 Welcome to the Condo Insiders show. I'm your host today, Cheryl Franklin. And today we're going to be talking about the subject of the benefits and the challenges of short term versus long term rental properties. Many of our homeowners and viewers are thinking about becoming rental homeowners. And there's a lot to consider in that. So we have one of my favorite guests again, Chris Stadler, broker in charge, essential Hawaii rental and sales division. I don't know why I always have a challenge with that, but welcome back. Thank you. Thank you so much for having me back. How are you doing? Good. Good. Good. Having fun. This is a subject right up my alley. Oh, of course. You're the expert. I'm comfy. I don't know about that, but I've been there and done this. Yeah, it's very familiar. Yeah, so you're the expert. I'm not. I'm endeavoring to be. So let's just jump right in because I know there's a lot to consider. And right out the gate, you need to consider whether or not you want to do short term rental properties. You're not. You want to do short term or long term. And even if you should or shouldn't hire a property manager, because I know there are some rental owners that think they could do it themselves. But, you know, we always kind of advise against that. And some do and some do very well at it. But it's a real commitment. And it's challenging if you're not in the same town or on the same island that you own your property that could be a real challenge. But so there's going to be a lot of information to cover. But I basically want to kind of set a stage. So we're going to, for the purposes of what we're going to talk about today, we're going to assume that the owner has purchased the property cash. Maybe they're nearing retirement, maybe want to retire in five years, but they want a little piece of paradise now. And they're trying to decide if they want to rent that property, that investment for now and going to be their property eventually if they want to rent it as a long term rental or short term rental. I've been in a situation where I've been helped people make this decision many times. There's a lot of things that they may not consider or have considered when they're going into it. So again, since we're doing condo inside it, we're going to assume it's a condo. Yes, yes, yes. So lots of pros and cons on both sides and in terms of whether you want to do a vacation rental or long term rental, but why don't we just start with the short term. Okay, and talk about some of the benefits of going down that road in terms of short term or vacation rentals. Correct. So if you are an owner that plans to use your property three or four months a year, especially if you're not planning to use it consecutively for those three or four months, you want to come in January and then you want to come back in April and then maybe you want to come in August. Obviously, you're not going to be able to do a long term rental. So that decision is going to be made for you right there. If you have options, if maybe you only want to come for winter, which when I owned my company in Kona, we had many situations where folks would just want to live in their property January, February, March. And then we would rent it for them in some cases, vacation rental, but more challenging because not high season. And in other cases, we would rent it for the remaining months of the year until they returned. Snowbirds. If you will. They would be snowbirds. The owners would be considered snowbirds. Yes. So that would be kind of some of the choices and things that they would be thinking about. You also want to be thinking about the property that you're purchasing. Is it completely furnished, beautiful, upgraded and has it been a vacation rental in the past? That's easier to move into transforming it into a vacation rental. And we're going to get into some legislative things that are happening that are also putting restrictions, but we'll talk about that in a minute. Yeah, especially here. Yeah, here at all the islands, but they're different. If the property, if the condo is in need of refurbishing, it's completely unfurnished. And the owners are thinking, well, before we move in, maybe not before we rent it, we want to do some renovations. Then for them, it might be best to rent it as an unfurnished long-term rental because the cost of refurbishing it to what they're going to ultimately want or what they're going to need to do to make it a desirable vacation rental and also furnish it and fully equip it with every kitchen item and accessory televisions. All the different things that they're going to need is going to be quite expensive. And they may not even want that furniture that they're purchasing in the five years. They may be bringing their own furniture over. Yeah, long-term is typically six months? Yes, so it's kind of interesting. In the state of Hawaii, a residential long-term lease is 180 days or longer. However, in the vacation rental world, so anything less than 180 days, you have to pay a transient accommodation tax. The guests typically, we call them a guest. When it's a vacation rental, we call them a tenant when it's a long-term rental. The guests would typically pay that 10.25% plus the general excise tax. You collect it and then pass it on to the state. The guests would pay that. Yeah, you would want to do that. You could gross it up, but typically when you're marketing it, you want it to just be the rental rate. Oh my gosh, I completely lost my train of thought. Well, let's start talking about the taxes. Yeah, well, that notes itself to earning potential. Let's maybe talk about that a little bit because I think initially until you've either rented your unit multiple times, you're not going to exactly have it fills like what, 50% of the time? Yes, this is very good. These are things you have to consider, yeah? Yeah, so I always look at a vacation rental as a, and I know where I was on that last one. We'll go back to that. I always look at a vacation rental as small business. They're so completely different. The long-term rental and vacation rental are so completely different. The expectation of somebody coming in for a vacation is similar to going to a hotel. And I know you share stories with me. Yeah, and if their air conditioning goes out or the refrigerator stops working, whatever it might be, you need to take action. You would want to take action, immediately have vendors on the ready to come in. They want to fix like an hour. They're not going to wait until Monday morning if it's a Friday afternoon for it to be repaired. Or if they're like me, they complain and then just never come back again. Yeah, or write a bad review. Or write a bad review. Yeah. So as far as earning potential goes, I typically would say to clients, maybe the first year, 40%. Probably going to get high season and I always like to under promise and over deliver. So 40%. As that property gets reviews and moves up in the SEO and as you have more bookings, all these different things, how quickly you respond to the inquiries, all these things push it up higher in the search engine. People going back to Minnesota or wherever they're visiting from and telling their friends, oh my gosh, this was such a great place to you and Susie should book it for your next trip. All those things are going to propel it to and those folks rebooking. Repeat guess. Oh, you love repeat guess. That'll just every year, year over year over year, you should be seeing pretty good increases. But really not until you're in the third year, are you going to see probably close to what the max potential is going to be? Yeah. If you're lucky, if you're lucky over that time, I'll use myself for example, my husband and I went to Las Vegas. We rented a home. It was beautiful at that time. We went back five years later, decided to rent the same house and invite our family again. And it was not the same. So it was a parent that they hadn't maintained it properly. But the pictures are still the same as before, as before. So I don't know if there's any way around that, but just keeping up with things. I mean, the nice thing about one of the benefits of a short-term rental is it's constantly, you're constantly having it cleaned and inspected. And hopefully if repairs would be noted or any kind of damage, obviously, and dealt with immediately, whereas with a long-term rental, you could have people in there for five years. I mean, hopefully you're still having inspections, but those probably would only be happening annually, unless they're living there. People on vacation are out and about a large majority of the time. Yeah, I think that's one of the benefits of hiring a property management company, because they're going to ensure those things don't happen. In my husband, in our situation, the owner, it was a private deal kind of thing. So I don't think he was as meticulous as a property management company would be in encouraging you to, like, pay that coffee pot. Is it really old? Or you know what I mean? And just kind of maintaining the place a little more. You really need to come into it and look at the property. You want it clean. Cleanliness is, you know, key. Yeah, because we're not going back. You don't want your sheets stained, and you want, you know, very nice pillow protectors and mattress protectors that are waterproof and bed bug resistant. And you want, you want it to almost feel luxurious as luxurious. Even on a budget, you can do that with nice bedding and nice towels and the decor. You can really do a lot, even for a one bedroom or a studio. You can still make it like a little piece of paradise for the folks that are coming into it. But cleanliness is huge. And typically with a property management company, you would want the cleaner to be coming in and then it to be inspected again by the property management company, which is different than the cleaner, to make sure that they didn't miss the coffee grounds and the coffee pot or you open the microwave, make sure they didn't miss wiping that out. You know, just double checking everything because you can always call them back if you find something like that. Maintenance though, because you kind of talked about that. Maintenance and reviews are so closely tied. Reviews are so important, not having a bad, a negative review, a bad review. And communication with the guest is very important if they have a concern wanting to immediately respond to them. You can take something that maybe seems negative at the beginning and turn it into an opportunity to shine depending on how you handle it. But if they leave and a coffee cup is broken, a wine glass is broken, and you turn around and charge them $12 for that. That $12, if you charge them for it and they decided that even though they may have had the greatest trip, everything was wonderful, but that's just going to set off a nerve and they're going to leave a three- or four-star review rather than a five-star review. It's not worth it. Just replace it. Just replace the coffee cup, please. Yeah. Yeah, so that's kind of important. I think one of the benefits of short-term or vacation is the flexibility. Yeah, you can just kind of schedule your own time. I'm going to be there in the spring. I can rent it out in the winter. Absolutely. You have a lot more flexibility. Definitely. If you own it free and clear like we were saying, and you aren't in a position where you need to have that income, you're just maybe trying to get some additional income while it's sitting vacant. Yeah, it's great. It's empty for a couple of weeks and you want to fly over or have your friends or family fly over. You just call the property management company or go in yourself if you're managing yourself, block off the calendar. So yeah, definitely a lot more flexibility. Yeah. Yeah, definitely. On the flip side of that, there are challenges, especially on Oahu, right? There's a lot of red tape and things going on. All the islands. And I'm definitely not the expert in this area. I know you've had other speakers in the past, but the big island, Island of Hawaii, Maui, I'm not sure about Kauai, but most likely. And also here in Oahu, there are strict regulations that are going into effect if they haven't already. They're each a little bit different. Each island is a little bit different. And it's primarily targeting rentals of less than 30 days. And it's also requiring, I believe in all of the, all three of those islands, it's requiring them to register. There's a registration fee and they've got to show proof that they've been operating as a vacation rental. They've got to provide proof that they've been paying their transient accommodation taxes. It's a lot more regulated. Yes. Yeah. I'm a little bit more familiar with what's happening in Kona since I just came from there, but I'm not exactly sure here in Oahu, but my understanding is once they register here, I believe they only have a certain number that they're accepting. You can turn around. If you keep it as a vacation rental and you sell it and they maintain it as a vacation rental, it'll keep it going. But if you stop and then live in it and then try to re-rent it as a vacation rental. No deal. That's a good place for a break. So we're going to take a quick break. Please come back and join us after the break. Thank you. The Hawaii Council of Associations of Abarbon Owners. Hawaii Energy. The Hawaii Energy Policy Forum. Hawaiian Electric Company. Integrated Security Technologies. Galen Ho of BAE Systems. Kamehameha Schools. MW Group. The Shidler Family Foundation. The Sydney Stern Memorial Trust. Volo Foundation. Yuriko J. Sugimura. Thanks so much to you all. Welcome back to the show. We're just going to jump right back in and continue our talk on long-term versus short-term rentals. The pros and cons of both. First half of the show, we talked about the benefits of short-term or vacation rentals. And at this moment, we're going to segue into long-term rental. And let's start with the benefits of long-term versus the vacation rentals. So if having consistent income is something that you're wanting, you're not wanting a month or six weeks with it being empty, that's one thing to consider with long-term rentals. Also, the commission rate. Consistent income, yeah. Consistent income, yes. So you'll also want to consider the commission rate that's being charged. Typically, a long-term rental is much less of a commission rate than a percentage than a vacation rental. The vacation rental, the short-term rental. I didn't know that. It's not the same. I mean, it's probably more than double. Yeah, maybe three times. And I've seen in some cases four times what a typical long-term commission rate is. But the amount of work required and the amount of communication with the guest and the turns and dealing with cleaners on the short-term rental side is like I said before. It's a lot of work. It's like running a hotel. There's a reason for the commission being higher. That makes sense. And then on the short-term the utilities are paid by the owner. Right, they're not. Yes, that's a really good point. So on the short-term rental whether your property is occupied or not electric, you're paying all of the utilities, the cable, the internet whereas on a long-term rental we recommend, or I recommend that other than maybe water and trash and the things that are included in your association news would be put in the tenant's name. Highly recommend especially the electricity and cable internet unless it's included again in the association. So you've got that expense. You've got a lower commission. Less lower amount of bills that you're paying. You really kind of have to net it out. If you figure you're going to on average rent your property as a short-term rental two weeks a month and that's a pretty 50% of the year and you take that gross and then you subtract out the higher commission and you subtract out the bills that you're going to have to be paying to keep it constantly operating. Then you're going to look you're going to want to net out what you're really going to get when all is said and done. Sounds complicated. Long-term savings. A lot cleaner. A property manager can help you sit down and evaluate some of those things. They would have to. In my case. So there is less turnover which could be good or bad. Less turnover from a financial standpoint is great. Less turnover from going into property and inspecting like we discussed before. Maybe perceived as a negative. There's always a demand for long-term rentals. So where short-term rental you may have a demand it's seasonally or based on Thanksgiving Christmas different events in the area like in Kona it's Ironman I'm sure there's many events here as well. With long-term rental they're always in demand. Especially here. It's nice to purchase property here and I know folks that have done that purchase a property here as an investment for retirement. So then they just rent it out long-term and then when it's time to retire they just don't renew the lease obviously and they're ready to retire and paradise. Very common. Very common. There are true investors who are never going to live in it. They're just purchasing to have the income but I have found especially with both with vacation rental and long-term rental that's the plan. Another one is 1031. They'll do a 1031 exchange. They have to rent it for two years before they can live in it. We would know as the property management company this is only going to be our baby for two years but that's okay. We talked about the vacancy periods are lower. Always a demand. I like that. Yes, yes, yes. The other thing that would be something you'd want to consider with long-term rentals is there are so many more regulations and laws related to the handling of having a long-term tenant where the typical vacation renter Saturday morning you know, hey honey, let's book a trip. They look at all the different sites that they can look at over their coffee. They book it. They get a confirmation. They get communication from the company or the owner the lock box code however they're going to access it. Like a hotel. They come, they go. They don't even greet anyone where a tenant is a whole different ball game. We discussed this last week so I'll totally repeat myself but for those that didn't watch you know, you've got the screening and you've got the you want to have a very thorough rental agreement and you want to understand the laws related to having a tenant you want to have your insurance in both cases, your property insurance you want to make sure that they're aware that you're either going to be running it as a vacation rental or a long-term rental. I have a future guest about that. That would be interesting. Tell me have you stayed in any other rentals, vacation rentals that you've had experience with? I have. I had an experience maybe about five years ago. I had friends that were getting married here. They didn't tell me. They just kind of ran away and called me and said we're getting married on the North Shore come over and spend the weekend with us. So the only reference they had was a really pretty brochure and what we discovered was the brochure was very pretty but the unit was very old and dated wicker furniture and it was right on the ocean that you would think would be a good thing but it was also right against the rocks. So all I heard was the waves against crashing all night so it didn't get much sleep but it was just interesting because I know when she rented the unit if you don't live here like we do and we kind of know all the locations and spots like that you can really get disillusioned between the difference between the brochure and what's online opposed to I'm not sure if she did that through just some kind of online website obviously because I would think a property management company would handle things a little differently. You can still go onto the website of a property management company and direct I mean depending on how sophisticated their system is you can. But I would think a property management company is a little more concerned about their inventory and reputation so that would make sure that that property doesn't have any termites. Oh yes. And things like that so it was not a good experience and since then they've kind of torn the place down so that was really weird really weird. Oh boy I'm sorry you had that experience yeah that's why reviews are so important and so many people look at reviews. I do. I look at reviews for everything. Everything I do I'm always I drives my husband nuts he's very simple he sees it he wants to go there I'm like wait a minute I have to analyze and see what the reviews are saying so that's a nice balance. Yeah I think that's a good idea. Yeah. And then you know with long term like you said there's increase wear and tear like if you have a tenant in there like for five years which is good yeah. If you have a long term tenant the chances are when they move out you're gonna have to replace things. Yes. It's neat. Carpet depends on the grade of the carpet when they when they moved in and how long it had been there prior to them moving in but you're gonna want to refresh it. Yeah. Absolutely. Are you losing your piece? I am losing my piece. It's okay I have weird ears so we'll figure that out next time. Okay we're just gonna wing it. We're gonna wing it. I have had situations also where with an owner thinking we're gonna go one direction and then it turns into another direction and I have a success story one of the most successful ones in Kona that I managed. They wanted to rent it out long term but the garage was not accessible which is huge. So here's this big beautiful two car garage but the people coming to look at it couldn't access it. Because they were using it for storage? They were using it for their vehicles and it had a great ocean view. It had two huge master bedrooms and then like a loft area upstairs but it wasn't a closed off bedroom so we were having a challenge renting it as a long term rental and the owners were thinking that's the way they wanted to go and so I finally I said you know what do you think about trying to do it as a vacation rental because it's got it's hitting all the marks. Vacation renters don't care about the garage they care about pool, ocean view a nice lanai and deck and then that loft area you could end up putting in another four to six people. It was a huge loft area with bunk beds and pulled out beds and then two master suites for the adults with their own bathrooms. It's perfect vacation rental. Vacation rental now other than when the owners come is I mean I would venture to say it's booked like 90% of the time. Yeah that would be important though. You can take a turn. If the company handles both long term and vacation rental you can take a turn. Yeah that would be a big deal for a long term tenant not to have access to the garage and things like that. Yeah it was interesting and they wanted folks wanting a home that size typically wanted to have the third bedroom completely closed off which I understand that on vacation it's different but to live in a 65 days a year you want to have a nice closed off room rather than this big open loft area totally understandable. But another challenge with long term is understanding those landlord tenant codes which many do not and that's another benefit of just taking the route of hiring a property management company because it's your job to kind of understand these codes and things like that. Absolutely yeah that's what we're there for keep them out of trouble. Just the words you say can be something that's going to get you in trouble but you may not even realize it as an owner a layman that doesn't understand this day and age pretty much everything that's kind of the deal that's kind of the deal. Any other exciting stories that you can share? Oh my goodness. The other thing I was just going to say is you really are going to want to rely again on your property management company as your partner in terms of making these decisions and making these turns if and when you need to and helping you with pricing all those things so just really utilize them and if you don't feel you're getting that maybe you need to move on. I like that. Partnership. That's what it's all about. I want to thank you for joining us we're going to continue talking about property management and various aspects of that from insurance to work orders and maintenance and things of that nature and we're going to continue talking about these things every first Thursday of the month for the next couple of months so I hope you'll tune back in Christa will be joining me my fave and we'll kind of go from there so please come back and join us and until next time Aloha.