Investing in real estate in Oahu, Hawaii, to operate a short-term rental is a complex process governed by a unique set of regulations. The city and county of Honolulu have implemented specific ordinances to manage the short-term rental market, which is in place to preserve housing for long-term residents and maintain the character of residential neighborhoods. Understanding these rules is a critical first step for any individual considering investing in Oahu real estate for this purpose.
This guide overviews the key rules, taxes, and considerations that shape the short-term rental market on Oahu, offering insight into what it takes to operate a legal and successful rental property.
The Role of Zoning and Designated Areas
The most critical factor for an individual seeking to operate a short-term rental on Oahu is the property's zoning. The regulations in Honolulu dictate that short-term rentals, or lodgings for fewer than 30 consecutive days, are only permitted in resort-zoned areas and a few specific apartment-zoned areas. This zoning is a direct result of the city's efforts to balance tourism with the needs of the local housing market.
Resort-zoned areas, such as Waikiki, Ko Olina, and Turtle Bay, are legally allowed for short-term rentals. Properties outside of these specific resort-zoned areas face severe restrictions. An investor must verify that a property is in an eligible zone before purchasing. The city provides maps to help individuals confirm a property's eligibility. Purchasing a property without understanding these zoning limitations could result in an investment that cannot legally be used as intended.
Resort-zoned areas, such as Waikiki, Ko Olina, and Turtle Bay, are legally allowed for short-term rentals. Properties outside of these specific resort-zoned areas face severe restrictions. An investor must verify that a property is in an eligible zone before purchasing. The city provides maps to help individuals confirm a property's eligibility. Purchasing a property without understanding these zoning limitations could result in an investment that cannot legally be used as intended.
The Nonconforming Use Certificate (NUC)
The concept of a Nonconforming Use Certificate (NUC) is a critical piece of the short-term rental landscape on Oahu. An NUC allows a property to continue operating as a short-term rental even though it is located outside of a designated resort zone. This certificate is a unique and valuable asset for a property.
The City of Honolulu stopped issuing new NUCs in 1990. The only way for an investor to acquire a property with an NUC is to purchase a property that already has one. An NUC is a valuable asset because it provides a legal pathway to operate a short-term rental in a residential area. These certificates must be renewed annually and are not transferable in some cases. It is essential to perform due diligence to ensure the NUC is valid and runs with the land before a purchase is finalized.
The City of Honolulu stopped issuing new NUCs in 1990. The only way for an investor to acquire a property with an NUC is to purchase a property that already has one. An NUC is a valuable asset because it provides a legal pathway to operate a short-term rental in a residential area. These certificates must be renewed annually and are not transferable in some cases. It is essential to perform due diligence to ensure the NUC is valid and runs with the land before a purchase is finalized.
Registration and Compliance Requirements
Operating a legal short-term rental on Oahu involves a rigorous registration process and a commitment to ongoing compliance with all city and state regulations. Honolulu has a specific registration process for all eligible short-term rentals. This process must be completed before a property is advertised or rented.
The registration process requires several documents, including a title report to prove property ownership, site and floor plans, and a statement of compliance with all applicable regulations. Guests must also be prepared with an informational binder containing house policies, emergency contact information, and other details required by the ordinance.
The registration process requires several documents, including a title report to prove property ownership, site and floor plans, and a statement of compliance with all applicable regulations. Guests must also be prepared with an informational binder containing house policies, emergency contact information, and other details required by the ordinance.
Specific Tax Obligations
Investing in a short-term rental on Oahu requires a clear understanding of the specific tax obligations associated with operating a business. All short-term rental operators must pay two primary taxes to the state and the county. Failure to comply with these tax regulations can result in significant fines and penalties.
The first is the General Excise Tax (GET), the state's sales tax. The GET has a state rate of 4% and a 0.5% county surcharge, for a total of 4.5% on gross rental income. The second is the Transient Accommodations Tax (TAT), which applies to all rentals of fewer than 180 consecutive days. The TAT rate is 10.25% of gross rental proceeds. You must obtain a GET and a TAT license before legally operating a short-term rental.
The first is the General Excise Tax (GET), the state's sales tax. The GET has a state rate of 4% and a 0.5% county surcharge, for a total of 4.5% on gross rental income. The second is the Transient Accommodations Tax (TAT), which applies to all rentals of fewer than 180 consecutive days. The TAT rate is 10.25% of gross rental proceeds. You must obtain a GET and a TAT license before legally operating a short-term rental.
Insurance and Financial Planning
Beyond purchasing the property, a person must have a sound financial plan for operating a short-term rental. This includes having the correct type of insurance coverage and being prepared for the financial considerations of a rental property. The financial requirements are more stringent for an investment property than for a primary residence.
Most counties require short-term rental operators to have a minimum of $1,000,000 in commercial general liability insurance coverage. This protects a property owner from lawsuits for bodily injury or property damage. An investor should also be prepared for a higher down payment when purchasing a short-term rental property, as lenders often require more capital for a second home or an investment property. An investor is also responsible for all utilities, maintenance, and upkeep costs.
Most counties require short-term rental operators to have a minimum of $1,000,000 in commercial general liability insurance coverage. This protects a property owner from lawsuits for bodily injury or property damage. An investor should also be prepared for a higher down payment when purchasing a short-term rental property, as lenders often require more capital for a second home or an investment property. An investor is also responsible for all utilities, maintenance, and upkeep costs.
The Evolving Regulatory Landscape
The short-term rental landscape on Oahu is not static; it is constantly evolving with new ordinances and regulations. Honolulu has been actively working to manage the short-term rental market to address housing affordability and community disruption concerns.
Ordinance 22-7, for example, was a significant piece of legislation that attempted to increase the minimum rental period in residential neighborhoods from 30 days to 90 days. While a federal judge granted a permanent injunction against the ordinance, the city's intent to regulate the market is clear. This constant evolution means that a person investing in Oahu real estate for short-term rental must remain informed and prepared for new rules and regulations that may affect their business.
Ordinance 22-7, for example, was a significant piece of legislation that attempted to increase the minimum rental period in residential neighborhoods from 30 days to 90 days. While a federal judge granted a permanent injunction against the ordinance, the city's intent to regulate the market is clear. This constant evolution means that a person investing in Oahu real estate for short-term rental must remain informed and prepared for new rules and regulations that may affect their business.
The Role of Condominiums and HOAs
Condominiums in resort-zoned areas are often a popular choice for individuals interested in a short-term rental. However, purchasing a condo for this purpose requires an additional layer of due diligence. An investor must understand the rules of the condominium and the homeowners association (HOA).
Even if a condo is in a resort-zoned area, the HOA's bylaws or rules may prohibit or restrict short-term rentals. An investor must obtain written confirmation of approval from the HOA to operate a short-term rental. This is a mandatory requirement for registration. Failure to comply with the HOA's rules could lead to fines, legal action, and the loss of your ability to operate the rental.
Even if a condo is in a resort-zoned area, the HOA's bylaws or rules may prohibit or restrict short-term rentals. An investor must obtain written confirmation of approval from the HOA to operate a short-term rental. This is a mandatory requirement for registration. Failure to comply with the HOA's rules could lead to fines, legal action, and the loss of your ability to operate the rental.
The Value of Professional Guidance
Navigating the complex and evolving world of short-term rental regulations on Oahu can be challenging. A person should seek professional guidance from a real estate expert who is well-versed in the local laws and market. This is particularly important for an investor who is not a full-time resident.
A knowledgeable real estate agent can help an investor identify eligible properties, perform due diligence on zoning and NUC status, and understand the potential for future regulations. They can also provide referrals to attorneys and accountants who specialize in short-term rental businesses. This professional guidance is essential for mitigating risk and ensuring a compliant and successful operation when investing in Oahu real estate.
A knowledgeable real estate agent can help an investor identify eligible properties, perform due diligence on zoning and NUC status, and understand the potential for future regulations. They can also provide referrals to attorneys and accountants who specialize in short-term rental businesses. This professional guidance is essential for mitigating risk and ensuring a compliant and successful operation when investing in Oahu real estate.
Connect With Kina Knisley Today
If you’re preparing for an investment in Oahu for short-term rentals, Kina Knisley is the trusted advisor you need every step of the way. With deep market knowledge, strong local connections, and a client-first approach, Kina can recommend reliable contractors, help you assess ROI, and ensure your renovation choices align with your property goals.
Reach out today for expert insight and excellent results in Honolulu’s competitive market.
Reach out today for expert insight and excellent results in Honolulu’s competitive market.
