When purchasing a house with the sole intention of house hacking, you’re going to want to analyze the home from both a financial and manageability standpoint.
Unlike when you’re buying a forever home – paint colors and the ability to knock down walls are not really important. The important areas to analyze are cash flow, ease of maintenance, and how much you need to invest (down payment, monthly payment, and overall housing costs needed to make it rentable).
Analyzing a house hacking deal is difficult to do accurately unless you have previous experience. But, that’s OK. Learn as much as you can via this website, Google, BiggerPockets, and then move forward.
Recommended Reading: House Hacking Guide
However, a big benefit when analyzing a house hack is that this strategy gives you a lot of flexibility. You can make mistakes with your analysis without suffering huge consequences. As long as your numbers are close, you’ll still enjoy many house hacking benefits when house hacking as a beginner.
So, in this post, I’m going to give you several different methods for analyzing a house hacking deal.
Table of Contents
Analyze your house hack as a beginner
The first method for analyzing a house hacking deal is the easiest method for beginners. But, in addition to being the easiest – it’s also the least accurate. I recommend this method for beginners or anyone looking at potential house hacks who just needs an idea if the property could work.
Information needed:
- An estimate of your monthly mortgage (PITI – Principal, Interest, Taxes, & Insurance)
- PMI or MIP amount (if applicable)
- Annual rental permit amounts (if applicable)
- An estimate of the rental income from the combined bedrooms/units that you don’t occupy
Start the analysis:
Once you have the information above, you can start analyzing your house hacking deal. As I said above, this is the easy method for analyzing a house hack – so the math is very simple.
1. Add your expenses
In this stage, you want the sum of all of your estimated expenses.
- An estimate of your monthly mortgage (PITI – Principal, Interest, Taxes, & Insurance)
- PMI or MIP amount (if applicable)
- Annual rental permit amounts (if applicable)
For example, we’ll use the numbers below:
| Mortgage amount | PMI/MIP amount | Annual Rental Permit | Total Expenses |
|---|---|---|---|
| $1,100 | $50 | $50 | $1200 |
2. Calculate your usable rental income amount
Once you put together a sum of your estimated expenses, you’re going to want to calculate your usable rental income amount. To do this, you’re going to first multiply your estimated rental income by:
- 10% for repairs (broken faucet, toilet flapper repair, etc..)
- 10% for capital expenditures (roof, driveway, HVAC replacement, etc..)
- 10% for vacancies (helps cover lost income when the tenant leaves and you have to find a new one)
So, if your estimated rental income amount is $1,000, you would multiply it by 30% in order to calculate your non-usable rental income amount (savings).
| Total estimated rental income | Non-usable income % | Your non-usable rental income amount (savings) |
|---|---|---|
| $1,000 | 30% (or 0.30) | $300 |
So in the example above, your non-usable rental income amount would be $300 per month. Now that have that number, we can calculate your usable rental income amount by subtracting your non-usable rental income amount from the total estimated rental income amount.
Using the same numbers as above, here’s what that looks like:
| Total estimated rental income | Non-usable rental income (aka savings) | Your usable rental income amount |
|---|---|---|
| $1,000 | $300 | $700 |
3. Subtract the expenses from your rental income
If your estimated usable rental income (from the units you’re not living in) is $700 and your estimated expenses from step 1 are $1200 – that leaves you with a negative $500.
That negative $500 is how much money your unit (aka you) needs to contribute.
However, you can go a step further, you can also calculate how much money you should set aside and save for your unit.
Since $500 is the usable rental income amount needed for our unit, we need to do the reverse of step 2 and figure out what the total estimated rental income amount should be. In step 2 we multiplied by 30% (savings amount) to find the usable rental income amount and, in order to do the reverse, we’re going to divide by 70% in this step.
For example, $500 divided by 0.70 = $714.29
Using the example above, your unit’s rent should be about $715. However, it’s your unit and you’re the property owner. You can save as much (or as little) as you’d like. As long as you’re prepared for when things break or go wrong in your unit – you’re good to go.
Analyzing your house hack in more detail
If you feel as if you’re more skilled than a beginner but not yet an expert (for example, you won’t need this post as an expert) – here are tips to help you analyze your house hacking deal more accurately.
Calculate your capital expenditures savings based on their useful life
I talk a little bit about knowing the useful life of your systems in the DIY Guide For Self-Managing A Rental Property but, in this section, I’m going to show you how to calculate your capex (capital expenditures) savings based on their useful life.
In this section, we’re going to use a roof for example.
Let’s say a roof costs $10,000 to replace and will last 20 years. If you’re looking at a potential house hacking deal and you learn that the roof is currently 10 years old – you now have all the information you need to make an estimate of how much money you should save in order to replace the roof on time.
The first thing to do is figure out how the monthly cost of the roof. To do this, we divide $10,000 by 20 years.
$10,000 divided by 20 (years) = $500 per year.
Then we divide the yearly amount by 12 months.
$500 divided by 12 = $41.67
Now we know that the roof cost about $42 per month. However, don’t forget that we said the roof was already 10 years old.
So, if we purchase this house hack – we’re taking on about $5,000 of wear and tear. This means that if you wanted to accurately save money for the roof – we’d need to double the amount we save monthly from $42 to $84.
If you keep analyzing all of the important (and expensive) systems in your potential house hack using this strategy – you will know a more accurate dollar amount you need to save AND you will be able to get an idea of if the purchase price of the home is too expensive as well.
Here’s another example of what I mean by learning if the property is too expensive:
If the property is selling for $150,000 and the ideal purchase price in that area is $150,000 – you may think you’re getting a good deal. However, once you start calculating your capital expenditures as I mentioned above – you’ll notice that the property may be more expensive than it seems.
The property may cost $150,000 but if you’re taking on an additional $5,000 of wear and tear from the roof, $7,000 of wear and tear on the driveway, and $1,500 of wear and tear from the HVAC systems – you’ll begin to see that your $150,000 property could actually cost $163,500.
With that said, you don’t have to make your decisions based on the math above. But, it’s nice to know how to calculate it – just in case you ever need it.
Frequently Asked Questions:
Should you calculate the property management fee on your first house hack?
Yes, you should calculate the property management fee on your first house hack even if you don’t plan to hire a property manager. This will allow you to know how much flexibility you have when it comes to managing your house hack. Just in case you find out that you don’t enjoy managing the property.
