There are currently 26 apartment buildings for sale in Hawaii. These multi-family buildings range from two story walk ups to 6 story mid-rises. They range in price from $2- $40 million. Initial rates of return range from 4.0- 6.45%. The majority of available properties have an asking price with an initial cap rate of 5.5%. Three of them caught my eyes this month.
Investors will ask themselves a few questions before making an offer and spending their time and money on due diligence. The first question for investors is, “will there be enough of a premium over borrowing costs?” We all want to grow our money over time and most investors are happy to accumulate their profits slowly but surely each year. When the market takes a big leap, we can cash-in on those profits and move up to a new property or improve our lifestyle. The next question investors ask themselves is, “will the net income go up or go down over the next five years?” Investors always hope for rents to increase but over the last few years, the pressure has multiplied. The third question is, “what kind of repairs will be required?” Accurately estimating the cash flow and expense is key here. If we only had a crystal ball, it would be so much easier….. but if there was no risk there would be no reward.
I was making calls to sell a multi family building in Honolulu today and something rare happened…… Every person I called was still employed at the same company as four years ago. Now that is unique in the commercial real estate market.Usually when I am talking to office building or shopping center owners and even Hotel owners in Hawaii ,I spend 40 percent of my time updating who has left the company and who has the new responsibility for Hawaii commercial real estate. This confirms my suspicion that apartment complexes are the most stable asset class to come thru this recession.
Apartment buildings in Hawaii are typically 8 to 16 units. Many of the larger properties, that you would believe look like apartment buildings in Hawaii have been converted into condominiums. The smaller buildings are fairly accessible to investors with the majority of sales prices ranging from $1MM-$3MM. In addition, apartment buildings provide for hands-on management for the buyer and the ability to add sweat equity by upgrading units as they are turned over. Financing for apartments has been outstanding. Loan rate for apartment buildings in Honolulu have been the lowest of any investment class of real estate. Sometimes as low as 4%. During the first six months of 2011, 24 buildings were sold primarily on the island of Oahu.
A smart investment strategy is to buy a small building, clean it up, and plan to do a tax-deferred exchange every two or three years to a larger building. Don’t get emotional about specific properties and continuously upgrade the size of your buildings. In addition, when you get to a large enough size of operations you can provide services more efficiently.
Many families and investors in Hawaii have started in small apartment projects and have never sold a property. They like them so much they just keep buying more.