Investors looking into Kahului condos have sometimes calculated their returns without considering property taxes and insurance. They were optimistic based solely on rental income, only to revise their numbers after checking the actual tax rates. The three main factors to consider are as follows.

First, the purchase price and rental income. The median rental price in Central Maui, combining Kahului and nearby Wailuku, is $2,650. According to Zillow, the average home value in Kahului is $1,016,632, which has decreased by 5% over the past year. Calculating the total return based on these two figures gives an annual rental income of $31,800 divided by the purchase price, resulting in a 3.1% return. This is a low figure, reflecting the high purchase prices typical of Maui.

Second, property taxes. Maui County treats owner-occupied and rental properties very differently. Owner-occupied properties are taxed at $1.90 per $1,000, while non-owner-occupied rental properties are taxed at $5.85 per $1,000. When calculating rental income, it is essential to use the rental property tax rate. Based on the $1,016,632 figure, the annual property tax would be $5,947. If calculated using the owner-occupied rate, it would come out to $1,932, resulting in nearly a threefold difference. Many investors overlook this aspect.

Third, the remaining operating expenses. Insurance, maintenance costs, HOA fees, and vacancy losses must all be accounted for. Maui has a high proportion of condos, so HOA fees can be particularly significant. The property tax of $5,947 already accounts for 19% of the annual rental income, and when adding HOA fees and insurance, it is common to exceed the 50% rule. If we conservatively estimate operating expenses at 55% of rental income, the NOI would be about $14,310, and the cap rate would drop to around 1.4%.

The rental market in Central Maui is known for absorbing a significant portion of the island's workforce, with Kahului and Wailuku together providing relatively accessible rental prices compared to resort areas, making it a popular area for new tenants moving to the island. However, the high purchase prices make it difficult to offset the low cap rates solely based on steady rental demand.

If purchasing with a loan, the cash-on-cash return should also be checked. Assuming a 20% down payment, the actual cash invested for a property priced at $1,016,632 would be around $203,326 plus closing costs. If the pre-tax cash flow, after accounting for loan interest and the previously calculated property tax of $5,947, is $2,000 annually, the cash-on-cash return would be about 1%. In a market where purchase prices exceed $1 million, the absolute amount of the down payment is significant, so even if the cap rate is low, the cash-on-cash return may not necessarily be low as well, and results can vary greatly depending on loan terms, so individual calculations are necessary.

According to the 1% rule, 1% of $1,016,632 is $10,166, while the actual rental price of $2,650 is only a quarter of that. Considering the three factors examined in order, Kahului appears to be a market better suited for investors focused on asset retention and long-term capital appreciation rather than cash flow. Korean families looking in Kahului often compare school districts up to the Wailuku area. Since school district boundaries frequently change, it is advisable to check the assigned school for the specific address before purchasing. If coming from another state, it is also important to first check the differences between owner-occupied and rental property tax rates.

In the long term, the total return perspective seems to be more important than rental income in this market. Considering asset appreciation due to loan principal repayment, potential capital gains, and tax benefits from depreciation, it is difficult to judge investment attractiveness based solely on the 1.4% cap rate. However, Maui tends to have significant price volatility due to tourism demand, so it is safer to assess risks rather than expect capital gains definitively.

This article is not investment or legal advice, and it is recommended to consult with a real estate professional before entering into any contracts.