$42K vs. $71K — Which Property Type Wins?

Hawaii Rental Income Breakdown: $42K vs. $71K — Which Property Type Wins?

Real numbers, real tradeoffs

Short-term rentals are properties rented for less than 30 consecutive days, while long-term rentals are properties rented for more than 30 days. You will see long-term rentals from 6 months to a year on rental properties.

Let’s start with what both investment types have in common. Both property types will require maintenance and upkeep. With short-term rentals, maintenance and upkeep are more frequent because visitors use the property more often, with stays of fewer than 30 consecutive days. You will have visitors staying on your property for 5 days and leaving, and someone else or family will occupy your unit for the next two weeks. Every time an occupant checks out of the property, the property unit needs to be cleaned, towels and bed sheets need to be cleaned and replaced. Also, the plumbing and lighting need to be in working order.

For long-term rentals, property maintenance and upkeep are less frequent. As part of the lease contract, the tenant agrees to keep the property in the same condition as when they signed the rental agreement. However, that doesn’t always happen.

My family owned a long-term rental property during my college years, and I can say from firsthand experience that the renter or tenant of a long-term lease doesn’t always keep the property in the same condition as when they signed the rental agreement. Therefore, the cost to maintain the house or property is much higher than you would probably see for short-term rental maintenance and upkeep if you managed a short-term property often.

Long Term Rental

Pros

• You will have a consistent monthly income throughout the rental lease.
• If you find a good tenant who pays their monthly rent on time and takes care of the home, you will have monthly passive income that can be a good investment.

Cons

• You could have a renter who doesn’t pay on time.
• You could have a renter who doesn’t take care of the property.
• You could have a renter who refuses to leave your property after the rental lease ends.
• You will find yourself spending more on legal fees to remove the tenant from your property because they refuse to leave.

Short-Term Rental

Pros

• There will be more than one tenant renting your property long-term. That means you will be able to maintain and upkeep your property more often. You will be able to fix and make minor repairs to your property before it becomes a problem and becomes more costly for you.
• You can change your daily rate at your discretion because you have a shorter lease.
• You will be able to find your optimal daily rate to maximize your rental income from your property.

Cons

• The occupancy rate of your property is unpredictable. You could go several months with almost full capacity and occupancy during the visitor months in Hawaii and Kauai.
• The tax rates for short-term rental property are higher for owners.

Now Let’s Talk Numbers

Long-term rentals

Let’s say you find a two-bedroom house for $3,500 per month. You also find an awesome renter who treats your property like their own and stays in your house for 8 years.

General Excise Tax (GET) plus County Property Tax: 4% (GET) plus your property tax on your assessed value.

$3,500 x 12 months x 8 years = $336,000.

Gross yearly income: $3,500 x 12 = $42,000 per year

Your gross income from your property investment is $42,000 per year. Of course, you will have business expenses that will lower your net income. But that depends on finding a good tenant who pays rent on time and takes care of your home.

Many long-term rental property owners are not as fortunate as to find a renter who fits that characteristic. My family’s long-term rental property when I was in college didn’t fit that category; it can be a nightmare for the property owner.

Short-term rentals or vacation rentals

On Kauai, a short-term or vacation rental is any rental of less than 180 consecutive days. Also, Rentals under 180 days are not allowed for properties outside of the visitor destination areas (VDA).

• 180-day rule

There are also additional taxes for owners of short-term rentals. Here are the tax requirements that you must pay to own and run a short-term rental on Kauai.

General Excise Tax (GET): ~4.5%

Transient Accommodation Tax (TAT) ~11%

County of Kauai TAT surcharge: ~3%

Green fee (State): ~0.75% added to the TAT, which increased to 11%

County of Kauai Property Tax

Kauai short-term rentals must be in visitor destination areas (VDAs). Here are the visitor destination areas on Kauai.

• Poipu/Koloa
• Princeville (north shore)
• Kapaa/Wailua (parts of)
• Lihue (near the hotels)
• Waimea (limited)

The Numbers

Example of a short-term rental rate: $300 per day

237 days of occupancy in one year (365 days) – 64.8% average occupancy rate

$300 x 237 days = $71,100 per year

Gross yearly income = $71,100

Short-term Rental vs Long-term Rental as an Investor

Obviously, from a gross income perspective, short-term rentals generate more income than long-term rentals in the situation above. But, from a business expense viewpoint, it’s a different story.

There is no comparison between a short-term and a long-term rental property owner. You will be taxed a lot more as a short-term rental property owner.

• Higher taxes vs. lower taxes
• Higher yearly gross income vs. lower yearly gross income

If you’re considering being an investor in short-term or long-term rental property on Kauai, the question becomes what situations you are willing to tolerate.