Phoenix House: Flip, Rent or Airbnb?

Question

I recently closed on a home in Central Phoenix and have analyzed it for a number of different strategies. My goal was to get in at a price where I have options and make sure there was upside in both a buy or hold option. I think I've done a decent job at walking in with equity with additional upside after renovations. Now the question is which strategy to pursue? Here's a bit more about the house and the numbers under each strategy.

The House:

The house is a 3 bedroom, 2 bathroom brick bungalow with 1,312 square feet. It also has a 2-car detached garage that could be converted to a guest house at some point, though that is not part of any of the immediate renovation plans. It is located in the Willo Historic District, which is a very popular area and has always had higher property values. It is walking distance to hospitals, retail, dining, offices and public transportation making it a desirable location for residents or visitors.

Purchase Price: $410,000Estimated Renovation Costs: $40,000Renovation Items: All new kitchen, electrical repairs, moving laundry to main house, exterior paint and landscaping, interior paint and light fixtures.

Flip:When I got the house under contract, I was not intending to flip it. However, based on recent sales in the last month in the area, my realtor thinks it could be a great flip candidate. A very similar renovated comp just went under contract for $550k (a 2 bed/2 bath, same square footage). For a flip, the optimistic numbers could look like...

Purchase Price

$410,000.00

Down Payment

$41,000.00

Mortgage

$369,000.00

Renovation Cost

$40,000.00

ARV

$550,000.00

Sale Costs

$38,500.00

Sale Earnings

$511,500.00

Earned Equity

$61,500.00

Total Equity

$142,500.00

Total Cash In

$81,000.00

Rent:This was really my fallback strategy for the house if it didn't do well as vacation rental. My monthly carrying costs for mortgage, taxes and insurance is just about $2,000 a month. An almost identical home to this (but renovated) rented for $2,800 a month in April of this year. So I'm estimating a rental rate of $2,500-$2,800. Once you factor in property management and reserves, I expect to break even or cashflow slightly depending on what it rents for.

Airbnb:This was going to be my primary strategy before flipping was on the table. I'm expecting to spend an additional $25,000 to fully furnish the home for Airbnb. Based on the neighborhood and Phoenix Airbnb stats overall, I expect the house to rent for $150-$200 a night conservatively ($250 a night optimistically), with an average occupancy rate of 68% over the year (bringing in $3,000-$4,000 a month). Of course, there are additional costs with this strategy such as cleaning and management, but those are also offset by the cleaning fees.

So, now I'm faced with a decision... which strategy do I pursue? Curious to hear from anyone who has experience with any of the strategies above and can share any thoughts on things I should consider. This is one of my first deals, so I'm trying to keep options open for the sake of learning or a pivot if needed. Appreciate any considerations or advice you have!

Neil Henderson · Answer

If it were me, I wouldn't want to be tied up with that property long term at this moment in time. A lot of potential volatility on the horizon, and I wouldn't feel comfortable holding that long term. So, I would lean flip. Not a huge return, but if the rehab can executed quickly, under 90 days, sure.

I don't like it as a long term rental at all! A $450,000 home that rents for $2,800 a month? I would be stunned if that would show positive cash flow. Negative cash flowing property in a hot market entering a period of severe economic uncertainty? Yikes!

As a short-term rental...maybe. I would not bank on 68% occupancy. Totally possible, we maintained nearly 85% occupancy for 6 years, but that was on a one room guest house. Larger properties tend to have lower occupancy, but higher revenues. You might hit 68%, maybe even better, but I would underwrite more conservatively to give yourself a margin of safety.

Let's say you average, over the course of a year, an ADR of $200 a night using dynamic pricing. If your occupancy is low, say 45%, you're looking at a gross of $33,000 ($2,750/month), if your occupancy is 70%, you're looking at a gross of $51,000 ($4,250/month). Those are some THIN margins for deploying a lot of capital.

Pamela Sandberg · Answer

Willo has seen some really fantastic appreciation! Personally, I might wait a couple weeks until AZ gets this second wave of COVID under control, and then you could really max out your list price. AirBnB has done well too, so that's not necessarily a bad strategy. You've just gotta be prepared to put in the extra time and money to more management.