How I Gave Myself a $24,000 Raise Through House Hacking

[Shiloh Lundahl]

I recently purchased a house in Burbank, California.  It was a long process finding a house that made investment sense in a location with such high demand and such high prices (average cost is $750k for a 1400-1500 square foot 3 bed 2 bath older home).  What attracted my wife and I to purchasing this particular house is that it has a huge high-pitched roof and a guest house in the back. 

The house is currently a 2 bedroom 2 bathroom 1400 square foot house that we are going to add around 800 square feet to by adding 2 bedrooms and another bath/laundry room and 2 lofts up in the enormous attic, thus making it a 4 bedroom 3 bathroom 2200 square foot home.  We are planning on making this a live in flip and then selling it in the next 2-3 years after we complete the addition for around $180k.

The raise I gave myself has to do with the guest house in the back.  The guest house is a 400 square foot finished house with a kitchenette and a 3/4 bathroom.

Because of the high demand for housing in the area, we were able to charge $1500 a month for the guest house (that included utilities, internet, and laundry access in the garage).

The tenant is reducing my mortgage payment by $1500 a month thus lowing my yearly expenses by $18,000 a year.  In order for me to net $18,000 more a year I would have to earn around $24,000 more a year if I were to pay around 25% or $6,000 more a year in income taxes.

Now, I know this example doesn't take in to consideration the increased utilities that the tenant uses, and it doesn't take into consideration taxes that I may need to pay on the $1500 a month (which I will be working out with my CPA to figure how to minimize that).  But, nevertheless, the decreased monthly expenses was equivalent to giving myself a tens of thousands of dollars raise each year through this version of a house hack.