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.

[Shiloh Lundahl]

@Samir Shahani I guess I would look at it though this analogy, when you are looking for dollars on the ground, don't pass up the quarters.  

I would say that we get our biggest profits from our flips, but they seem to be getting harder to come by.  I could just wait for more opportunities to arise for flipping, or I could learn other aspects of real estate while I am waiting to come across more flips.

This year we decided that we wanted to get some buy and hold properties, but we didn't want to have regular rentals with the associated stresses that can come with being a land lord.  So rather than doing straight rentals, we decided to do lease options.  This way we could take out the 3 biggest expenses of having rental properties (vacancy, turn over, and capital expenditures) and we could cash out in 5 years.  So far we have purchased 11 properties to lease option this year and we have 7 already optioned with another one signing next week and the other 3 just came up on the market.

The general rule of thumb for us is if we are able to get the house and rehab done for less than $150k then we will try to do the lease option.  If our total in is more than that then we will probably do a flip.  When we run the numbers, we want to make at least $20k profit on each flip.