The hydration of fat-free mass, or hydration fraction (HF), is often defined as a constant body composition parameter in a two-compartment model and then estimated from in vivo measurements. We showed that the widely used estimator for the HF parameter in this model, the mean of the ratios of measured total body water (TBW) to fat-free mass (FFM) in individual subjects, can be inaccurate in the presence of additive technical errors. We then proposed a new instrumental variables estimator that accurately estimates the HF parameter in the presence of such errors. In Monte Carlo simulations, the mean of the ratios of TBW to FFM was an inaccurate estimator of the HF parameter, and inferences based on it had actual type I error rates more than 13 times the nominal 0.05 level under certain conditions. The instrumental variables estimator was accurate and maintained an actual type I error rate close to the nominal level in all simulations. When estimating and performing inference on the HF parameter, the proposed instrumental variables estimator should yield accurate estimates and correct inferences in the presence of additive technical errors, but the mean of the ratios of TBW to FFM in individual subjects may not.