House Hacking: A Real Life Example

There’s a ton of interesting articles on BiggerPockets about House Hacking. But I hear people saying it doesn’t actually work, or its not worth it, or you can’t literally live for free. So here’s the real-life numbers from my very first house hack, back in 2015.

Numbers at a glance:

• Purchase Price: We bought the property for $300k with a 10% down FHA loan
• Rental Income: $1000/mo rent from unit 1 and $1100/mo rent from unit 2
• Mortgage, Taxes, Interest: $1800/mo mortgage (including taxes and insurance)
• Repairs & Maintenance: A popular rule of thumb is that 1% of the purchase price will go to repairs and maintenance each year (on average); that’s $3k/yr
• Vacancy: We’ll assume 5% vacancy when the sits empty for a couple weeks between tenants. That’s $1,200 we won’t get.

If we add this up, that’s $2100/mo in rent from the tenants, or a total of $25,200 for the year. After subtracting for vacancy, that leaves us with $24k in income.

On the flip side, we’ll pay $21,600 for the mortgage, insurance, and taxes. Add $3k for maintenance and repairs, and we’re at $25k in expenses.

We got our own apartment for a total of $1000 per year. Sweet!

But does this mean the naysayers are right? That this isn’t really living for free? NO! It’s wayyy better than that!

Fortunately, there’s more to the story.

• Principal: our tenants are also paying down $5k of mortgage principal each year. That money is directly increasing our net worth. And each year, a little more of the mortgage payments go toward principal and a little less toward interest.
• Tax Benefits: We get to deduct 2/3 of our expenses, which saves on taxes. (say $480)
• Depreciation: We get to depreciate the property, which is awesome for reasons we’ll explain in another article. And that helps a lot with taxes. ($9,500)
• Appreciation: Each year, our building should appreciate in value just a little bit. We’ll conservatively estimate 1-2% per year. Historically housing prices have tracked inflation, on average. ($3,000-$6,000)
• Inflation Hedge: Each year, you increase the rent a little bit. And between tenants you can do a bit of work and increase your rent even more. This is usually enough to counter any effects of inflation in your expenses, and often enough for your income to also to provide you a “cost of living” (inflation) raise in your cash flow as well.

Taking these other benefits into account, we realize how powerful house hacking can be:

every year, this house hack adds between $7k and $10k to our net worth

Compare this with renting or owning a traditional single family home or condo. If you’re shopping in the same price range (which is realistic, or even low, for many areas of Chicago)… you would be dropping your net worth by $25k per year instead. This is what your peers are doing; their housing choice drops their net worth by $25k while yours adds $7k to $10k per year. This is a $32k to $35k difference that you’re gaining every. single. year. Let me say that again,

House Hacking helps us get $32,000+ ahead of our peers every year!

I know, I know… comparison is the root of all unhappiness. But if you want to get ahead in life, give house hacking a try.

And the final benefit: when you’re ready to move, you can rent out your unit too!