House Hacking a $780k Duplex in Phoenix
Happy Tuesday! Today we’re analyzing the numbers on a duplex for sale in Phoenix. Sit back, grab your coffee, and let’s get into it.
Here’s the duplex we’re looking at - it’s currently listed for $780k and has the following units:
Two 3 bed/2.5 bath units (1,706 square feet each)
This duplex is in Villa Monte Vista, a comfortably middle-class neighborhood located on the south side of Phoenix. We’ll assume that we purchase the property for the asking price. The property is a new construction so we don’t have to worry about repairs or renovations.
We’re going to make the following assumptions:
20% down with a 30-year fixed mortgage at 7.5% interest rate
0.50% annual property tax rate (based on Phoenix’s current rates)
$250/mo home insurance
10% reserve for capex and maintenance
5% vacancy rate
2% annual rent and expense increase
We’re going to rent out one of the units and live in the other. Additionally, we’ll rent out the two spare bedrooms in our unit.
Looking at rental comps in the area, it looks like 3-bedroom units go for about $2,500-$3,000. Given that this is a brand new unit with high-quality finishes, we’re going to assume it rents out for $3,000/mo. Rooms for rent on Craigslist in the area are going for around $750 - we’ll assume our rooms rent out for $800/mo each given the quality. That brings our total monthly rental income to $4,600.
Plugging these numbers into our house hacking calculator (reply to this email and I’ll send you the link!), we get the results below.
Our monthly outlay for mortgage + insurance + property tax comes out to $4,938 and we’re bringing in $4,600 in monthly rental income. Subtracting the two, we’re losing $338/mo in our first year living in the property ($4,057 for the whole year).
We’re also putting aside $8,280 ($690/mo) in the first year for capex, maintenance, and vacancy. Rolling that into our calculations, our year 1 out-of-pocket living cost comes out to $12,337. We accrue $5,752 in home equity in our first year, so the net living cost comes to $6,585 or $549/mo. Based on the current financials, we won’t be breaking even anytime within the next 10 years.
The numbers on this deal don’t look great, even with our somewhat optimistic rent assumptions. There’s a couple things to note here - certain markets are great for renting out by the room (e.g. Los Angeles, San Francisco), whereas others are not so much. This duplex is in a middle-class neighborhood where it doesn’t seem like there’s much demand for room rentals. Most of the rentals on the market are detached single-family homes for people with children. Before you buy a property, always have a good understanding of the renter demographics of the area. I wouldn’t worry about the demand for a room rental in San Francisco, but here you should definitely have some pause.
We were also pretty conservative with our capex and maintenance assumptions - this property is a new build so presumably we won’t be pouring as much money as we would into an older property. We probably won’t be spending 10% on capex and maintenance, but even if you reduce that to 5% we won’t break even on the property until year 10.
Would I buy this property? Probably not. It’s tough (but not impossible) to make the numbers pencil out on a new build like this, especially in a market like Phoenix. To juice the monthly rental income, you could explore renting out the other unit on Airbnb - based on comps in the area, it seems like you could expect to make $4,000-$4,500/mo. There’s a lot of miscellaneous costs with Airbnb, so it’s hard to say whether it would be worth it.
Thanks for reading until the end - see you next week!