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Is Hawaii a good place for investors in vacation property? Recent developments in the state legislature have left many in doubt.

Overwhelming fear from homeowners that legislation affecting short-term rentals in Hawaii may cause them to lose return on their investments – possibly having to sell their property or even risk foreclosure.

The highly divisive legislation in question calls for non-resident (read: off-island) vacation rental owners to employ a licensed property manager who would be responsible for collecting taxes on the homeowner’s behalf and who would be the primary contact listed on all solicitations, advertisements, etc. Guests would be required to deal with this agent in place of the homeowner.

The bills have sought, in large part, to be a means of ensuring non-resident owners pay their required taxes, a justification that has angered owners who have consistently paid their taxes. In effect, for non-residents this means the end of the concept of vacation rental by owner, i.e. the self-management of their vacation rental homes.

A slew of legislation has led some to describe the legislative battles as a “war”. Bills that have been fought over include SB2089, HB1706, and HB1707. At play now are HB2078 and SB2947, the language of which is being hotly contested as this story goes to press.

The highly charged opposition to the legislation has sent thousands of pages of testimony to legislators, organized petitions and watch-groups to protect vacation rentals by owner in Hawaii and beyond, and have taken to web boards and online forums to share strategy and information. They describe the legislation as an “onslaught” that unfairly targets non-resident investors of vacation rental property which has quickly garnered Hawaii a reputation as an inhospitable environment for outsiders to do business. Rentini.com has confirmed as much. “Many would-be investors on Hawaiian vacation homes are holding off until this legislation is behind us before going through with their plans,” a Canadian client recently told us.

The technology of the Internet has made do-it-yourself solutions more popular than ever. It is no surprise that vacation rentals by owner has grown into such a huge industry, one that continues to threaten management companies that have traditionally acted as intermediaries, charging large sums of money and taking up to 50% commission plus other fees on rental transactions. Just as travel agents have been hit hard by the Internet, so too have hotels and property management firms felt the sting of new ways of organizing travel.

Individual owners have long complained that this arrangement is deeply unfavorable to them. With a simple Internet connection, many have taken the responsibility of management upon themselves. As reported earlier, a homeowner from California told us:

I know most of the management companies on the Big Island, and I wouldn’t trust the majority of them to manage my home. To me, this is the realtors wanting this legislation. I just don’t think it will work the way they think it will. Two realtors [I know of] (one of them a vacation rental property manager), has lost one home to foreclosure and the other one had to file for bankruptcy. My help on the island had her realtor’s license, but I think she let it expire. What I don’t get, is that I would have to give up the handling of the rent completely and it would go through a management company in Hawaii. I think I will sell before I do that.

Adam Yanow, a vacation rental owner from Canada, expressed his frustration with management companies which he views as the driving force behind the legislation. Fearing foreclosure, Adam writes:

This is just another attempt by rental managers to increase their profit margin at our and our guest’s expense…. I, for example, am at least 20 percent underwater on my mortgage already due to the recession. This bill will force me into foreclosure.

The legislation is also feared by many simply because it would take over a role they have cherished for several years – the role of manager of their vacation home. Marsha Vaughn, a Kihei condo owner living on the main Island, expressed her disappointment in towards the legislative hurdles. “[T]he Hawaiian legislators ha[ve] created not one, not two but at least four different bills,” she writes, “[all] designed to force me to turn the management of the business I so lovingly created over to licensed property managers or real estate agents.”

What has outraged many homeowners regarding these bills has been that as one is successfully deferred its contents have “morphed” into an amended version of another bill. This was the case with HB 2089 that was deferred. The requirement for a licensed property manager to operate the rental was vociferously opposed until the bill’s deferment. Yet in an amendment to HB 2078 this clause was resurrected, reintroduced. In light of this, homeowners have become hyper-vigilant to any amendments that may affect them.

Online message boards have been on fire with homeowners opposed to the recent string of bills. “The intent behind much of it seems, from my perspective, to place the blame for on-island problems directly in the laps of off-island investors,” said one blogger.

“We live in Vancouver and own two condos on Kauai, and I wouldn’t want anyone managing them but us. We take great care with them and have had just the best experiences dealing direct with our guests. I also have two friends in the process of buying in our same complex and both have put their deals on hold until this gets sorted out,” wrote another.

Adam Leamy lambastes Hawaii’s “me-first” policies that threaten NAFTA protections for cross-border investments in vacation rentals, such as his own. “And what a monopoly it will be. Testimony on these bills has revealed that the commissions Hawaii property management firms charge to properties under their ‘care’ can be 30, 40, and 50 per cent, with all manner of hidden costs and property abuses. It’s hard to see how those commissions will decline, or how quality and service will increase once a state-legislated monopoly is in place,” added Leamy.

John Eckel, Vice-President of the Rentals By Owner Awareness Association, has stated that he doesn’t believe it would be wise for the State of Hawaii to pass the legislation as it currently stands. The repercussions can be “damaging for Hawaii.” Citing alleged unconstitutionality of the bills, Eckel warns of the cost of “legal wrangling” that will result should this legislation pass. “It may cost Hawaii dearly,” Eckel said.

Comments on: "Legislation Affecting Vacation Rentals in Hawaii Upsets Investors" (2)

  1. Thanks for writing the article. It was an Montauk

    Real Estate
    read with some thought provoking points.

  2. Dear Paul, I am happy to state that this portion of the bill is dead per the legislative update at RAM’s broker luncheon this week. Owners continue to have the option to use unlicensed property managers. Aloha!

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