Why house hacking is so powerful: A multi-year look-back at my actual numbers


In 2017 I strategically relocated to eastern Tennessee and bought a moderately priced house in the area for $163k.  It was a 1970’s split-level (aka. split-entry) home that had never been updated.  I had 20% to put down, but I only put 10% down and took PMI on the loan.  Having listened to Dave Ramsey for so long I also chose to take a 15 year loan so I could have a better interest rate and be forced to pay it off faster.  The house was livable but dated, it had 3 bed/1 bath upstairs and 1 bed/1 bath downstairs, although the downstairs bathroom had cement board on the walls for the tub as if someone planned on tiling it one day.

I bought the place in early April, I furnished the living room, kitchen, and one of the bedrooms immediately.  I took pictures and posted it on Airbnb as a room for rent with a shared bathroom and living area and had my first guest in early May.  My bedroom was completely unfurnished, with the exception of a futon couch/bed I slept on.  I swapped out doorknobs in the house and put a digital lock on my bedroom door and was careful to keep it locked and closed so guests didn’t see how little was in there.

I rented that other bedroom out for all of 2017, occasionally blocking it off for friends to come visit. I ended up seeing $5400 in revenue that year, about $675/month for the 8 months it was renting.  The principal and interest on the mortgage was $1100 with about $450 of it in interest + $75 for PMI.  So, mentally, I equated it to paying the interest and my utilities and I was just paying down the mortgage principal with my W2 earnings.  That itself would equate to a pretty decent house hack.  There was a 3rd bedroom upstairs I could have potentially rented out also, but I chose not to thinking it might hurt my 5 star reviews.

I began working on renovating the downstairs after work and on weekends.  I would avoid doing any kind of loud construction and didn’t work late into the night when there were guests staying with me upstairs.  So most weekdays I could only get 2-3 hours of work done from 5pm until 8pm at the latest.  Weekends I would get a full 8 hour day working on it typically, often waiting until 10am to start so I didn’t disturb guests early in the morning.

In July and August 2018 I shut down the upstairs rental and focused on getting the downstairs finished.  I ultimately spent about $15k renovating the downstairs, which included the materials as well as hiring an HVAC professional to install a new mini-split system so the space would have its own temperature controls.  I locked off the downstairs by adding a wall and solid core door to reduce noise, I gutted the bathroom and redesigned the layout in order to move the bathroom door, and I added a kitchenette.  I did 90% of the labor and paid a few friends to help me on occasion. Unlike most people, I had read the mortgage papers when I signed them, one of the ways you can get rid of PMI on a mortgage within the first two years of having the mortgage is if you have done “substantial renovations”.  What I had done classified, I paid $500 for a new appraisal, it came in at $190k and requires a 25% equity to drop the PMI in this manner.  I was $1650 short of that 25%, but they allowed me to pay that with cash on the principal, dropping the loan below $142,500 and they dropped the PMI for me.
The short end of this was: I put $16k down on a $163k property, I then put $10k worth of materials in the renovation, and got an appraisal at $190k.  Giving a $27k equity improvement, about $7k would have been from a normal 3% annual appreciation rate, but it still built $10k of additional equity, eliminated the PMI and left me with $47,500 of equity after spending  only $28k of cash, and having all the interest associated with borrowing money paid by the renters/guests up until this point.

Expenses* Interest PaidRevenueEquity Increase*EOY EquityNet Income
2020 -est* 60k10k4.0k30k103.8k167.3k16k

*Expenses: based on Utilities, Taxes, Insurance, Repairs, hired lawn care, etc
*Equity Increase: based on 3% appreciation, appraisals or estimated increase after renovations, and principal pay down
*2020: Based on Oct 2020 YTD number + 2 months projected

I started renting the downstairs in November  of 2017 and started to bring in $1700/month those last two months of the year.  I stopped renting the upstairs as well, being worried about the noise generated that might disturb guests downstairs.  I knew I would be quiet, but couldn’t guarantee that with upstairs guests.  All together, that year I saw just under $10k in revenue.

In 2019 I got married, so I shut the downstairs down from rentals for almost a month so I could allow friends and family stay for the wedding.  After getting married I moved into the house my wife owned.  I got focused on renovating two other houses (back to back, not at the same time) and left this one just renting the downstairs as it paid for itself at this point.  I saw $19,600 in revenue in 2019 with the downstairs as the only rental.  $1630/month was enough to cover the PITI mortgage, utilities, and a guy to cut the lawn for me.  I could have just as easily had been living in the upstairs for “free” while the principal on the debt was being paid down had I not gotten married, but the wife had a nice house 10 minutes away from this one and we could be guest free over there.

2020 then rolled in, I shut down the downstairs rental in mid-January, hired a contractor and did a major renovation on the upstairs.  I installed sound proofing under the floors, added real wood floors, removed a wall between the kitchen and living room, added a large island, put new doors on the cabinets, added. 3/4 bathroom, renovated the other bathroom, put in granite countertops, installed recessed lighting, and bought new furniture for the entire house… it cost me $60k for all of this.  Covid of course then hurt the short term rental market, but since I was in the middle of a renovation I had planned it wasn’t terrible. The project got finished up and I managed to get a family renting it the entire house (upstairs and downstairs) for 2 months who had unfortunately lost their home due to a fire.  Things have been getting back to normal over the past few months, the future bookings are low, but the resulting occupancy with most last minute travelers has keep things occupied.  It has been a few months now and it appears to have around a $4k/month of revenue from both the upstairs and downstairs being rented.

My projections on end of 2020 numbers if things continue in this weird covid/presidential election year way will result in approximately $30k of revenue and $25k of operating expenses (which includes the mortgage payment).  So far all of the income that has been generated (plus more) has been funneled back into the property for improvements though.

If 2021 can maintain that $4k/month income ($48k/year), my operating expenses should remain around the same $25k and I will hopefully see a sizable cash flow of $23k and see the principal balance decrease by $9k.  Due to the renovations and appreciation, the property is now valued around $290k, so there should be an additional $9k of appreciation (based on a 3% rate). Therefore 2021 should see a $41k increase in net worth due to this property.
There is also $185k of equity, so the $32k yield represents a 19.4% return on my current equity and a 35% annual return on my $93k cash outlay. Of course the higher returns are also capturing some of the labor put in to make this all happen, so it is not an apples-to-apples comparison to putting the money in an index fund.

Many people are spending at least $1/month on rent and utilities This allowed me to spend only $160/month for two years – saving over $20k. I took advantage of PMI and only put 10% down and kept the other $16k to do a renovation.

I realize I was able to sink a lot of money into the property, primarily the $60k during the renovations in early 2020 and trying to finish it up just as the COVID-19 pandemic was getting started. In the FIRE community it is not unheard of to be able to save 30-50% of your income while still paying housing costs. If you can initially save up the 10% for a down payment, or you already have, you can mimic what I accomplished. Here’s how with an initial 25% savings rate on a $60k/year income.

  1. Save $15k over the next year (25% savings rate)
  2. Buy a $150k split level home that is livable and take PMI
  3. Start renting a room immediately in the upstairs with you – this should generate another $5k of income/year
  4. Save $20k during the first year and spend it renovating the downstairs.
  5. Start renting the downstairs – this should start making you an extra $10k/year.
  6. Continue to rent the upstairs room too.
  7. Save $15k (your income) + 10k(downstairs) + 5k(upstairs = $30k/year for two years
  8. Shut down both rentals for a couple months and move into the downstairs
  9. Renovate the upstairs with the $60k you saved over the last two years.
  10. Remain living downstairs for the next year and rent out the upstairs – it should bring in more than the downstairs – at least $2500/month ($30k/year)
  11. After 1 year you should save $45k in cash – $15k from your salary and $30k from the rental.
  12. Buy house number two, move into it, and rent the downstairs – the revenue from downstairs should offset nearly all costs of the first house (mortgage, utilities, etc) that you used to be paying with your salary. You’ll still make $30k/year of income from the house… combined with the $15k of your income, you will be able to almost immediately start renovating the new house.

BTW… you also just gave yourself a $30k/year raise after only a few years…. considering you used to live on only $60k, you’re likely more than half way to FIRE… the $30k is also taxed at a lower rate than your salary and doesn’t require 20hours/week of work, so it’s worth more than only half of your salary.


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