Ask the Expert: What Must You Know Before Buying a Condo?
Today’s question has been answered by L. Lee & Barbara Potts from Aloha Group Maui KW Island Living.
This is part two of a four-part series about purchasing a condo in Hawai‘i. Click here to read part one.
Q: What are the four things you must know before you buy a condo in Hawai‘i?
A: If your realtor hasn’t mentioned these important issues, you need to dig a little deeper on your own.
- Rental company management agreements
Most people who buy condos want to make a little—or a lot—of their money back by renting out their unit to vacationers. There are basically four ways your rental can be handled:
- Manage it yourself, (you need to live on island or have an “on island” contact designated to handle emergencies)
- Hire an offsite property manager to handle it for you,
- Use an onsite company that leases and manages the “front desk”,
- Use an onsite company hired under contract by the Association of Apartment Owners (AOAO).
There are numerous competent rental management companies on Maui, and many condo developments have onsite companies.
Before you sign with any rental management company, make sure you know what you are getting, how much they charge, and what are potential additional charges that aren’t covered under your contact that could give you an unwelcome, nasty little surprise.
There are a number of things that you might rely on your management company to do. The five big things that you must have from a company so that you can rest easy are:
- check in
- minor maintenance
- on-island representative to handle major repairs or replacement of items such as appliances
1. AOAO Contracted Rental Management Companies
Most resort condominium developments (condo-tels), both large and small, have a “front desk” operation and some other services, such as housekeeping, onsite.
In some developments, usually in smaller complexes, the AOAO contracts with a management company, perhaps in the form of an LLC, to run the front desk, housekeeping, maintenance and the like.
These companies usually hire a manager to be in charge of day-to-day operations. The manager and company’s performance is usually reviewed by the board of directors and the other owners at an annual meeting.
As owners of the rental management company, the condo owners, including you, may have a responsibility and liability for the actions and employees of the company. If an employee needs to be reprimanded or fired, your company is on the hook if it isn’t handled properly. And, if your manager needs to be replaced or leaves, you can count on being in conference calls or meetings to deal with the situation.
This type of management company will normally charge between 20% and 35% of your rental income with the balance being distributed to you. In some cases however, your distribution may be determined based on the profitability of the company, and your distribution may be paid monthly, quarterly, semi-annually or annually.
Since most of the smaller developments tend to be more “homey” and laid back as compared to the luxury resorts, they get nightly room rates ranging from the low $100’s to the high $100’s on average. Occupancy rates will vary based on several factors, but you should expect at least a 60% occupancy rate on a year around basis.
Tourism is high on Maui again, so hopefully you will achieve a much greater occupancy rate.
2. AOAO Affiliated Rental Management Companies
Here we are using the term “affiliated” to indicate that the onsite rental company is leasing space, usually, but not always, from the association. At larger condominium developments like Kā‘anapali Shores and Aina Nalu in Lahaina, the AOAO tends to have a seasoned management company, i.e., Aston, Outrigger and the like, to manage the rental operations.
These types of management companies make your condo ownership and rental completely turnkey. They have marketing power and get favorable treatment from travel agencies including big vendors, such as Expedia. They know how to make guests feel well taken care of and deliver a consistently high level of service.
It is not unusual for condos managed by these types of companies to average occupancy rates of 80% to over 90% and be completely sold out during high season.
If there are employee issues, they are handled by management. If there are management issues, they will be handled by the parent company. You will likely never have to get involved at all, and, in most cases, won’t even hear about it.
These companies do a lot for you and make your ownership worry-free. They also charge approximately 40% of your revenue at this time. The percentage may vary over time depending on competition and the budget setting process. In the recent past, fees at these companies were charging approximately 50%.
3. Off-Site Rental Management Companies
Just because your AOAO leases space to a management company onsite or decides to run its own program, you are not under any obligation to participate. The company you choose to manage your property is entirely your decision.
Some condo owners opt for off-site management companies instead of going along with the crowd.
Off-site companies tend to charge less for their services, we’ve heard of rates as low as 20% but we are seeing rates more in the 30% range. Of course, they may have lower occupancy rates as well.
If you own a condo managed by an off-site company, you should be getting an occupancy rate of at least 60%. Our expectation for oceanfront complexes would be higher.
There is only one acceptable reason for a lower occupancy rate. You. If you hold your unit for personal use during the high season, when occupancy rates are frequently at 100%, you can’t expect to achieve big numbers during the off months—spring and fall—when tourism rates are naturally lower.
4. Do-it-yourself rental management
We know a handful of brave souls who are do-it-yourselfers. Of course, in Hawaii, unless you are a resident, you can’t legally do-it-yourself unless you have an on island contact who will handle emergencies. You must have a representative, either a licensed real estate agent, an unlicensed contact to handle emergencies and check ins, or employ a caretaker. A caretaker is someone who is not licensed, but is hired as an employee to care for your property. There are some companies that will agree to act as your management company to cover you legally and help you out in case of emergencies.
The other thing you need to have is a reliable housekeeping service.
To get renters, many owners run ads in the Maui News, some Magazines like Sunset and Hawaii, and set up websites with links to on line portals like VRBO, Vacation Rental By Owner, Air BNB and HomeAway.
The benefit of managing your property yourself is that you have control and you get to keep most of the rental income. Of course, the other side is that you are now a small business owner. You are responsible for getting your condo rented, dealing with customers and complaints, repairs and maintenance and don’t forget to get liability insurance and collect and pay your taxes.
Of course, if you are experienced, go for it.
A word on taxes… first, you have to pay them. “Them” includes Hawai‘i’s general excise tax, transient tax (TAT) and state income tax. Your accountant needs to file a tax return for you in Hawai‘i. I can’t tell you how many home owners I’ve counseled who tell me they’ve never filed a return in Hawai‘i, and it has to be dealt with when you sell.