Buying a vacation rental in Hawaii

Vacation rentals are a popular topic for mainland investors buying in Hawaii.  Buyers often think about owning a property here, renting it out like a hotel room for a tidy sum and living in it when they vacation in the islands.  It's a great idea!  There are some considerations that buyers should be aware of.
 

The difference between a vacation rental and a normal rental

In Hawaii, a transient rental is defined as being for a  period up to 180 days.  Residential (non-transient) rentals can be for periods of 30 days and more (yes, it's a bit confusing).   In general we consider 30 days and longer as non-transient rentals for residential properties.

Applicable taxes for Hawaii rentals

Hawaii has two taxes that may apply to rentals.  The General Excise Tax (GET) is Statewide.  The rate on Oahu is 4.5% and for the neighbor islands (Maui, the Big Island, Kauai etc.) the rate is 4%.  Oahu's rate is higher because we're funding construction of a mass transit system.  GET is taxed on income at stores, restaurants, car dealerships, self employment income and other sources.

The Transient Accomodations Tax (TAT) applies to rentals for transient-type properties (hotel rooms and vacation rentals).  The TAT rate is 7.25% 

Problems with vacation rentals

In general, vacation rentals are legal at properties zoned "resort."  Most "resort" zoned properties are hotels and condotels.  On Oahu, these properties are most prevalent in Waikiki. 

Many prospective buyers are interested in places like Kailua and the North Shore.  They've seen vacation rentals on the internet and they want to buy a similar property.  Some of the vacation rentals are grandfathered in (they became vacation rentals many years ago, before the State began regulating them) and others are just plain illegal.

Grandfathered vacation rentals are sometimes transferable.  The State keeps a close eye on them and if certain rules are not followed the rental certificate can be permanently revoked. 

Illegal vacation rentals have historically been overlooked by the Counties.  This seems to be changing. The County of Maui is in court at the moment, seeking to collect $214,000 from a California woman who claims that she only lets friends and relatives stay in her Kihei home. 

The County alleges that she charges thousands of dollars per week to rent out her four bedroom home.  The County did some private eye work, searching for vacation rentals on the internet and following up with people who rented the home.  Several of the renters interviewed with officials and described how they found the rental on the internet and paid the homeowner, not knowing that the property was an illegal vacation rental.  The renters presumably were not penalized by the County.  Out of state renters usually do not know whether their vacation rental is legal or not.

The County Code specifies chages of $1,000 per day for violations of the rules regarding vacation rentals.  The homeowner claims she's being harrassed by the County of Maui.

What's the big deal?

Some people wonder why there's such a fuss about vacation rentals.  Imagine being in your home, getting ready to go to bed and hearing people partying next door.  Not just tonight, maybe several nights a week, every week.  Seeing different people coming in and out of a neighbor's house every day or week is not comforting either. 

Another problem is taxes.  If a vacation rental is illegal (not properly zoned), is the owner paying tax on the rental?  Also, is the owner paying both the General Excise Tax AND the Transient Accomodations Tax?  One would think, if the owner is conducting illegal vacation rentals, they might decide not to pay the applicable taxes.  Therefore the State of Hawaii and its residents lose.

Yes it's a big deal.  When we buy homes in residential areas we expect reasonable peace and quiet.  And we all should pay our taxes, including vacation rental owners.

Visit Mike's website when you're looking for Hawaii homes.  We can also send you listings of legal vacation rental properties for sale.

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