 And this is the life of its land is in its real estate on Think Tech Hawaii. Today, we're going to talk about COVID-19's impact on the short-terminal market. And I'm lucky enough to have Rick LaPorga with Hawaii Ocean Club Realty Group Inc. here with us to share some information. Hi, Rick. Thanks for joining us. Hey, aloha. Dad, tell us a little bit about yourself. Well, I'm a local boy born and raised on this island in Oahu. I'm a west side guy from Waipahu. And I love this island, you know, all my family here, of course. And I actually went into tourism as a long-time career as a tour guide. And so being involved with hospitality, I enjoyed the tourist and the industry as a whole and sharing Hawaiian. And anyway, it evolved into, you know, getting into maybe a profession that, you know, a profession change into real estate went into like mortgage first and then getting my license and then becoming a broker and meeting my wife. She was also in hospitality from Japan. And so that's where the team started with this brokerage of Hawaii Ocean Club Realty. And, you know, we have clients from Japan and also, well, most of our clients is not from here, is living, you know, in Japan and mainland US even as far as Taiwan. We represent them on that, you know, vacation rental type management. They're doing vacation rentals. OK, so we always hear about short-term rentals. So what exactly is a short-term rental? OK, short-term rentals is residential dwellings that would do less than 30 days of rental. OK, so there were, I understand, 8,000 to 10,000 vacation rentals on Oahu, and which is a lot of great impact to even affecting the hotel industry. So short-term rentals, people enjoyed having that option, staying outside of, you know, that hotel type. They want a full kitchen. They want even an extra bedroom for a group or family not have to be in that same room, but, you know, different rooms and having that privacy. Some wanted to be on the beach. So this is the vacation rental experience. And man, it grew to its own animal over time when, you know, you have social media and Airbnb and all these booking channels came up out with online. Man, it just exploded. But short-term rentals are less than 30 days. But also keep in mind that in the taxes, in the, I guess, the way you pay your taxes and how it affects that part of it, the accounting part, if you are long-term, which is six months and longer, all you have to do is pay a general excise tax, 4.712%. Anything less than six months would fall under transit accommodation tax. So this is a whopping 10.25%. That's a big difference in having the identity of what is your responsibility doing this short-term. So almost 15%, 14.925% if you're doing less than six months. So, but really in the jargon of vacation rentals, you either be nightly or less than 30 days. There's extended stays for month to month for corporate and nurses. They, you know, love staying at a furnished unit with the kitchen. And so this is what, you know, in a nutshell, what a short-term rental is. So those taxes are, I assume, what brought on the law a couple of years ago. There was a law that kind of went into effect here in a lot. So how did that law impact the short-term rental market then? Yes. Okay, what an impact that is because it has, you know, a tax hit or increase of taxes and what you owe. See, the hotels, they were paying their high taxes and, you know, they didn't mind vacation rentals, but they thought it wasn't fair that vacation rentals could just pay like a residential property tax. They thought, well, you know, they're charging so much, they should help out in paying the type of taxes they did. So, and not to go all over the place, so this new law, Bill 89, it's referring to the zone, zoning. So there's a resort zone where you can do this short-term rental. In Waikiki was a great impact because you're looking at Coheo Avenue as the boundary. If your Maoka side of Coheo Avenue and the mountain side, that is residential and not falling into a resort zone. The resort zone is from Coheo towards the ocean side or Makai. And so, oh boy, too bad there was a lot of vacation rentals that was impacted. They're doing great with their occupancy, their income was substantially higher because offering vacation rental, but they no longer can do that. And maybe later on, we can expand more on numbers in comparison. Did I go all over the place about your question? So have we seen those recover? Have we seen a recovery since the Bill 89 impact? Did we start to see recovery? A recovery? Absolutely not. If we narrowing down a property owner who has a vacation rental, representing this question and all other vacation rental owners that was one time doing it before the Bill happened. So before doing it, let's say a one-bedroom Waikiki Sky Tower is a great example. It's on just at the Maoka or the other side of the resort zone. And so they could do like 170 a night. They would take in like 35 to 4000 and sometimes even more per month during the vacation rental. So now that they can't do it, they have to go into this long term market. And luckily, you get like maybe 1700 or 1800 a month in comparison. So they were making twice and three times more on the vacation rental market. So it has a great impact. People cannot recover from that type of income. And you have to run the numbers and see the true impact numbers wise because it has that ebb and flow of... So if you're doing long term and if you're 30 days and longer, property tax ID is substantially less that you're paying on the monthly or for the full year. So let's say if it's $100 a month that they were paying or they're paying as an owner occupy with 30 days or more. Let's say it's $100 a month. If it was a vacation rental, a property tax would be about four times more like $400 per month. So but you have to run the numbers but substantially higher income on a vacation rental versus going to that long term. So never recovered. Your question was have they recovered? No is the answer. It's hard to recover that type of numbers. So they still hadn't recovered from the bill going into effect and then we hit with COVID-19. So what kind of impact has that had on the short term rental market? OK, so COVID-19 is just another killer itself because doing a vacation rental as a whole, you need vacationers, you need this tourist. Yes. And the numbers are, you know, across the board way lower. And let's say with the bill on top of that, vacation rentals even impacted not only the homeowners. And I would say the homeowners that were doing part of their home as a supplement income, they're having a hard time paying their mortgage now. So those are type of transient vacation rentals or bread and breakfast type. So they're impacted greatly. The investors who did condo, same thing that even though they're not living there, it's hard to pay that mortgage maintenance fees and so forth. They needed that high income. And poor people who was involved in handyman and the cleaners involved, management companies losing all this income, Hawaii Ocean Club Realty, I think we're about 60 to 70% less or down in hitting that thank goodness for long term rentals keeping us alive here. So both that bill surely started to bleed. And now it's the board, we're in a free fall with this COVID-19 really impacted altogether. Sure, yes. So what it did, it did. I had never actually even thought beyond the owners. I didn't think about the handyman, the cleaners. You know, the property managers that, you know, the ripple of friends that it had. So what are the owners doing to survive the shift? You know, that is the key word, a survival mode. It's definitely that, you know, the tourist stop coming, the income stop coming for that. So you need to start to at least stop bleeding. The Band-Aid would be, you know, your long term rental market just to pay the bill. So that's what we're trying to do. Well, you know, it's really tricky because leading up to winter, we thought it was going to recover even two months ago. We didn't think you're just like extending, extending, getting worse. The numbers of COVID just, you know, increasing. So it kept on stopping. And I think even the restaurant industries are all of white key hospitality. As a whole, we were just hoping and it'll come back. But man, it may take another six months, a year, you know. So, you know, we need, we need that medical help somehow to curb that. So the survival mode is just getting into that long term market, anything to pay the bills. And the other thing is, of course, just selling it and, you know, going another direction. And of course, if you do go back into the market, do it legally. Purchase one that is zone in the zone of resort and is a legal vacation rental. Man, the fines are 1000 to 10,000. Crazy, right? Yeah. They're going after you. And the way they go after you, they look at the advertisement. That's where they start. And so that's where they're telling these booking channels like Airbnb and others verbal. You better tell your clients it has to say 30 days or longer. If they're not in that resort. So, of course, you know, non conforming certificates is gold, right? You can, you can do vacation rentals. So, so now that we have moved into tier two and we hope we stay there. Are you seeing more activity now that the tourists are allowed to come back in and making rentals are allowed to operate? You know what? Magical. It surely has put some life in here across the board. I mean, restaurants, you know, are able to open and other, you know, small businesses. So as tourists start to come in, we see an increase of interest in booking vacations coming up to the winter. So that's nice. And of course, it'll change probably significantly when Japan rolls around. Japanese visitors coming over here. So I understand a lot of hotels are not operating. My office is at the Imperial Hawaii Resort. And getting an update from them when that took an effect, October 15, having negative COVID testing coming over without quarantine with that test. They're about 20 percent increase. So that's good. I think it's across the board. 20 percent is a pretty good number increase in activity. And yeah. So that's good. It's better than nothing. So. Oh, yeah. Oh, yeah. So now you talked about, you know, maybe it's time to sell it. So what does the market look like for buying and selling a vacation rental right now? Okay. So buying and selling. Let's look at pre-Bill 89 or before. This zoning really was out there for a long time. It was more of enforcing it with the steep fines. And so last year in October, you would have, and I had, you know, actually data on a couple of places that we manage. Like we're talking about the Waikiki Steak Tower, pre-Bill 89, and so even pre-COVID. It was selling from mid $400,000 to mid $500,000. And so right now on a six months, it's mid 300s to mid 400s. So that's about 100,000 dip. So it is impacted greatly where they couldn't, they was doing vacation rental, but now they know it's illegal and so they want out. And that's the hard numbers. And so here's another case in point, the Waikiki Banyan. That's another story in itself about, you know, legal vacation rental because they, they're, I think we'll win the battle that they will be an exception to that. They're at the other side of the Cajillo at the mountainside. So it's not in that zone, but there may be an exception to the Waikiki Banyan because they were running as a hotel and when the non-conforming certificate was being passed out, or when it was permitting, maybe when they built that building, somebody forgot to let them know that we are operating as a hotel. So it never really got listed. So that's where they, you know, the hotel has been known. The Banyan as a condo has been known as running as a hotel since day one. Well, anyway, so the numbers were pre-Bill 89, same time last year, 23 sold and they sold fast. It was hot as a vacation rental, 500,000 to 600,000 once sold at 750,000 last year. Okay, right now you have in post Bill 89 and now with the COVID, you have six units sitting for 100 to 200 days on market, sitting a long time. You have five of them sitting about two months. So 15 total active sitting for an extended time. And you're talking about comparing the sales price, right now it's sold for as low as 400,000 and then going up to maybe around 500,000. Okay, so last year we have 500 to 600,000, this year 400 to 500,000. You know, same thing, 100,000 dip almost, that's an impact. So that's where buyers market, it's cheaper, yeah, and sellers market, yeah, you're losing, yeah. So I work with a lot of investors, that's what my heart is with the investors. So would you think an investor picking up some short-term rentals now why the prices are low would be a good investment? I mean, we have no crystal balls, we take no responsibility, but what do you think as far as an investment? You have to run the numbers and while you're going into a down cycle, run the numbers that long-term could at least, you know, don't hit a home run, you know, in baseball, you bunt, try to get on base, you do singles, right, just covering the expenses. Okay, you don't want to go negative, you just want to cover your expenses. So, and when vacation rental keep coming in and getting back to almost like their heyday, yeah, look at higher return rates, substantially higher. So got to run the numbers carefully because, you know, you have all these, you know, the taxes involved, you know, first you could do the 30 days or longer, so you don't have that big tax hit on property tax and then shift it when the next tax cycle comes around and go and do that vacation rental. Of course, you pay the higher tax because you're getting a higher income, so that's a good strategy and know your building, know what's legal, you have to know that. Of course, you know, you would know as an agent to cover those basics, yeah. To do your due diligence. So what about cap rates? What I know in a long-term rental that we're seeing about a 4% cap rate here on the island, what's a cap rate, a good cap rate to see for a short-term rental? Yeah, so just an overview not to get too of that nitty gritty, yeah, long-term, you know, 2 to 4% and the short-term, yeah, you know, you'd be cooking, you know, 4 to 5 and then we, or 4 to 6% and then some would even reach heights to even 8%, you know, but I don't think 8% will come in a long time. You know, yeah, I would say, you know, a good return 4 to 6% is safe to say, yes. So what's the best way to find a good deal on a short-term rental? How would you, how do you tell your clients to get to find a good deal? To find a good deal. Man, I tell you, there's now a lot out there, but people are, and their agents know that if you're in a legal and resort zone, you know, you're going to demand the higher taken across the board. So you just have to, you know, it's, you have to dig and lift up every little stones and see what's out there. Not too many, not too many is out there. Hawaiian Monarch is unique because it's at the Kohio-Mauka end, not in the resort zone, but find out there's an exception to that. I call the Department of Permitting and Planning, Planning and Permitting, DPP, and I call them and they told me that that is a legal vacation rental because it was a known fact. And still today, they do have a front desk and operating. So that is one exception. It's an older building. You have to know the nuances because of, you know, older buildings, you know, you have a lot of repairs. So you have to account for that and no assessments that I know of, but, you know, it's an old building. So you have to calculate for that. And you can buy it, you know, kind of low and they do have, you know, there's a market for long term there, of course. So that helps you as a good investment to know those interesting buildings like Hawaiian Monarch, exceptions, where it's a vacation rental. Like Marine Surf Waikiki is in that resort district on that Makai at Oceanside of Kohio. Their price has always stayed high. So, you know, you're not going to get a good deal there, that's for sure. Yeah, but Hawaiian Monarch, yeah, you might find and, you know, there is some lease, a few lease holds. You can get really inexpensive and then later on purchase the fee. And but, you know, if it's simple, even that is, you know, substantially lower than others, you can still do vacation rentals. So, you know, those are interesting buildings to consider. Yeah. Oh, all right. So what's the best advice that you can offer somebody who is thinking about investing in the short-term rental market? Yes. Okay. So normally someone who is looking for vacation rentals is obviously not from here. And there's some that, you know, would go into the market that's investors here in Hawaii, but most of which are, you know, mainlanders. Because one, they might, it might change the dynamics because they want somewhere to stay, especially during a winter time. So we have some owners that do that when it's vacant and they would take the good months, you know, the high-income months is winter. They would come over here in the winter and then we try to find the vacation rentals, you know, surrounding those months. So know a vacation rental specialist, I guess, to tell you some of those little tidbits to know numbers have to go across the expenses. Some vacation rentals, if you're doing like a Trump Tower, it might be super low in price and purchase. But I tell you, they would take like 70% of your earnings, you know, 50% already as like a management fee. And there's, you know, other fees involved, you know, the reserves, their advertising fees, fees, fees after fees. And, you know, we got out of escrow knowing that we would be losing 400 a month even if we self-managed a Trump studio, which, you know, was kind of low at $350, $250 for Trump, you know, that's unheard of. We thought, oh, that's a good deal, you know, do a purchase. But yeah, we ran the numbers even if it's self-managed. Yeah, we're still about $400 to $500 negative. Some vacation rentals, you have to go into the rental pool. So you have to look at that too. You have to get one that you can self-manage. Yeah. All right. It's good to know a vacation rental specialist. Yeah, I can recommend one. So if you want to contact you, please reach out to me. I can connect you with Rick because I would love for him to answer any of your questions on short-term rentals. And I'll get you all the information. We're making a good team. Yes. All right. Thank you so much for joining us. I learned a ton. I think our viewers did too. And again, this is Keena Nisley with The Life of the Land. It's real estate. Thank you, Thank Tech Hawaii. And in a couple of weeks, I will be back. It'll be Veterans Day and I have the military, the millionaire is going to be here to share with us how he has been an active duty Marine and a successful investor all in one. So I can thank you so much, Rick. And I will see you all in a couple of weeks.