If you haven’t read my previous post, just as the world descended into the depths of Covid I bought a house in Hawaii. It’s the first house I’ve ever owned and I bought it having never seen it in person.
I’ve since spent several months living in the house with my family and currently have the place rented out. But my long term goal remains unchanged—I’d like to own small homes in San Diego, Hawaii, and on an island in Greece and split time between them.
My initial post on this topic garnered much more of a response than I expected with many readers asking for updates—so here it goes.
The house exceeded my expectations
In short, I got lucky. While there’s no doubt that I researched real estate on Hawaii’s Big Island obsessively, buying a house sight unseen and having it exceed your expectations is an awful lot of luck. All I can say on this front is kudos to our realtor, Noelani, and that buying a place that had been recently rehabbed certainly brings some peace of mind.
But especially buying a place in East Hawaii—I can’t say that I’d recommend anyone buy a house without seeing it. Hawaiian standards for a clean and maintained property are quite different from those you’ll find on the mainland. The climate is out of control (intense rain and humidity), there’s generally a lot of poverty, and there’s no shortage of sketchiness on island.
Yet when I pulled up to the house for the first time, as apprehensive as you might imagine, I knew before the car was even half way down the driveway that we’d lucked out.
Orange trees growing in the side yard, orchids waving in the breeze, and a sweeping ocean view from above a hilltop, spilling out over open fields and a traditional Hawaiian neighborhood. Now that I’m back in San Diego I’m already itching to go back.
The Big Island itself is a fascinating, complicated place. The two hour drive from the airport in Kona to our house just north of Hilo was all that it took to demonstrate the island’s unique geography. The landscape around Kona looks like a volcanic version on Joshua Tree—an expanse of gnarled black rock for miles in front of you.
Heading north you reach Waimea just 30 minutes later, at least 20 degrees cooler given the elevation. Waimea looks like a Hawaiian Ireland, with rolling grass fields filled with cows and horses. A couple of switchbacks later and you descend to Hilo, nothing if not lush with vegetation. The sporadic rains emphasize the point—you’ve left the country and entered the rainforest.
It’s quite literally Joshua Tree to Ireland to the Amazon in minutes.
I ended up writing a book about our time in Hawaii—a first hand account of the people, places, and our day to day life on the island. I’ll be sharing that soon, but this post will focus on the house as an investment.
Financials
We ended up buying the house for $330,000—a sum that is absurdly low for what we got. We bought the house both as a financial investment, but also as an investment in the lives we want to lead. And after receiving several offers to sell the place, I’m happy we didn’t—my family has already had a wonderful time here, and the house has proven to be a great investment only a few years into ownership.
In looking at property in Hawaii I was really betting on the future of remote work, as well as the appeal of Hawaii. Then Covid hit—dramatically accelerating both remote work as well as interest in real estate in Hawaii. We bought at a time when most buyers were running scared, which absolutely contributed to us getting such a good deal.
Here are the income and expenses for the property through the first two years of our ownership.
Income vs. Expenses June - December 2020
Our mortgage payment on the property was initially $1558, and our early expenses were mostly related to finding a tenant, furnishing the house with a bed, and buying a lawnmower. A (great) tenant moved into the place within 10 days of closing—we had over 24 applicants within 5 days of posting the property on Zillow. We struck a deal with our first tenant that he’d maintain the yard for a reduction in rent—he paid $1600/month in rent plus all utilities.
Total profit / loss after 6 months of ownership: -$89
Income vs. Expenses 2021
2021 was the first full year that we owned the property. Our original tenant moved out so that my family could live in the house for the months of August, September, and October. You’ll also note that our mortgage payment jumped from $1558 to $1612 mid year—this is change was driven by property taxes increasing as a result of the assessed value of properties in Pepeekeo generally increasing.
We had a couple large expenses throughout the year—we put new window screens throughout the house and had one sizable electrical repair. Our time on island was an awesome opportunity to take inventory of the condition of the house, perform some maintenance ourselves, and also meet local vendors who are critical to maintaining the property today.
But the biggest takeaway from 2021 was finding a new tenant after my family left—again interest in the property was totally oversubscribed. We went from charging the previous tenant $1600/month + utilities to charging the new tenant $2400/month with utilities included—this was a big step forward in terms of the running the property profitably.
We ran the property at a loss in 2021—mostly as a result of buying new window screens, a new washing machine, and paying for an electrical repair. While that’s the case, we intentionally optimized for having an amazing and very low maintenance tenant, then we got to live in the property for 3 months, then we found another great tenant.
Total profit / loss after 18 months of ownership: -$2581
January - June 2022
After my family lived in the house for a few months and was ready to return to San Diego, we set out to find a new long term tenant. Our new tenant is the mother-in-law of a successful tech entrepreneur from California—we rented the property to her because he acted as a co-signer and was willing to pre-pay six months of rent. As a result of rent increasing to $2,400/month, our income started outpacing our expenses.
For the first six months of 2022, we ended up making $1,793 in profit on the property.
Total profit / loss after 2 years: -$788
Appreciation both helps and hurts
While losing $788 over two years might not sound unexciting, during this time the property appreciated in value by roughly $144,700. That makes this far and away my best performing investment over this time period. Zillow’s “zestimate” for the value of the home is currently $474,700, which is actually down a decent amount from earlier this year.
I’m well aware that you can squabble over the accuracy of a “zestimate,” but we’ve now had multiple inbound offers to buy the place and comparable properties are selling in this price range.
More than anything, now that I’ve been to the property I’m fairly certain I’d be a fool to sell it. It’s updated and the house itself is small but nice, but the piece of property it sits on is beautiful. I have a strong sense that the house aside, the land itself will be worth millions if I’m just smart enough to sit on it 10 or 20 years.
And while I’m excited about how much the house has already appreciated in value, with appreciation comes increased property taxes. I was unexpectedly and unpleasantly surprised last month when I saw my mortgage payment (which includes estimated property taxes) had jumped to $1864. After a bit of research, I found that was completely a result of the assessed value of the property increasing.
After having heard so much about property taxes being severe in states like California (where I live regularly, yet my property taxes have never increased much), I suddenly felt the weight of those taxes myself. Interestingly, Hawaii actually has the lowest property taxes in the US—assuming your full-time residence is in Hawaii.
But if you own a second home in Hawaii, taxes are quite high—and with the rate that my property is appreciating, that resulted in a 16% increase in my mortgage payment in a single year.
Conclusions
People in the tech industry generally like to shit on real estate investing—the upside is only so high, and with any real estate investment comes property management and some degree of oversight. That’s absolutely true.
But nonetheless, the return both in term of my happiness and from a financial perspective dramatically outperformed everything from the stock market to crypto over the same time period. There’s not an asset class as time tested as real estate.
My overarching feeling is that real estate investing—if you’re willing to obsess over it—is incredibly easy in comparison to the bets you can might place on lots of other types of investments. And for me it’s also been fun.
I’ve got a long way to go to make the property in Greece come to fruition, but I have two little homes in San Diego and Hawaii that I love. While I plan to hang on to them both, I also know that they are desirable and in highly sought after areas so they should continue to appreciate in value for a long time to come.
