By Lisa Lee
“Successful real estate investors don’t wait for the market to change, they jump on opportunities that the current market brings,” says Dan Tabori, executive vice president of business operations at Prudential Locations. “Today’s market is primed to benefit investors looking to reposition their properties. Record-low interest rates combined with low prices and a low capital gains tax make it an opportune time for investors to adjust their investment strategy.”
Toan Doran, a real estate agent and partner at Prudential Locations, has a number of clients taking advantage of these factors to reposition and grow their portfolios.
“It’s kind of a ‘perfect storm’ situation — great equity, prices have dropped and low interest rates,” he says. “It’s the perfect
time to upgrade.”
Two and three years ago, Doran had multiple clients approach him to discuss trading investment properties, he says, but “the trade didn’t make sense then — they would have had to pay too much. Now, they are acting. It makes sense to sell because they have good equity, and it makes sense to buy while prices are still low. For every 1 percent that interest rates go down, it’s the equivalent of prices falling by 10 percent.”
Doran’s clients have different strategies based on their goals. “Some are selling 1-bedroom condos to acquire single family homes, which have much bigger rental income. One is moving up from a 1-bedroom condo to a 2-bedroom with greater value.”
Depending on an investor’s current situation, there are multiple ways to take advantage of today’s market.
“1031 exchanges provide an opportunity to reposition your portfolio while deferring any taxes on gains from the sale of existing investments. You can swap out properties that aren’t producing enough income for those that are,” says Doran. He sees investors in areas that have been hit, like Ewa and the Leeward coast, exchanging for properties that are in higher demand in town. Another common scenario is to swap undeveloped land for income-producing property, such as vacation rentals.
“Depending on the property being purchased, we’ve seen excellent financing options that make the exchange even more attractive and can improve the investor’s position and cash flow on day one,” Tabori adds. While many investors are refinancing to take advantage of low interest rates, selling a property in order to acquire one with lower-interest financing can kill two birds with one stone by repositioning your investment at the lower interest rates.
“Although the 1031 exchange is a great vehicle for deferring taxes, it’s not the only option for investors,” Tabori says. “Capturing your profits at the current low capital gains tax rate in speculation that taxes may rise over time, and then purchasing a new investment, may fit certain investors’ goals depending on their tax situation.”
Leveraging Current Assets to Acquire More
Some investors see the current market as an opportunity to buy more. They are leveraging their assets by using the equity that has appreciated in one property to acquire additional property while interest rates are so low.
“If you have a sizable amount of equity in one property, that’s like money sitting in a bank account,” Doran says. “Investors are taking out the equity from one property and using it as a down payment for another property, which they’re getting at a very cheap mortgage.”
According to Doran, condos are popular with investors due to their low maintenance, easy rentability and appeal to offshore buyers. Both local and Mainland investors gravitate toward Waikiki.
“Many people like to own real estate where they like to travel so that they can write off travel expenses,” he says. “Kakaako is also a hot neighborhood. It’s a different type of investment and a great place for second-homeowner/investors.”