Phoenix House: Flip, Rent or Airbnb?

[Reilly Carpenter]

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: $410,000
Estimated Renovation Costs: $40,000
Renovation 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]

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.