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.

[Steve Vaughan]

Well done and welcome to the 'not all househacks are plexes' club @Shiloh Lundahl!

I've had mine for 10yrs so far and it has a lot to do with my not having a w-2 in so long. Sounds like more freedom to me!

I would disagree that it is all taxable and the rent is akin to ordinary income.  Without my  mother-in-law rental, I wouldn't be able to deduct any mortgage interest at all (I'm well below $11k/yr), I wouldn't be able to deduct yard work or half the water/sewer/garbage fees.  Not to mention it is passive and not subject to SE.

Biggest benefit is your primary is now an actual asset that will put money in your pocket when paid off.  Mine will forever bring in more than maintenance, taxes, insurance etc will cost.  Congrats and thank you for sharing this part of your story!