Hawaii Short-Term Vacation Rentals – New Legislation and What You Need to Know Before Investing

Hawaii is a paradise that draws millions of visitors each year with its pristine beaches, lush landscapes, and vibrant culture. The demand for short-term vacation rentals (STVRs) has surged, offering lucrative opportunities for investors. However, recent legislative changes at both the state and county levels have significantly impacted the STVR market.

Understanding these regulations is crucial for anyone considering investing in Hawaii’s vacation rental market. This comprehensive guide delves into the new legislation, Hawaii County rules, and essential considerations for potential investors.

Overview of Short-Term Vacation Rentals in Hawaii

Short-term vacation rentals (STVRs) are accommodations rented out for 180 consecutive days or less. They range from condos and apartments to single-family homes. STVRs have become increasingly popular due to their affordability and the unique experience they offer compared to traditional hotels.

However, the proliferation of STVRs has raised concerns about housing affordability, community character, and tax compliance. In response, Hawaii has enacted new regulations to address these issues.

Current Statewide Legislation

In 2018, Hawaii passed Bill 108, which significantly impacts the operation of STVRs across the state. This legislation aims to create a uniform regulatory framework and address the negative impacts of STVRs on local communities.

Key Provisions

1. Registration and Licensing: All STVR operators must register their properties with the state and obtain a Transient Accommodations Tax (TAT) license. This ensures compliance with tax obligations and helps the state track the number of active STVRs.
2. Advertising Requirements: STVR listings must include the TAT license number, registration number, and contact information of a local representative. This transparency helps regulators monitor compliance and allows guests to reach local contacts in case of issues.
3. Tax Compliance: STVR operators are required to pay the TAT and General Excise Tax (GET). The bill mandates stricter enforcement of tax collection and remittance to ensure that STVRs contribute their fair share to the state’s revenue.
4. Penalties for Non-Compliance: Operators who fail to comply with registration, licensing, or tax obligations face significant fines. Repeat offenders may face higher penalties and legal action.

While current legislation provides a statewide framework, each county in Hawaii has its own rules and regulations for STVRs. Investors must understand these local ordinances to ensure compliance and avoid penalties.

Hawaii County (Big Island) Specific Regulations

Hawaii County has implemented some of the strictest regulations on STVRs to address community concerns and protect housing availability for residents.

Key Regulations in Hawaii County

1. Permits and Non-Conforming Use Certificates (NUCs): Operators must obtain a Short-Term Vacation Rental permit or an NUC if the property was in operation before the regulations were enacted. NUCs allow properties to continue operating under specific conditions.
2. Zoning Restrictions: STVRs are generally prohibited in residential and agricultural zones unless the property has an NUC. Permits are primarily issued for properties in resort and commercial zones.
3. Owner-Occupancy Requirements: In some residential areas, only owner-occupied properties can be used as STVRs. This restriction aims to preserve the residential character of neighborhoods.
4. Operational Standards: Hawaii County imposes strict operational standards, including noise limits, parking requirements, and occupancy limits. These standards ensure that STVRs do not disrupt the local community.
5. Local Contact Requirement: Each STVR must have a local contact person available 24/7 to address possible issues. The contact information must be provided to guests and displayed on the property.

2023 Statewide Legislation

Last month, Hawaii Governor Josh Green signed into law SB2919, a bill introducing stricter regulations for short-term vacation rentals across the state. The legislation aims to address the housing crisis and community disruptions caused by the rapid proliferation of these rentals. This move represents a significant effort to balance the interests of the tourism industry with the needs of local residents, ensuring that the growth of short-term rentals does not undermine community stability and housing affordability.

According to the article called “New Hawai’i law aimed at tackling illegal short-term rentals, provides counties with home rule authority” in Big Island Now,

“SB 2919 clarifies the counties’ zoning authority to regulate the time, place, manner and duration that land and structures can be used, particularly transient accommodations which include short-term rentals.
The measure also allows counties to phase out transient accommodations in areas zoned residential or agricultural.

A package of transient accommodation bills was already making its way through the legislative process in Hawai’i County before Green signed SB 2919.

Transient accommodations are those provided for 180 days or less.

The bill expands the definition of a transient accommodation by adding certain shelters and vehicles with sleeping accommodations. Furthermore, it broadens the scope of the state’s transient accommodations tax law.

According to the governor’s office, the measure provides counties with home rule authority so vacation rentals are not allowed in communities that do not want them and helps clear up issues of state preemption.

Green said the bill will also assist against adverse impacts of non-resident ownership of short-term rentals, which impedes housing supply for Hawai’i residents and emphasizes the unique needs of each of the state’s county to regulate such accommodations.”

So, in short, the main points of this bill are:

1. Counties have the home rule authority to regulate zoning and ban STVRs in residential and agricultural zones.
2. The definition of transient accommodations is amended to include shelters and some vehicles and refers to accommodations that are provided for 180 days or less.
3. This law takes effect on 7/1/2040.

You can read the whole bill here.

Hawaii County is working on a set of bills regulating local STVRs, and we are still waiting to see what they will come up with.

What does it all mean for potential investors?

What Potential Investors Need to Know

Investing in Hawaii’s STVR market can be lucrative, but it requires careful consideration of the regulatory landscape. Here are essential factors potential investors need to know before diving in.

Understanding the Market

1. Demand and Seasonality: Hawaii’s tourism market is seasonal, with peak seasons during winter and summer. Understanding demand patterns can help investors optimize pricing and occupancy rates.
2. Property Location: Location is crucial in determining the success of an STVR. You want to get really clear on the zoning and make sure STVRs are allowed in this area. Resort areas are usually a safe bet. In addition, properties in resort areas or near popular attractions tend to perform better than those in remote or residential areas with strict zoning regulations. Talk to your realtor about potential zoning changes.

Navigating Regulations

1. Compliance with State and County Laws: Investors must comply with both state legislation and county-specific regulations. This includes obtaining necessary permits, adhering to zoning restrictions, and meeting operational standards.

   You must obtain an STVR License to operate a vacation rental legally. You can learn more about license requirements here.

   As stated in the article mentioned above, on Kaua’i, the government has been “able to crack down on illegal [transient vacation rentals] through constant world wide web monitoring, proactive enforcement and negotiated agreements between third-party platforms, who now assist in our enforcement actions and only advertise legitimate units” on the island. “This effort reduced illegal vacation rentals on Kaua’i from 1,500 in 2017 to less than 50 today.”

   That means that a county government can mandate third-party platforms like Airbnb, VRBO, and others to only list legal STVRs that maintain valid licenses, and it is not unlikely that Hawaii County will follow that path as well.

2. Tax Obligations: STVR operators must pay the TAT and GET. Understanding these tax obligations and ensuring timely payment is crucial to avoid penalties. At the time of writing this blog post, GET (General Excise Tax) in Hawaii is currently at 4.5% and TAT – 10.25%. You can file your tax returns and pay the taxes at Hawaii Tax Online.

   In addition, there is a 3% Hawaii County Transient Accommodations Tax payable directly to Hawaii County. You can learn more about it here.

   Keep in mind that tax regulations in Hawaii are ever-changing, so be sure to check with the Hawaii Department of Taxation for current rates and changes.

3. Insurance Requirements: Adequate insurance coverage is essential to protect against potential liabilities and property damage. Some counties may have specific insurance requirements for STVRs.

On the Big Island, you want to avoid high-risk zones like Lava 1 and Lava 2. Again, a good realtor can provide you with this information.

Financial Considerations

1. Initial Investment and Renovation Costs: Purchasing and renovating a property to meet STVR standards can be costly. Investors should budget for these expenses and ensure the property meets all regulatory requirements.
   In addition, calculate a little extra time if you are planning a renovation and hire a reliable contractor. Getting permits and materials here can take some time; knowing it in advance will help you make an informed decision.
2. Operating Costs: Operating an STVR involves ongoing costs, including utilities, maintenance, cleaning services, and management fees. Investors should factor these costs into their financial planning.
3. Revenue Potential: Estimating the potential revenue from an STVR is crucial for assessing the investment’s profitability. Factors to consider include occupancy rates, nightly rates, competition in the area, and the global economic situation that may affect tourism at large.

Property Management

1. Self-Management vs. Professional Management: Investors must decide whether to manage the property themselves or hire a professional management company. Professional management can ensure compliance and provide a better guest experience, but it comes with additional costs.
2. Guest Experience: Providing a positive guest experience is critical to securing repeat bookings and positive reviews. This includes maintaining the property, responding promptly to guest inquiries, and addressing any issues that arise during their stay.

Community Relations

1. Respecting the Local Community: Investors should strive to minimize the impact of their STVR on the local community. This includes adhering to noise limits, parking requirements, and occupancy limits.
2. Engaging with Neighbors: Building positive relationships with neighbors can help address any concerns they may have about the STVR. Open communication and responsiveness to issues can foster goodwill and reduce potential conflicts.

Future Outlook

1. Regulatory Changes: The regulatory landscape for STVRs is constantly evolving. Investors should stay informed about potential changes to state and county regulations that may affect their operations.My team and I will monitor what is happening in Hawaii County and the State closely and will update you on any new developments.
2. Market Trends: Understanding market trends, such as changes in tourism patterns and traveler preferences, can help investors adapt their strategies and maintain a competitive edge.

Investing in Hawaii’s short-term vacation rental market offers exciting opportunities but comes with significant regulatory and financial considerations. Understanding the new legislation, county-specific rules, and key factors affecting the STVR market is essential for making informed investment decisions. By navigating the complex regulatory landscape and staying attuned to market trends, investors can capitalize on the demand for vacation rentals while contributing positively to Hawaii’s communities.

Looking to buy a potential vacation rental in Hawaii? Contact me!