Honolulu Real Estate Is A Great Long Term Investment!
April 4th, 2008 categories: Buying Honolulu Real Estate, Honolulu Real Estate 101
Given all of the news regarding the economy, sub-prime loans and real estate prices a great rhetorical question is “Why buy Honolulu real estate now?” To me, the real question many buyers are asking is “Aren’t prices going down in Honolulu and shouldn’t I wait to get a better value?” My answer is always, it depends.
If you want to make money in real estate over the short term, then you should not ever buy! No one knows what real estate values will do, especially over short periods of time. Could values be lower a year from now? Sure they could. Could they be higher? Sure they could, but I wouldn’t bet on it. Over the short term real estate can make you look like an idiot. However, over the long term it can make you look like a genius.
Here is a real life example. In 1994, I purchased a leasehold 1 bedroom 1 bathroom unit at the foot of Diamond Head, in a building called Diamond Head Gardens for $185,000. I proceeded to remodel the unit at a cost of approximately $20,000, so my initial cost of the unit was $205,000. Within 2 years similar units were selling in the range of $130,000 to $150,000…a significant paper loss. In 1998 and 1999, there were sales of $160,000 and $165,000. Along the way, I spent another $22,500 to buy the land, which moved my total cost to $227,500. Needless to say, even I thought I would never see a price that would make me whole. To cut a long story short, I sold the unit in June of 2005 for $349,000.
So lets go through the numbers. My total cash investment in the property was $61,000 (down payment, remodel costs and purchasing the land). My gross profit before closing costs was $121,500. It took 11 years and my original investment was returned plus another $121,500. That’s a total return over 11 years of 199%. Averaged over the entire holding period, I had an average annual return of 18%. Note that that the return is calculated on the actual return and does not take into account the tax savings while I lived in the apartment. Once converted to a rental, further tax savings were generated from depreciation. So my actual return on investment was much higher.
I wish I could say that I had a master plan that foresaw these long-term returns. However, it proves that over the long run real estate is a great place to invest your money.
