Why You Should Invest in Real Estate
There are many types of investments out there and many people who will tell you which is the best. As a real estate agent in Oahu, I am of course a little biased. While I’m not saying it’s the best form of investment in the world, there is no doubt that investing in property is a good one. Especially if you are able to diversify and have other forms of investments alongside. Here are some of the reasons why it’s a good idea to invest in Real Estate.
Real Estate Appreciates Over Time
Ok, so almost every type of investment appreciates over time. If it didn’t (or didn’t have the ability to), then it wouldn’t be an investment. That being said, real estate on average has gone up in value 5.4% annually in the US.
How Much do Houses Cost in Hawaii
The price of a house in Hawaii is generally speaking higher when comparing with most US states. Moreover, it can vary quite a bit between different cities and neighborhoods. However, house property values in Hawaii have some of the best appreciation rates in the nation. If you look at the law of supply and demand, the Hawaiian island has a finite, limited amount of supply of land. Housing demand continues to grow as our island population continues to grow. With decreasing supply and increasing demand, it can only lead to increased or appreciating housing prices.
Will Hawaii Housing Market Crash
No one can be certain that the Hawaii housing market will ever crash. However, looking at history, even in bad economic times, Hawaii real estate was not affected as much as the mainland. During the housing bubble of 2008, while the nation had decreased housing prices by 30-50%, Hawaii was stable or down about 10%. During the pandemic of 2020, Hawaii’s housing prices actually increased dramatically. In April 2021, Oahu’s median price for a house is $930,000. The median price for a condo is $450,000. If you are on the fence between buying a home of a condo, check our summary of benefits to buying a condo in Hawaii and anywhere else in the nation.
Real estate sales and rental prices have consistently beaten inflation prices year over year (by a lot). This means that every year, it is harder to live in Hawaii.
You Can Live in Your (Investment) Home
Since real estate appreciates over time, investing in a home as your primary residence can be extremely lucrative. At an average rate of appreciation of 6%, investment is expected to double in value in about 12 years. Many homeowners have a pleasant surprise as to what their home is worth, living their own lives, but also get to enjoy the use of their homes.
For those that eventually move out of their homes, they can choose to sell lock in the gains of appreciation, or rent it out for continued cash flow.
In Hawaii, it is difficult to rent a home for positive cash flow unless at least 20% is put down.
There are Many Tax Advantages with Real Estate:
There are many tax advantages with real estate investments that you might overlook because of the complexity of property holdings. Many of these options make real estate a great choice!
- Mortgage interest payments are tax-deductible: All of the interest you pay the bank can be written off your taxes. Meanwhile, personal car loan interest payments are not. This can lead to hundreds to thousands of dollars refunded to you come tax time.
- Improvements and Repairs are Tax Deductible: If you rent your home, it is considered a business. Repairs and improvements are business expenses and can be written off your taxes.
- Depreciation: If you rent your home, depreciation is another business expense you can write off. Tax law allows you to consider losses on the value of your home due to wear and tear for 27.5 years (slightly less than the 30-year mortgage term). This usually creates a business net loss for any rental property, which shields your actual rental income.
- Primary Home Property Tax Exemption: In Hawaii, you are allowed to pay fewer property taxes on the unit you claim as your primary residence. For individuals under 65, you’ll be allowed to pay taxes on $100,000 less than what it’s worth. This equals approximately $290 in savings per year as of 2021. If you’re 65 or over, the discount is $140,000 less than what it’s worth. This equals savings of about $406.There are many people that aren’t aware to apply for Home Owner’s Exemption when they purchase their home to live in. This means you are paying more in taxes than you need to! You can check with the Department of Land to see if you have applied for your home.
- Capital Gains Exemption or Deferment: When you sell any investment, you have to pay capital gains on the money you make. Capital gains tax is usually lower than your individual tax bracket, but with real estate, it can get even better!
Capital Gains on Real Estate
- Capital Gains on your Primary Residence: In Hawaii, you’re allowed to skip out on capital gains if you sell your own primary residence, up to $1,000,000 on gains! In addition, you can continue to use this benefit until you have surpassed the million in gains for future sales.
- Capital Gains on a Rental: There is a well-known investment strategy called a 1031 Exchange. It is a complicated procedure, but it basically allows you to defer (pay later) your capital gains on an investment property if you purchase a new one in 6 months or less. I have known many clients that inherit property and continue to sell/buy new rentals until they pass it along to their children. This allows them to upgrade their real estate holdings, and also not pay taxes on the gains!
While there are many tax advantages to owning property and real estate, tax laws will vary greatly on the individual. Please make sure you consult your own tax accountant to see how owning real estate can benefit you.
Real Estate can be Leveraged
There are ways how to leverage real estate. When you take appreciation and taxes into consideration, leverage might be the greatest reason why you should own real estate.
Real estate can be leveraged in two different ways:
- You can borrow money to purchase real estate
- You can borrow against your property
How to Borrow Money to Purchase Real Estate
Borrow money to purchase real estate is the most obvious way to leverage. Most people already know that they can get a mortgage to buy real estate. In fact, most people need to borrow in order to buy real estate!
If you can’t afford to buy a property in full, this is a great benefit for obvious reasons. Even if you can afford the house in its entirety, it’s a great benefit because it allows greater flexibility with your cash. It means you can invest the remaining balance on something else, maybe even buy more real estate.
However, a word of caution on borrowing to purchase: The major reason for the 2008 Housing Bubble was that many people were borrowing more than they could afford for really bad terms. While I am a big supporter of borrowing to own, I think it is a bad idea to max out your borrowing power. A general rule of thumb is to put down at least 20% of the purchase price and or make sure you have several months’ worth of savings after buying.
Borrow Against Your Home or Real Estate
Once you own property, you can borrow against it to get access to the equity you have built. For many people, their most valuable asset is going to be their home. If they needed to sell in order to get access to the value, it would defeat the purpose of being able to live in it. After owning their homes for some time, the value should be higher due to appreciation. A common strategy is then to borrow some money from the home, and use it to buy another house!
There are several mechanisms you can use to borrow against your home. One is called a HELOC (Home Equity Line of Credit) and the other is to refinance or take out a 2nd mortgage. Out of these options, I would recommend a HELOC assuming you are diligent enough to pay off the balance on your own. You can either reach out to see what the difference between the two is, or you can talk to your local banker.
Are You Ready To Buy Real Estate?
If you’re ready to take the plunge, then I can bet you have already started to research online as to what it takes to buy your first home. If you’re buying or selling an asset for the first time you might find the research hard. Real estate investing can be a high-risk investment if you don’t understand the market, financial condition, and the economics of investing in real estate.
The number one, most important step in the process is to educate yourself and to learn more about the market. If you don’t know the market you will be at a huge disadvantage compared to a market expert.
Do I Need a Real Estate Agent to Buy a New Home?
Who are the experts in real estate you may ask? Well, real estate agents and brokers of course! Sure, I am a little biased as I am both, but if you’re looking to buy for the first time (or any time), I would highly recommend hiring a real estate agent. The most obvious reason for this is that when you are buying, hiring a real estate agent IS FREE. That’s right, you read that correctly. It is the seller that pays a commission on any real estate transaction.
More importantly, a real estate agent should know the market, trends, and what makes a property value or something you should walk away from. In Hawaii, big issues could be foundation issues (common in Aina Haina), termites (Manoa), or a poorly run condominium building. If you don’t have an agent on your side, it is somewhat easy for the seller to trick the buyer into a bad purchase.
An agent will also protect you as their client in the purchase transaction. They will run pricing comparables, to find the right price, hire a property inspector to look for problems, and negotiate for you to get the best deal. While appraisers and contractors can often do these tasks too, I bet they too will hire a real estate agent when they purchase.
Buying real estate in Oahu is a major milestone in one’s life. It’s scary, intense, and also exciting. At Kamehameha Realty, we are a full real estate brokerage. We focus mainly on Oahu property management, but we love helping buyers get into their first, second, and third place. We find that decades of managing units in so many different condominium, townhomes, and neighborhoods, provide us insights and experiences that a sales agent may not know due to only dealing with the properties during the transactions. Reach out to us for a free consultation.