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The Honolulu Advertiser

Posted on: Sunday, October 5, 2003

Advice for landords: 'Prepare for worst'

By Deborah Adamson
Advertiser Staff Writer

Doug Fortner, a real-estate broker with Century 21, examines a property in Mililani that was recently put on the market. Real-estate agents in Hawai'i have noticed increasing interest in rental properties.

Richard Ambo • The Honolulu Advertiser

Your dream: Tired of busy Honolulu, you buy a vacation home in Hilo. When you're not living there, you rent out the house, sit back and collect the money.

The reality: Your tenants are driving you up the wall. They call in the middle of the night to complain of leaks. Their family bulldog wets your new carpet. To your horror, their teenage son has decided to plant pakalolo in the garden.

Your piece of heaven has turned into a nightmare. What happened?

"When you become a landlord, you need to know what you're doing," said Albert Joy, president of Hawai'i Real Estate Professionals in 'Aiea. "You need to prepare for the worst and hope for the best."

Your rental home could turn into a headache if you're not prepared for the realities of being a landlord. It's a challenge faced by an increasing number of homeowners who are turning into first-time landlords, thanks to low interest rates and hefty home equity.

In 2002, 37 percent of second-home buyers nationwide purchased for investment, up from 20 percent in 1999, according to the National Association of Realtors in Washington, D.C.

"There's a perception of real estate as being a more stable and solid investment over time," said Walter Molony, spokesman for the group. "Demographics also is a factor, as baby boomers enter into their prime years for buying vacation homes."

In Hawai'i, real-estate agents and property managers also have seen increased interest in rental properties, not only from residents but those from the Mainland who want a vacation home in the Islands.

"They now have some equity and they're investing in rental property," said Jim Mazzola, broker in charge at CB Pacific Properties in Kailua.

Bradley Properties, a property manager in Honolulu, is handling 30 percent more properties this year to date compared with the same period a year ago.

Douglas Fortner, principal broker at Century 21 Liberty Homes in Mililani, said sales of investment properties at his office make up nearly a third of business. That's up from 10 percent in the mid-1990s.

ALBERT JOY
"We've got more investors now than we had before," he said. "For the first time in many years, you can buy property in Hawai'i and get a positive cash flow. Rents are going up and interest rates are low."

When the real-estate market was depressed, many people who leased out their homes did so at a loss because the going rents were lower than the mortgage payments. But during the past 18 months, rents have risen by 15 percent to 20 percent and mortgage payments have shrunk because of lower interest rates, he said.

For years, Judith Slawsky rented out her three-bedroom, two-bath Kailua condo at a loss. She charged $1,750 a month but her mortgage was $1,500 and the maintenance fee and taxes were another $495. Together with other expenses, she figures she lost $300 to $550 a month.

But with rents rising, she can now charge enough to cover her costs.

Still, the first-time landlord has decided to put her house on the market instead of renting it out. "I don't like the headaches and the unexpected expenses," she said.

Slawsky once lived in the condo, but moved out when she bought a house. At one point, she ended up renting out rooms to transients.

"It was a big mistake," she said. "They had their differences."

And then there were the repair bills: $7,000 for a new carpet and $1,700 to replace the stove and fridge. Then the water heater broke, leaking on the downstairs neighbor.

"We had to hire somebody with big huge fans to dry it out," she said.

Phil Weaver, an English tourist who bought a condo two years ago at the Waikiki Banyan, makes only $200 a year from his rental.

But that's just fine with the first-time landlord: He'd rather make chump change renting it out to a trusted friend than deal with the hassles of being a far-away landlord. Besides, when he's in town, he can stay at the condo with his pal.

"I'm a nudist," he said. "I wanted a place of my own so I can sunbathe for two hours every morning (on my lanai) without offending anybody."

A Pu'uloa Valley homeowner who became a landlord two years ago realized that he had to make repairs for the rental immediately, not when he gets the time. He also had to have enough money set aside to replace broken appliances right away — he couldn't tell the tenant to wait until he got his next paycheck.

Moreover, if you're renting to tourists from the Mainland, get ready to deal with gripes about nature.

"We get calls from guests who are upset that they saw a gecko or cockroach. We have to remind them that this is a tropical island," said Kaulana Irons, a vacation rental concierge at Coldwell Banker Bali Hai Realty on Kaua'i.

One tourist called to report a "4-foot long gecko," said Irons, with a laugh. "They're exaggerating and they're freaking out."

Another time, a guest called to complain about the rain and asked her what she could do about it.

"I said, 'let me put you through to God, and they laughed,' " Irons said.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.

• • •

First-timer tips

While being a landlord may not be a cakewalk, don't get discouraged. Proper preparation can turn a potentially unhappy experience into a joyful and profitable venture. Here are some tips from real-estate experts:

• Go beyond the tenant interview.

Many people make the mistake of going with first impressions.

"They would say, 'I had a conversation with them and they seem like nice people," said Albert Joy, president of Hawai'i Real Estate Professionals. "Then with the first month's rent, they are five days late and the next month, they are 10 days late."

Call their references, current and prior landlords, as well as the condo managers.

One red flag: They have a pattern of violating house rules at previous places they've rented, repeatedly caused disturbances or had illegal pets.

Consider letting your property sit empty until you spot a good tenant.

Check the applicant's credit and income.

In Hawai'i, the biggest headache landlords face is nonpayment of rent by the tenant, said Harold Chu, a real-estate attorney in Honolulu.

To avoid rent-skippers, run a credit check on the potential tenant and verify their income, said Stephanie Bullock, principal broker at Bradley Properties.

If they are self-employed, check their tax returns, she said.

• Get a copy of Hawai'i's landlord and tenant laws.

Know your responsibilities and rights, Chu said. For example, if a tenant is leaving, you need to return the security deposit within 14 days after the property is vacated.

If there's damage the tenant is responsible for, you have to send a letter within 14 days outlining the deduction from the security deposit and attaching the appropriate receipts.

If you don't return the security deposit in a timely manner, the tenant can sue you in small claims court for up to three times the security deposit plus legal costs.

Another thing: You can't discriminate against renters, Chu said. If you have a small, one-bedroom condo and a family of six would like to rent it, you can't legally tell them they have too many family members to be approved.

You can get a copy of the state's residential landlord-tenant code at a bookstore or the public library. It's also available online at www.state .hi.us/dcca. Click on "Office of Consumer Protection" and choose "Landlord-Tenant Info."

Opt for a long-term tenant instead of short-term rentals.

If your tenant stays for fewer than 180 consecutive days, you have to pay the 7.25 percent transient accommodation tax as well as the percent general excise tax, Bullock said. For those staying more than 180 days, only the general excise tax is applicable.

• Put the tenant's responsibilities in writing.

If the tenant is supposed to take care of yard work as part of the deal, put it in your contract to minimize misunderstandings.

• If you allow pets, be picky.

Letting a tenant have a pet means you can charge more for rent.

But be selective, Bullock said. For instance, prefer tenants with older, housebroken pets than those with kittens or puppies that may not be fully potty trained.

Moreover, "young puppies bark, chew, scratch," she said.

• Tell smokers to take it outside.

Don't let tenants smoke inside the house since the smell could get into the carpet and the walls, Bullock said. Tell them to smoke outdoors and make sure it's in the contract.

• Don't put in any furniture.

Supply the drapes and appliances, but let the tenants bring in their own furniture. If a sofa gets damaged, it won't be yours to pay for.

• Consider remodeling.

Just upgrading the kitchen and the bathroom would make a big difference in an older property, Bullock said. Your unit would be more alluring to tenants.

• Hire a good property manager.

If you'd rather not do it yourself, let a property manager handle the rental for you as long as you don't mind giving up between 10 percent to 15 percent of your rental income.

Bradley also charges an additional fee of 15 percent each time it moves in a new tenant to cover the cost of marketing and time spent showing the condo or house.

Joy said choose a licensed property manager who belongs to the Honolulu Board of Realtors; its members must abide by a code of ethics.

Check out a property manager's references and contact the state Department of Commerce and Consumer Affairs for any complaints against the company. Call 587-3222 and press 1.