Just like any business, the payday comes when selling an asset for higher than what was paid. All our day to day efforts to increase marketing, to reduce housekeeping costs, staging to attract more potential tenants … are just efforts to make margin as wide as possible. At the end of the day, we want the maximum sale price.
One part of the equation is buying the house at a low price. There are a variety of ways to drive down price, but let’s look at three common ways: if the seller needs to sell, if the overall market has been beaten down (like in the real estate collapse in 2007-2008), or if you happen to buy somewhere before it becomes a popular tourist destination.
One of our firm’s first clients loved taking his family on cruise ship vacations. One particular trip, about 20 years ago, the vacation was to hop from one Hawaiian island to the next. Unfortunately, the whole family falls seasick, but luckily the ship happened to be docking the next day on Maui. The family decides to end their cruise adventure and stay on solid Maui ground for the rest of the time.
Maui, 20 years ago, was nothing like what you see now. You could actually get a spot on Kaanapali Beach to tan! These days, that beach is so popular that even if you are from a small town in Finland, you’ll still manage to run into 3 of your neighbors while you walk between the golf course to the nearest Starbucks.
Kaanapali Beach now… can’t even walk
The family falls in love with the Maui, and the dad buys a property – not for investment purposes, but rather, to lay the foundation for their annual trip to the then-quiet island of Maui.
Today, that same property has appreciated 168%.
This is literally the view from their vacation home overlooking the beach.
And the rental income is roughly 17.4% net income return to original asset cost… per year. And it’s completely turnkey – there is a very capable management company, the reservation rate is very high, and the expenses are running very lean. There are ways for him to increase the net, however, for his current lifestyle; he is perfectly content with doing absolutely nothing except for cashing in the cheque every month.
This is a wonderful story of being first to the party. However, the takeaway is not about buying properties in undervalued markets – because there is certainly risk that comes with this (see “The Risk of Being First to the Party”).
And yes, to this day, the family (with some additional family members) still goes to Maui on their annual trip.