Hawaii Rehab Projects: Insights from a Local Lender - KECO Capital

February 05, 2024

Cory Nemoto from KECO Capital shares some insights about residential rehab projects in Hawaii.

Video Transcript

Speaker: Cory Nemoto, Co-Founder & Principal, KÉCŌ Capital

What are some of the trends with rehab projects in Hawaii?

Cory Nemoto: So some of the trends that are being utilized here in Hawaii is called a CPR. So CPR stands for a Condominium Property Regime and it's basically dividing a parcel of land. So it's kind of like a subdivision except it's a little quicker and it's a little less expensive, a little less costly to go the CPR route. So if you have 20,000 square feet of land zoned R-5, meaning residential five, you can have one dwelling per 5,000 square feet of land. Then technically that parcel of 20,000 square feet on R-5, you can have four houses on that property. So a lot of investors have been looking toward to projects like that where they check the zoning on the land to see if they can build or renovate and sell separately four separate houses in that scenario. So CPR's are a lot more common here in Hawaii and it is a very powerful way to force the appreciation of the asset. So instead of just renovating a house and flipping it, what else can you do with the land? Can you divide it with a CPR, maybe in two or three or four and sell them. Now, one thing to watch out for with that is that it does take a little longer for projects like that. Right. You have to work with the city sometimes and really get them on board. But it's common here and we've done a lot of loans on CPR projects and investors are looking at that as another value add in the projects that they are pursuing.

What are some of the challenges your Hawaii real estate investor clients have been facing lately?

Cory Nemoto: Some of the challenges that investors in the Hawaii market face is long lead times, long lead times in permitting and also long lead times in delivery of materials, especially if you're playing in the more higher end luxury space. Those items take weeks sometimes to land here in Hawaii if it's not here on island. So that's a challenge that investors have to navigate as they go through these projects. So if you're going to invest or land in Hawaii, expect long lead times and long project times, it's not uncommon for projects to take over 12 months here even for a single family home. So you want to make sure that you're invested, you as in the investor is aware of that and you're factoring that into your numbers and your deals here. And as a lender, same thing, you want to make sure that you are providing, you know, your borrower or your investor enough time on the loan so that they're not stuck within 12 months, especially if it has to go through the city and county with permitting because permits are backed up quite a bit and they don't have enough people in there. So that's one thing that challenges a lot of investors is navigating the timelines and the lead times with delivery of materials.

What is the more common investment strategy for your clients? Fix & Flip, or Rehab-to-Rent?

Cory Nemoto: The most common investment strategy here in Hawaii that's used amongst investors in the community is definitely fix and flip. One, we have a lot of inventory that's older here in Hawaii and needs to be renovated. So and two is the, since we're a high equity, high appreciation market, most people pursue high equity type of strategies like fix and flip or ground up construction. We're definitely a poor cash flow market. So investors, what investors do here is they, they flip houses, they build a piggy bank and then they find a cash flow market somewhere on the mainland. That is more suited for cash flow. And so they do their equity deals here to build the piggy bank and then they go and build their portfolio in another market that's more suited for cash flow.

What types of rehab projects do you like to lend on in Hawaii?

Cory Nemoto: The type of rehab projects that we like to lend on here in Hawaii is one that we have a lot of equity in the deal, not just like us as the lender, but the investor as well, which shows that we have big margins for profit for the investor, but also that security insulates us from risk, right? So since majority of our loans in Hawaii are fix and flip, we want to make sure that the investor is getting at the right price, right? And they're focusing on instant appreciation, which is buying right with instant equity, hopefully and their forced appreciation, which is the value add in the property. So we look for that and those are the type of deals that we like to lend on just like any other lender, right? You want to make sure that you're getting into a good deal, not one that's playing on skinny margins, especially here in Hawaii because since a lot of our loans and the deal is done out here are sometimes in the millions, then you need a a wider margin. One to make sure that the returns is worth the risk. And two is to insulate, you know, because anything can happen during a project, right? And, and no project really goes 100% as planned. Sometimes you go over budget, sometimes it takes longer to sell, right? So we want to make sure that our investors are buying right? With instant appreciation and their plan to execute, to force the appreciation or create some sort of value add to lift the value of the property and the ARV, we're looking for that. So what is the, you know, how deep are they buying the property? Do they have instant equity in there? Are they insulated of risk and to what's the plan to get us to the finish line to get us to the ARV? Right? And is that plan feasible? So we look like to look at rehab projects that just makes sense in that, you know, in that arena where we were not playing on skinny margins where we're putting ourselves, you know, and our investors and our lenders at risk.

Tell us about your rehab loan program in Hawaii.

Cory Nemoto: We have a very unique product for fix and flip and it was actually designed for investors, as I mentioned before is our model is funding for investors by investors. And it's not just about the leverage that we offer, which is the highest, you know, in the nation. But it's also how do, how is that leverage allocated? Meaning we like to focus on how much are we putting upfront? You know, we'll go up to 90% of the purchase price depending on what market you're in and we'll fund 100% of the renovation budget. Now, it's not just that though, we will, if you've done five deals in the last three years and you qualify as an experienced borrower with us, then we can also fund the renovation in advance instead of arrears. So if your budget is $100,000 if you're getting funded in arrears, then you would have to put up that first $25,000. If you want to do four draws to start the project and then you'll be reimbursed once those line items in your scope of work is completed. So if you're an experienced investor. then with us in our product, we can advance you up to 20% to 25% of your budget after closing. We can also wrap 100% of your interest into the loan. So the reason why that's beneficial, especially in Hawaii is because even though it still costs you money and you're still being charged interest and time is still of the essence, you're not coming out of pocket to pay that mortgage every month. Right? So that's more money that you don't have to have saved up to make sure that you can cover the, the mortgage, to the, the 1st, you know, the hard money lender, you can save that and use that to put down on another property. So it's not just about how much leverage we give, which is, you know, high already, but it's how it's allocated in the deal. That's what makes our product unique.

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