Financial Freedom,  Planning

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.

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.

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.

  1. Look at comparable sales of renovated properties in the area in the last year. This helps determine how much you can sell for.
  2. Calculate the cost of renovating your property
  3. (Optional) Calculate the holding costs of the property, like utilities, taxes, insurance, etc.
  4. 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.

  1. Sell your house and move into a new one to house hack
  2. 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.

Michael

I'm living the path to financial success and sharing everything I learn in this blog. I believe in the power of cash flowing investments, due diligence and time. This is my journey so far.

Before 2016: Just living my life, working full time and trying to get by.

2016: Kate and I start to discuss the possibility of getting into real estate investment. We read books like Rich Dad Poor Dad and listen to the Bigger Pockets Podcast. We find a Realtor and start looking at property. We even make an offer or two, but nothing happens.

2017: Kate and I continue looking for property. We meet with banks and find lenders willing to work with us. In one month (August), we turn our basement into an Airbnb and list it AND we purchase our first long term rental property, which is a triplex. We can't find good tenants for our triplex.

2018: In April, we finally get our first tenant in the triplex, our second in June and get it fully rented in July. Our basement Airbnb makes so much money that in September we decided to buy another property to exclusively rent out on Airbnb. It makes us even more money than the first one!

2019: Kate decides we should put together a mastermind group. So we get in touch with people we know who care about money and start sharing knowledge with each other. Our triplex is profitable, but our two Airbnb properties are making way more money, so we buy another property to put up on Airbnb and VRBO.

2020: Coronavirus hits in March and all the guests booked at our Airbnb properties cancel. We freak out, but after a few weeks everything comes back and we're making money again. Discussion and research from the mastermind group makes me want to investigate online business as an investment strategy. Kate and I started Unbound Investor with plans to purchase a website in 2021.

OK you're all caught up!

I learned everything I know from books, podcasts, conversations with friends and family and of course through real world experience as a cash flow investor. And I'm always pushing to learn more.

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