How To Analyze a House Hack
Kate and I completely changed our real estate investing path after house hacking our basement into an Airbnb. House hacking can change your life, too. Now let’s see how to analyze a house hack and find a profitable investment.

The Big Picture
I believe house hacking is the single best way to get started in real estate investing. It’s much easier to get a loan for a house you plan to live in, and you need somewhere to live anyways, so why not try to build some wealth?
There are two scenarios you may find yourself in. Either you already own a house and you’re trying to figure out how to make some extra money, or you are looking to buy a house and want to make the best decision you can.
Today, I’ll be focusing mostly on the second scenario. But I’ll talk later about what to do if you already own a house.
Prioritize cash flow
The first big picture item is cash flow. When it comes to investing in real estate, your bottom line focus for deal analysis should always be cash flow.
Why?
Because the other ways you make money from real estate will happen automatically. The property will appreciate in value over time as long as you keep it in good condition. You get the tax benefits as long as you claim them on your taxes. You’ll gain equity in the home as long as you make your mortgage payments.
So the only hard part is having the property make you money. In the case of a house hack, it is more difficult to be cash flow positive. You may just want to cover your mortgage. Or maybe you can cover your mortgage plus utilities.
Either way, the deal analysis will focus on the revenue and expenses of owning your property.
Think about the long term
When I analyze an investment property, I focus a lot on the 12 months following its purchase. We’ll be doing the same thing today when we get to our analysis.
You want to look at your initial investment and compare that with your cash flow over the next 12 months. This helps simplify your analysis and makes it very easy to compare different properties.
However, when you’re doing a house hack, you will need to also consider your plans for the future.
Are you planning to live there forever? Or do you want to eventually move out?
If you are going to move out, when do you plan to do it? And what happens to the space you were living in when you do move out?
These are things you should be thinking about BEFORE you buy.
If you plan to move out soon after buying, you’ll want your analysis to be based off the numbers when you’re not living there. And vice versa. If you want to live there for a long time, then you’ll want to run the numbers based on what they are when you’re living there.
Cash flow and rent
House hacking differs from normal real estate investments in that a house hack may not be cash flow positive.
I would never consider buying a normal investment property that wasn’t going to be cash flow positive. But it’s OK for a house hack to be cash flow negative.
But you have to live somewhere. So we’ll add in an extra source of revenue when we do our cash flow analysis. You’ll be saving money on the cost of rent, so that savings will be figured into our revenue calculation.
Long term rental vs. short term rental vs flip
There are three primary ways to do a house hack. You’ll need to go into your hack knowing how you intend to make your money.
Long term rental
You can share your home with roommates and charge them rent, or you can have separate living spaces.
A classic house hack is a duplex. Live in one side and rent the other side.
I also have a couple friends who live in a house with several other people and everyone pays rent to the owner of the home (who also lives with them).
Long term rentals help create income that’s consistent.
Short term rental
Kate and I have our basement listed on Airbnb. We have several of our other investments properties listed on short term rental sites.
We’ve found that we can make quite a bit more money with short term rentals than long term rentals. But it’s also more work overall.
House flip
The last way to house hack is to buy a house and rehab while you live in it. If you live there for one year, then when you sell it you get major tax breaks.
Flipping is a legitimate real estate investment strategy. And the tax breaks make house flipping even more lucrative for house hackers.
I’ll be covering house flip analysis later in the article.
Rental House Hack Analysis
There are many ways to make investing decisions, but good investors always listen to the numbers. You should never buy a property that doesn’t pass the numerical analysis.
Calculate expected revenue
The first step in analyzing your house hack is to calculate your expected revenue.
For long term rentals, you can go on Craigslist or Zillow and look at the rates being charged in your area. Use rates for similar size, number of bedrooms and number of bathrooms.
For short term rentals, you’ll want to visit Airbnb, VRBO or whatever other site you plan to use and do a competitive analysis.
At this point you just want to get an average monthly revenue. If you expect to charge $1,000 per month in rent, then use $1,000. If you think you can make $10,000 per year from Airbnb then use $833 ($10,000 ÷ 12 months).
Then you want to add in the amount you’ll be saving by not renting.
If you would be paying $600 per month in rent then add that number to your expected monthly revenue.
Monthly Revenue = Revenue from rent + Money saved by not renting
If we expected to charge $1,000 per month rent and we’re saving $600 per month by not renting, then our expected monthly revenue is $1,600.
Calculate expected expenses
Calculating revenue is the easy part, expenses is where things get harder. You’ll need to gather up a list of all your expenses and come up with a monthly average.
Here is a somewhat comprehensive list of possible expenses:
- Mortgage payment
- Property tax
- Home insurance
- Utility bills
- Internet bills
- HOA fees
- Vacancy costs (for long term rentals)
- Stocking items (toiletries, food, paper towels, etc. for short term rentals)
- Maintenance and repairs
- Property management fees (if you don’t plan to manage your house hack)
- Miscellaneous (I always tack on 10% to my final number)
The expenses portion of your due diligence is the most important. If you have a good estimate for your expenses, then you’ll be able to make a good decision about your investments.
I want to elaborate on a few items here.
Vacancy costs are included to estimate the cost associated with getting new tenants into a long term rental. When a tenant’s lease expires and they decide to leave, it may take a month or two to find a qualified replacement. This should factor in as a percentage of your monthly rent. I typically go with 5%. So if I charge $1,000 per month rent, my vacancy cost is $50 per month.
To run a good short term rental you must stock certain items. Toilet paper, soap, shampoo, paper towels, trash bags and coffee are a must. Then you may also choose to stock breakfast food or other luxury items. This should factor into your expenses if you plan to run a short term rental.
Property management fees are only necessary if you plan to have someone else manage your property. I don’t recommend it, but some people really hate the idea of dealing with people. So include this cost if that’s you.
And last I always add 10% in miscellaneous costs to my final expenses number. I used to call that my “inexperience tax,” but now that I’ve got more experience, I just call it a cushion. Just do it, you’ll never be sorry that you gave yourself some room for error.
Make everything monthly
Last thing to mention is some of these costs are on a yearly basis. You want all your expenses to be a monthly average.
Something like property tax is a once per year expense. Divide that one time tax by twelve and add that number to your monthly expenses.
And with maintenance/repair costs, you never know exactly when or how much you’ll be paying. I typically take 2% of the purchase price of the house and divide that number by 12.
So if I’m paying $100,000 for the house I multiply by 0.02 to get $2,000. That’s how much I expect to spend each year. Then I divide $2,000 by 12 to get $167 as my monthly maintenance/repair cost.
Calculate cash flow
So now we have our expected monthly revenue and expenses. It’s time to calculate cash flow by subtracting our monthly expenses from our monthly revenue.
If your monthly revenue was $1,600 and you monthly expenses were $1,550, then your cash flow is $50.
You definitely want to see a positive number for your cash flow. Since we’ve added in the amount we’re saving by not renting, that should help us simulate the positive cash flow that a normal investment property would create.
This number is helpful, but not the number I use to determine whether an investment is a good one.
Calculate cash on cash return
I use a metric called cash on cash return to determine whether a piece of real estate is a good investment.

Cash on cash return is a measure of how much of your initial investment is returned to you after one year of cash flow.
Here’s how you do it.
Take your monthly cash flow number and multiply by 12. That’s your annual cash flow.
Then you divide by your initial investment. In real estate, this is generally just your down payment. There may be additional up front costs, though. If you’re renovating the house or furnishing it, then you’ll want to consider those to be part of your initial investment as well.
Here’s an example.
Earlier we calculated my monthly cash flow to be $50, then my annual cash flow is $600 (12 x $50). If I put $20,000 down to purchase the house, then my cash on cash return is 3% ($600 ÷ $20,000).
If you’ve read about my personal investment standards, then you know I look for a cash on cash return of 20% on my real estate purchases. For a house hack, I think 10% cash on cash return is quite good.
You get to decide what’s acceptable for you, but cash on cash return is a great way to compare different houses from an investing perspective.
House Hack Flip Analysis
Analyzing a house flip is much different from analyzing a rental. In the case of a flip, you should actually be able to make more money on a house hack flip than you would on a normal flip.
There are special tax advantages when you sell you primary residence. You can sell your primary residence and get the first $250,000 ($500,000 if you’re married) of gains tax free! You get this tax break as long as you’ve lived in the house at least two of the last five years.
So the only real difference in analyzing a house hack flip vs. a normal flip is the time line.
You’ll need to live in your house hack for at least two years.
Summary of house flip analysis
I’m not an expert on flipping houses, so I’ll leave the in depth explanations to the experts. Look in the next section for my recommendations.
However, I can give you a quick summary of what a house hack flip analysis should look like.
- Look at comparable sales of renovated properties in the area in the last year. This helps determine how much you can sell for.
- Calculate the cost of renovating your property
- (Optional) Calculate the holding costs of the property, like utilities, taxes, insurance, etc.
- Calculate your profit. Expected sales price minus cost of renovation, holding costs and any fees from the sale (like realtor commission).
Your return on investment is your profit divided by your monetary investment in the flip.
If you include holding costs in your calculation, you should be able to at least break even on your sale. But again, you get to decide what your investment standards are.
If you don’t include holding costs, then I would want to see a 30-40% ROI after two years.
Resources for house flip analysis
Again, I’m not a house flipping expert, but I can recommend some resources that I believe to be great.
In my early days, I used Bigger Pockets a lot to learn about real estate investing, and they have a house flipping calculator. The calculator will help you predict returns and makes sure you don’t miss anything.
Flipping Prosperity has a lot of great resources from someone who flips houses full time.
What If I Already Own A House?
Kate and I are house hacking right now. We have our basement listed on Airbnb, but we didn’t start our house hack until we had already lived there for three years.
If you already own a house, then you’ve got two options.
- Sell your house and move into a new one to house hack
- House hack the house you’re already living in
If you want to house hack the house you’re living in, then there isn’t much in the way of an analysis to do.
You just need to figure out what type of hack works best for you. You are already living with the expenses from your house, so any money you can bring in from your hack is pure profit.
Kate and I decided to put some work into our basement and list it on Airbnb. We made so much money that we decided to start doing Airbnb for all our investment properties.
If you want to sell and move into a new house, then you can go through the same analysis covered in the article. Since you probably get to sell your primary residence tax free, you should consider only putting 20% down on your new house hack. More leverage equals better returns. You can invest the rest into something else!
Conclusion
If you’re looking to break into the world of real estate investing, there is no better way to do it than house hacking. With the right analysis you can purchase a home that provides you a place to live and some extra cash as well.
The key is having thorough and accurate estimates for your revenue and expenses, then comparing properties through calculating your cash on cash return.
Happy investing.
