in place for government-backed loans. The current limit is $548,250 for a single-family unit. Either the borrower has to pay the difference or get a jumbo loan. The only catch is it has stricter requirements compared to other mortgage plans. 

Step 2: Pick the Neighborhood Suitable to your Investment Goals

More than the house’s architecture, interior design, and structural integrity, its location also plays a huge part in determining its market value and marketability.  When looking for a property, consider the neighborhood and community it is in. Here are a few things to look for: 

Home Values

Because houses are expensive in Hawaii, it’s not a matter of selection but more of a process of elimination. Learn to look at average home values in HI and consider past home value trends. Knowing these two things will help you determine how much the property will appreciate within a specific time frame and if it will lead to a huge return in case you decide to sell. 

Rental Income

The rental income is your monthly earnings so it is wise to be aware of the average rental rate where the property is located. 

Cash-on-Cash Returns

This is one of the most important metrics identifying if a property is worth investing in or not. It is the return rate based on the amount of money earned on the amount of cash initially invested in the property. To figure out a property’s cash-on-cash return rate, take the annual rental income and divide it by the annual mortgage payments. Look for a property that will give you at least a 2% CoC rate. 

Occupancy Rate

This is the ratio of the specific number of days a property is rented out over the number of days it is listed. The higher the occupancy rate, the more stable the rental investment. And the more stable it is, the greater the chances of raising rental rates. A 75% occupancy rate is a good number for traditional rental methods while short-term rentals should have an occupancy rate of at least 50% to be profitable. 

Property Taxes

Because property taxes aren’t dependent on the rental income, buyers and investors should factor this in with all the other expenses. Different states and locales have different rates, with some charging too much tax that the rental income isn’t enough to cover it. 

Price-to-Rent Ratio

This number determines whether a person is better off buying a home or renting one. A property with a price-to-rent ratio of 20 or more means that the median price is significantly higher compared to rental rates. This means that it makes much more sense to just rent a property than buy one. 

Number of Listings

The number of active listings for a specific area can send different signals to potential buyers and tenants. It could mean that a particular area is in decline or perhaps it’s just a seasonal cycle. If the occupancy rate is high and the property doesn’t stay too long on listings, you’re all good. But if the occupancy rate is low and it stays on the market for quite some time, that might make it a lot less attractive to prospective tenants. 

Local Lifestyle

Of course, more than the financial rewards, one also has to consider if the neighborhood has everything to meet his or her needs and preferences. This includes features such as, but not limited to: 

• Restaurants and other amenities
• Health-care access
• Schools
• Transportation and accessibility
• Low crime rates; and 
• Walkability

Tourism Potential

For investors who are keen on starting a short-term rental business, it would be in their best interest to look for a property that is within the vicinity of popular tourist attractions or a commercial-industrial district that attracts plenty of leisure and business travelers. 

Step 3: Get Mortgage Pre-approval

As we already mentioned earlier, the competition is stiff in the Hawaii housing market. Single homes usually get numerous offers from potential investors and buyers. One of the things that you could use to get sellers to show you a property is getting a mortgage pre-approval. This piece of paper shows sellers that you are not just financially capable but also dead-serious about buying a home in Hawaii. 

Make sure to shop around first and compare lenders and their different products. More than just looking for favorable rates, look for a lender that is credible and trusted in the community; one that already has a proven track record of quality service. 

Step 4: Get Started on your Hawaiian Property Hunt

Once you have already set order to your finances and have narrowed down your neighborhood choices, you can start hunting down a property that suits your profile and aligns with your financial goals. And while getting a house that is ready for moving in is a great thing, most of them are far more expensive. As an investor, be on the lookout for a less expensive property that has so much potential. You can use the money you save for renovations and updates to make it attractive and rental-ready. 

Step 5: Get a Good Real Estate Agent

Buying a house way out on the other side of the Pacific will require the assistance of a real estate professional. A good real estate agent is your best friend and ally in this case. He or she can help you during the entire process and make recommendations for other services related to the transaction. Real estate agents are the ones that make sure buyers and investors get the best possible deals, 

Mashvisor can help connect you with trusted and credible local real estate professionals with its Real Estate Agent Directory. This tool will save you tons of money as you no longer need to fly out to Hawaii to find a partner agent. 

Step 6: Start Making Offers

Now we get to the tricky part. Since the competition is tough in the Hawaiian real estate market, an investor has to think of certain ways to make his or her offer stand out. This may be a lot harder to do in a hot market but there are ways that a buyer can make an attractive offer that will make sellers take notice. 

• Make a large deposit. In most cases, this goes more than 20% of the selling price.
• Ask the seller for any concessions they may want so you can include them in your closing costs. This allows them to sell their properties at a higher price.
• Ask for repair credits so you gain more control over the house repairs. This frees sellers from going over their budget to get things fixed. 
• Forego inspection contingencies for a speedier closing process
• Reach out to the seller with a personal letter.

Step 7: Perform Due Diligence with the Inspections and Appraisals

Once the seller agrees to your offer and accepts it, it is now time to go over the property and inspect it and have it appraised. This allows the buyer and investor to see if they are really getting what they signed up for. If in the process of performing due diligence they unearth certain issues in the house or some unexpected things happen, they can still renegotiate with the seller. 

The typical inspection-and-appraisal process is followed here. However, one Hawaii-specific inspection requirement is having the property inspected for termite infestation. Whether a buyer is applying for a VA loan or other funding types, buyers in the state of Hawaii commonly ask for a termite inspection letter before proceeding with the purchase. 

Step 8: Seal the Deal

Lastly, it’s time to close. Buyers often do a final walkthrough of the property to see whether it meets their expectations. Understandably, most buyers get too excited and over-eager to close the deal that they sometimes miss certain things in the final walkthrough. Even if the house has already been inspected, it is still best to take note of every detail that you can think of during this step.

• Things buyers should tick off their checklist are: 
• Floors, walls, and ceilings
• Electrical outlets and light switches
• Water pressure and temperature
• Keys and combinations for all doors and locks
• Toilet and plumbing
• Appliances and fixtures
• HVAC system
• Windows and doors
• Trash, clutter, and the previous owners’ belongings to be removed

Once fully satisfied, the buyer then proceeds to sign the necessary documents to seal the deal. The real estate agent needs to explain and clarify each document before closing. Buyers and investors can take this time to ask questions and have their concerns addressed before they sign. 

Top Cities in Hawaii to Invest In

It’s no secret that investing in real estate property in Hawaii is expensive. This may make a few buyers not want to take part in the market, however, with the right real estate investment strategy, investors and buyers might find themselves sitting on a gold mine and get quite a handsome return on investment. 

According to Mashvisor’s latest data, the following cities have great potential for cash-on-cash returns for those who plan to rent out their properties for profit: 

1. Wahiawa, Honolulu

• Median Property Price: $894,400
• Average Price per Square Foot: $500.44
• Days on Market: 37
• Traditional Rental Income: $3,442.01
• Traditional Cash-on-Cash Return: 2.96%
• Price-to-Rent Ratio: 21.65 (high)
• Airbnb Rental Income: $10,233.44
• Airbnb Cash-on-Cash Return: 8.91%
• Airbnb Daily Rate: $315
• Airbnb Occupancy Rate: 83.71%
• Walk Score: 56

2. Ewa Beach, Honolulu

• Median Property Price: $842,321
• Average Price per Square Foot: $586.77
• Days on Market: 37
• Traditional Rental Income: $2,684.79
• Traditional Cash-on-Cash Return: 2.56%
• Price-to-Rent Ratio: 26.14 (high)
• Airbnb Rental Income: $6,353.47
• Airbnb Cash-on-Cash Return: 5.15%
• Airbnb Daily Rate: $225
• Airbnb Occupancy Rate: 78.68%
• Walk Score: 56

3. Mililani, Honolulu

• Median Property Price: $654,403
• Average Price per Square Foot: $557.05
• Days on Market: 48
• Traditional Rental Income: $2,119,87
• Traditional Cash-on-Cash Return: 2.71%
• Price-to-Rent Ratio: 25.72 (high)
• Airbnb Rental Income: $6,132.12
• Airbnb Cash-on-Cash Return: 6.51%
• Airbnb Daily Rate: $311
• Airbnb Occupancy Rate: 76.13%
• Walk Score: 55

4. Kailua, Honolulu

• Median Property Price: $1,549,107
• Average Price per Square Foot: $1,073.10
• Days on Market: 56
• Traditional Rental Income: $3,356.55
• Traditional Cash-on-Cash Return: 1.7%
• Price-to-Rent Ratio: 38.46 (high)
• Airbnb Rental Income: $9,289.20
• Airbnb Cash-on-Cash Return: 5.09%
• Airbnb Daily Rate: $468
• Airbnb Occupancy Rate: 65.2%
• Walk Score: 56

5. Pukalani, Maui

• Median Property Price: $928,800
• Average Price per Square Foot: $652.10
• Days on Market: 37
• Traditional Rental Income: $2,402
• Traditional Cash-on-Cash Return: 1.47%
• Price-to-Rent Ratio: 32.22 (high)
• Airbnb Rental Income: $9,827.02
• Airbnb Cash-on-Cash Return: 8.4%
• Airbnb Daily Rate: $300
• Airbnb Occupancy Rate: 71.78%
• Walk Score: 57

Buying a home in Hawaii may be a lot more challenging compared to purchasing a property in the mainland US but with due diligence and a sound investment strategy, buyers and investors could reap great financial rewards from it. The key is to approach it with thoughtful planning and connecting with the right people. Investors, whether those with years of experience or a newbie need all the help they can get to make the wisest decisions. Using a trusted real estate investment platform such as Mashvisor can help make things easier and safer for real estate investors.

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