Friday, August 19, 2011

Calculating the cost of the home ownership in Hawaii

We are closing in on four glorious years of living in Hawaii. We lived in a house in Hilo for two years and in couple of months we will have lived in a condo in Kailua-Kona for two years.

As renters we are aware of having a different status from the owners. We aren’t invited to the owners meetings and can’t vote for our favorite board members though they make a big difference to us as residents in the condo complex. The global economic contraction has meant that many of the owners have deserted their condos or returned them to the banks. The resulting short sales and foreclosures have dropped the prices substantially during the two years we have lived here. The desire to have a say in the condo complex politics and the substantial reduction in prices made us wonder if it still makes financial sense to keep renting so we re-calculated the cost of ownership in Kona with new lower prices.

The property under consideration is a two story, 1800 square foot, 3 bedroom, 3 bathroom townhouse with great views of the beach. It was built in 2004 and has modern appliances, a parking spot, and an enclosed single garage. The original owner paid for $550,000 for it. Our calculation looks at the cost of ownership over 4 years or 48 months (since that is the average time a mainlander stays in Hawaii before moving back). The owner/bank is asking $350,000 (a 36% loss over the past three years). The cost of ownership includes taxes, monthly home owners fee ($680), real estate transaction fees (6%), mortgage (assuming 4% loan and no PMI), and other purchase and sales costs. The costs don’t include maintenance and upkeep of the unit or any unexpected assessments by the owners association.

Monthly home owners fees: $680 X 48 months = $32,000
Annual Insurance: $1200 X 4 years                  = $4,800
Real estate taxes: $1200 X 4                           = $4,800
Purchase costs (1.5% origination fee)               = $5,250
Purchase/sell cost (6% real estate fee)             = $21,000
Mortgage:  $1,673 X 48                                    = $80,304
Total for 4 years                                              = $148,154

The total is about $3,100 a month. These units currently rent for $1,800 a month, making it substantially more expensive ($1300 per month more) to own than rent right now. In addition to this extra cost is the risk that the drop in resale prices may continue. Though there is a tax benefit for some mortgage holders, this year the State of Hawaii has limited the tax deductions.

Though we continue to be bullish on owning real estate and even have several properties in Hawaii County, our take away is that being an owner would almost double our monthly “rent” in addition to increasing our financial risk at this time.

2 comments: said...

Very well stated and I enjoyed the 'insights' and pros/cons. The 4 year stat I had not heard -- so that's another bonus. Mahalo for a great website!

chansara said...

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