Consider These 5 Hawaii Real Estate Investor Strategies in 2023

Page Guide: Build an ADU | 1031 Exchange | BRRRR Method | Hawaii Airbnb | House Flipping

Hawaii is known for its beautiful beaches, year-round sunshine, and laid-back lifestyle, making it a popular destination for both tourists and those looking to call it home. As a globally recognized "Trophy" desination, real estate in Hawaii can be a lucrative investment opportunity.

One of the standout features of investing in Hawaii real estate is the diversity of options available. The state is home to a 8 different islands with their own unique geography, attactions, culture and despite each island being different; each side of each island also has it's own unique character and appeal. Whether it be the bustling city of Honolulu, booming with new Oahu New Construction, resort communities like Kuilima Estates & Ko Olina offering Airbnb in Hawaii, or the laid-back charm of small beach towns like Hilo and Kailua, Hawaii has something for everyone.

In addition to its diversity, Hawaii also offers a range of housing options to suit a variety of needs and budgets. Whether you're looking for a single-family homes, condos, or a piece of land to develop, Hawaii has it all. And with its strong economy and growing population, the state expects a steady increase of people Moving to Hawaii. 

But investing in Hawaii real estate isn't without its challenges. The state's high cost of living and limited supply of housing can make it difficult to find properties that offer a good return on investment. Additionally, the state's unique geography and climate can pose challenges for those looking to develop land or build new homes.

1. Build An ADU

Building an ADU in Hawaii can be a great way to add additional living space to your property, whether you want to use it as a rental unit, a place for visiting family and friends, or just for your own personal use. Adding an ADU in Hawaii has become especially popular as "Tiny Homes" continue to catch fire across the nation.  

This strategy is likely my favorite; one I've helped a couple of clients take advantage of over the past 2 years and arguably the most efficient option to increase passive income. This is because it requires you to already own the land, which we all know is the most expensive part of Hawaii Real Estate; accounting for 70-80% of Hawaii home values in most cases.  Since your money is only being leveraged to improve the existing property, your cash on cash return is likely substantially higher than it would be if you chose to acquire a new property instead. The cost of living in Hawaii has skyrocketed over the course of the pandemic, which condo prices of $500,000 and $1,100,000 in 2023. 

Building an ADU in Hawaii does come with its own set of unique challenges and regulations that you will need to navigate. To learn more, check out our Comprensive Guide to Building an ADU in Hawaii with Insights, Pros & Cons, Builder Recommondations, as well as my experiences with adding an ADU to my Kailua home!

2.) Do a 1031 Exchange 

A 1031 exchange, also known as a like-kind exchange, is a tax-deferred transaction that allows investors to sell a property and then purchase a similar property without paying capital gains tax on the sale. This can be a valuable tool for real estate investors looking to sell a property and then reinvest the proceeds into a new property, as it allows them to defer paying taxes on the sale until a later date.

With Hawaii appreciation rates sky rocketing through 2022, homeowners and investors have seen a substantial tick up in their equity. Selling an investment property in today's market could make for a sizable taxable gain which makes 1031 exchanges more attractive than ever. 

I took advantage of a 1031 Exchange myself in 2018; trading (2) duplexes valued at $400,000 each in Waianae for a tear down 2-unit property in Kaimuki for $960,000. After $150,000 in renovation and a lift from market appreciation, I refinanced this property for an After Repair Value of $1,400,000 and pulled out equity to reposition myself for another acquisition. This saw me effectively combine the 1031 Exchange strategy with the BRRRR strategy that I'll detail next!

3.) BRRRR

The BRRRR strategy, which stands for "buy, rehab, rent, refinance, repeat," is a popular investment strategy that involves buying a distressed or undervalued property, rehabilitating it, renting it out, refinancing the property to pull out equity, and then repeating the process with another property. This strategy can be a effective way to build wealth through real estate investing, especially in markets with high demand for rental properties.

If you are considering using the BRRRR strategy in Hawaii, there are a few things you will need to keep in mind. First and foremost, it is important to carefully research the local real estate market to identify potential investment opportunities. This may involve looking for properties that are undervalued, distressed, or in need of repair, as these can often be purchased at a lower price and then renovated to increase their value.

Once you have identified a potential property for your BRRRR investment, you will need to carefully consider the costs and financing for the rehab and renovation process. This may involve working with a contractor to develop a detailed renovation plan and budget, and securing financing to cover the costs of the project. In some cases, it may be possible to finance the rehab and renovation through a construction loan, which allows you to borrow the money you need to complete the project and then roll it into a traditional mortgage once the property is ready to be rented.

Once the property has been renovated and is ready to be rented, you will need to consider the ongoing costs and responsibilities of being a landlord. This may include things like property management fees, maintenance and repair costs, and marketing and advertising expenses. You will also need to familiarize yourself with the local regulations and laws governing rental properties, including any requirements for permits or licenses.

Finally, you will need to consider the timing and logistics of refinancing the property. In order to successfully use the BRRRR strategy, you will need to refinance the property at a higher value than you paid for it, in order to pull out equity and fund your next investment. This will typically involve working with a lender to secure a new mortgage, which may require you to provide documentation of the property's value and income potential.

4.) Buy a Hawaii Airbnb

Buying a vacation rental property in Hawaii can be a great investment opportunity, as the state is a popular tourist destination and vacation rental properties are in high demand due to the year round tropical climate, world class surfing, and destination weddings. Despite Hawaii having 46,000 hotel rooms, the state receives 10,000,000+ visitors per year at times.  Hotel occupancy rates in Hawaii are some of the highest in the nation and with travel culture steadily shifting from small hotel rooms in limited locations to Airbnb's & VRBO's in Hawaii, savvy vacation rental unit owners can position themselves for lucrative returns. And then there's the added perk of being able to visit or live part-time in your Hawaii investment property!   

Buying a vacation rental in Hawaii also comes with its own set of unique challenges and considerations that you will need to navigate. Check out our comprensive Hawaii Airbnb Investor's Guide to educate yourself on all elements of owning a vacation rental in Hawaii. From zoning laws, permits, taxes, property management and everything in between. We'll also give you our favorite buildings for legal vacation rental ownership.

5.) House Flipping

House flipping, also known as property flipping, is the process of buying a distressed or undervalued property, renovating it, and then selling it for a profit. This can be a lucrative venture for experienced investors who have a keen eye for identifying properties with potential and the skills and resources to successfully complete renovations.

If you are considering flipping houses in Hawaii, there are a few things you will need to keep in mind. First and foremost, it is important to carefully research the local real estate market to identify potential investment opportunities. This may involve looking for properties that are undervalued, distressed, or in need of repair, as these can often be purchased at a lower price and then renovated to increase their value.

Once you have identified a potential property for your flip, you will need to carefully consider the costs and financing for the renovation process. This may involve working with a contractor to develop a detailed renovation plan and budget, and securing financing to cover the costs of the project. In some cases, it may be possible to finance the renovation through a construction loan, which allows you to borrow the money you need to complete the project and then roll it into a traditional mortgage once the property is ready to be sold.

As you complete the renovation, it is important to keep in mind the needs and preferences of potential buyers in the local market. This may involve making aesthetic improvements, like updating finishes and fixtures, or making functional improvements, like adding new appliances or making energy-efficient upgrades. You will also need to carefully consider the timing of the sale, as the success of your flip will depend on your ability to sell the property for a profit within a reasonable timeframe.

Finally, you will need to consider the logistics of selling the property, including things like preparing the property for showings, marketing the property to potential buyers, and negotiating the sale. It is a good idea to work with a real estate agent or broker who has experience selling properties in the local market and can help you navigate the process.

We would express extreme caution with this last strategy, especially given current market conditions. Flipping Houses in Hawaii became very lucrative over the course of the pandemic due to skyrocketing appreciation rates but with the Hawaii Real Estate Market cooling off in 2023, profitable flips are going to be fewer and further between. With that, we are inclined to encourage Fix and Flips to only the most savvy investors, with the highest risk tolerance. 

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Overall, investing in Hawaii real estate can be a rewarding and lucrative opportunity. With its beautiful location, diverse housing options, and strong economy, Hawaii is a great place to invest in real estate. However, it's important to carefully consider the challenges and potential risks before making any investment decisions.