What’s a House Hack?
House hacking. It’s a great strategy in which you buy more house than you need and rent out the bedrooms or buy a multifamily property, like a duplex or a fourplex, and live in one unit while renting out the others.
Whether you’re a new real estate investor or a savvy homebuyer, house hacking can lower your cost of living, supercharge your equity growth, and depending on where you buy, even produce positive cashflow.
Choosing the Right Metrics
First off, don’t sweat it. I’m going to teach you how to analyze a house hack deal and with a little practice you’ll be a pro. Also i’m going to give you free, unlimited access to my house hack calculator, an easy-to-use spreadsheet that I built myself. Feeling better? Good! Let’s get into it.
Ok so you’re onboard with house hacking but you’re having a terrible time figuring out how to properly analyze deals. I sympathize. It’s part home, part investment, and none of the online calculators I’ve seen account for that.
Some calculators, like the one at Bigger Pockets, don’t have an option for living in one of the bedrooms or units. And most oversimplified “napkin” approaches I’ve heard people use don’t make much sense or did paint an accurate enough picture of the financial realities.
For example, in his otherwise very good book The House Hacking Strategy, Craig Curelop creates a metric he calls “net worth return on investment.” He takes all of the financial advantages of house hacking, from the reduced living expense to appreciation to principal paydown, and divides that by the initial investment in the property. Sounds fine, except that the example return he offers range from 85% to 1205% to an infinite “net worth return on investment.”
To be clear infinity isn’t a number. So if there’s such a huge range of returns that also literally have no ceiling, how am I supposed to simply gauge what a good one is? Not very helpful.
An investor friend of mine likes to think about his house hack as though he were paying rent on his unit. He likes to run the numbers with his imaginary rent and see that the property cashflows. That’s fine for reassurance’s sake, but it’s not the reality of the situation. He’s not collecting rent from himself and the property isn’t actually cash-flowing, so this isn’t the best analysis either.
Analyzing Deals the Right Way
Without further ado, here’s how I analyze house hack deals. I’m going to share my philosophy, and then we’ll hop right into using my house hack calculator to see this philosophy in practice.
A house hack is two things in one: it’s your home, and it’s an investment. So I think you need to analyze the property in two ways: as your home while you live there, and then separately, as an investment when you move out.
Let’s quickly discuss these two components, and then we’ll start using the spreadsheet.
Analysis 1: Living in the House Hack
While you’re living in your house hack property, it’s your housing so you should be comparing the financials against your other housing options.
In some markets, particularly in the Midwest, you can buy a house and rent out the other bedrooms and the rent you collect from your roommates will more than cover the mortgage and expenses and may even create positive cashflow is addition. We like this!
In more expensive markets, like Los Angeles where I house hack, the cost of real estate is so high that it’s really difficult, if not impossible, to cash flow while you’re living in the house hack.
Does this mean it’s a mistake to house hack in Los Angeles because you won’t cashflow like you might in the Midwest? Absolutely not because Los Angeles also has extremely expensive rent.
According to Zumper.com, the median rent for a one-bedroom apartment in Hollywood right now is $2400. Let’s say you bought a duplex of one-bedroom units in or near Hollywood, and your monthly cost after collecting rent and paying the expenses and mortgage was $1400. Well, you’re not generating cashflow, but you’re saving $1000 per month on your living expenses. That’s $1000 more in your bank account every month.
By contrast, let’s say you’re in Indianapolis and you can buy a house and rent the extra bedrooms and cashflow $300 per month. Score! But what’s it cost to rent a bedroom in Indianapolis? What are you comparing the house hack against? Looking at Craigslist Indianapolis, I’m seeing a lot of bedrooms listed for $500 and under.
Going from paying $500 per month to earning $300 per month is great. It’s a difference in your favor of $800 per month. But let’s not forget that our Los Angeles example had a difference in your favor of $1000 per month.
One cashflows and the other doesn’t, but now you see that what really matters is the difference between your house hack financial situation and the situation you’d be in otherwise. It’s the difference between the two that measures the value of the house hack while it’s your home.
That’s analysis number one, and I’ll explain in more detail how to actually run the numbers – how to tally up expenses, factor in principal paydown, etc. – when we dig into using the house hack calculator in just a moment.
Analysis 2: When You Move Out
Analysis number two is to determine how the property will perform as a rental when you move out.
Now this requires a little estimating because you might not know when you’re going to move out. You’re obviously not moving out immediately, so you can’t use the current rents and expenses to judge the property’s performance.
You have to project forward a year or two or three and model out what income and expenses will look like then and that can be tricky.
Plus, what if you want to use the property’s performance to help determine when you move out? For example, you might say, “When this property will cashflow $1000 per month without my living here, then I’ll move out.” How do you figure out when that point will come? And, how do you figure out how different financing options might affect that?
To answer all of these questions, a savvy investor or homebuyer needs a model for what’s going to happen in the years to come. Using the best information available, you can get a sense of where rents and expenses will be in a few years. And using a smart spreadsheet, you can play with those variables to figure out the scenario that works best for your goals.
And have I got a smart spreadsheet for you! I’ve been building the House Hack Calculator since 2019, and I think it is the best, if not the only, tool out there for appropriately analyzing house hack deals.
And right now, you can have free and unlimited access to the House Hack Calculator.