I’d like everybody to meet Joe. Joe is a pretty average guy earning \$50,000 per year and has a little over \$10,000 in savings. Joe has also recently begun to take a deep interest in his personal finances and has wisely decided to look into building wealth by tackling his largest single expense: his housing. Joe is not a fan of seeing almost a third of his income go towards his rent, and he wants to carefully consider ways to reduce that expense while minimally impacting his personal life.

Joe has already decided where he wants to live — he’s a young yuppie and wants to live near the nice part of town so that he can be near all the fun things his city offers, his work, and of course, good schools. Within his target living area, he spots an opportunity. A duplex has come on the market, and remarkably, it’s available either to purchase or to rent.

Now, in Joe’s day job, he crunches financials for a well-known real estate investing company — he projects costs and expenses by building spreadsheets. Joe wisely decides to do what no one else in the working world ever seems to do and creates a spreadsheet analyzing the cost of his own housing expenses. Crazy, I know.

## Joe’s Financial Model

Joe maps out the financial impact of three different ways, three cases, in which he could live in his favorite part of town and in this duplex. In the process of doing so, Joe realizes that this study is applicable to almost anyone deciding whether to rent, buy or house-hack” (buy, then rent out part of the house to others). Joe does his best to think through all the costs, rents and other financial factors that might come into play under each scenario. Again, his goal is to see how he can live for the lowest cost, but still reside in his favorite part of town.

No, people looking at his spreadsheet don’t need to be Microsoft Excel wizards to play around with the numbers, so long as they only change the numbers highlighted in yellow!

With that, let’s talk about Joe’s three choices, or cases.

### Case #1: Joe rents half of the duplex as a tenant.

Joe is currently a renter, so this is no big change for him, just a little bit of an upgrade in location.

Joe’s Renting Assumptions:

• The property is listed at \$300,000
• Monthly rents are 1% of the list price
• Joe pays 0.5% of the purchase price in rent per month (\$1,500 per month) because he only lives in one of the two units
• Rents increase over time with inflation at 3.4%

In this case, the monthly rents for Joe would come to \$1,500 per month, or \$18,000 per year in the first year. Joe will build no wealth through this process, and the cost of living is very easy to calculate over time as rents increase with inflation.

Related: BP Podcast 086 – House Hacking Your Way to 97 Units (While Holding a Full Time Job!) with Cory Binsfield

Joe notes that if he pursues this strategy, he does not have to bring money down like he would in a home purchase, and he can immediately put that money in the stock market or spend it as he wishes. His short term cash position will be very favorable as a renter.

True cost of living as a renter in year one: \$18,000

### Case #2: Joe buys both sides of the duplex and converts it to a single-family residence.

Many of Joe’s friends and coworkers have recently purchased homes. Very few of those coworkers are purchasing half-duplexes or small, reasonable condos. Instead, they purchase the largest and nicest single family homes that they can possibly qualify for. Sometimes, Joe suspects, these folks are actually purchasing a little bit more home than they can afford.

Joe would like to fit in and believes that he too can just barely qualify for (afford?) a mortgage to live in a large, nice single-family residence. In this case, he’d make some minor changes to the duplex by knocking out a wall and removing two doors to make it into a spacious SFR.

Joe’s Single-Family Residence (SFR) Assumptions:

• The property is listed at \$300,000
• The seller will cover the costs needed to convert the property into an SFR (this might be compared to Joe buying a typical nice-ish American SFR)
• Joe will put down the FHA minimum of 3.5% of the purchase price (\$10,500)
• Joe’s fixed interest rate will be 3.5%
• Joe’s taxes are 1% of the property’s value
• Joe’s insurance is 1.5% of the property’s value
• Joe pays monthly FHA mortgage insurance, which comes to 1% of the initial loan amount
• The property will appreciate with inflation at 3.4% per year
• Joe will spend an average of \$250 per month maintaining his home
• Joe will claim standard tax deductions and not itemize interest or PMI

Based on these assumptions, Joe realizes that purchasing the house and living in it as a homeowner is going to require way more cash than renting. He will have to put down \$10,500 and will pay at least \$29,000 in the first year in cash expenses for his mortgage, taxes, insurance and upkeep. His cash outlay as a homeowner is close to \$39,636.

At the same time, however, Joe is benefitting from average appreciation of about \$10,200, and roughly \$5,608 of his mortgage payments will go towards paying down the loan — that contributes to his net worth. He also didn’t “lose” \$10,500 when he used that towards his down payment; it simply goes towards the equity in his property. These items offset his cash outlays and give him equity in the property.

True cost of living (factoring in equity) as a homeowner in year one: \$13,441

### Case 3: Joe “hacks” his housing — buying both units, living in one, and renting out the other.

He’s intrigued by this so-called “house-hacking” and suspects that it will lower his cost of living dramatically, though he can’t be sure how impactful it will be until he runs the numbers. He understands that his friends and coworkers will think he is slightly odd to live in a smaller space than he could afford, so the financial impact of this decision will have to be substantial.

Joe’s House-Hacking Assumptions:

• All homeowner assumptions from Case 2 apply to the duplex
• Joe will collect \$18,000 per year or 0.5% of the property value per month in rent for half the duplex
• Rents will increase each year with inflation
• Managing tenants in the other side will cost \$100 per month above and beyond the normal homeowner expenses of \$250 per month, including vacancies

Based on these assumptions, Joe sees that house-hacking will cost him \$40,836, including the down payment in the first year, but that these cash costs will be offset by \$18,000 collected in rent. In total, Joe’s cash outlays (net of rent) for living will be \$22,836 next year.

Further, like the homeowner, Joe also benefits from appreciation of \$10,200 and \$5,608 in principal reduction, and, of course, his \$10,500 down payment does not count as lost wealth either.

True cost of living as a house-hacker in year one: negative \$3,368 (he builds wealth!)

## Joe’s Conclusions

In just the first year, Joe’s model tells him that living as a house-hacker will result in building about \$21,500 more wealth than the renter and about \$16,800 more wealth than the homeowner. That’s a huge amount of money, considering he earns a \$50,000 salary!

Assuming he averages 5 hours a month managing his tenants next door (likely a very conservative estimate), that comes out to \$280 – \$360 per hour for any efforts that a house-hacker would have to put in over a renter/homeowner. Joe is unable to think of anyone who will pay him that kind of wage per hour… even if he is a legendary financier!

In an effort to visualize the wealth building impact this decision will have on him and his family over a longer period of time, Joe projected out and graphed the long-term impact of his three choices:

Over 30 years, Joe’s model tells him that this decision’s financial impact is almost beyond belief. Living as a house-hacker will result in about \$1.5 million more wealth than renting and about \$850,000 more wealth than living in both sides as a single family home. Yes, not losing wealth can be counted as building wealth in the case of housing, which for most people is a fixed expense.

Interestingly, Joe notes that becoming a homeowner is a losing investment. That’s contrary to what most Americans think. True, it is less bad to own a home than to rent over time. But Joe will still lose close to \$300,000 in wealth over 30 years just by living in his nice single-family residence. Plus, look at his cash outlays! His bank account will look way worse as a homeowner (less cash in the bank, more tied up in equity in his home) than if he were to just keep renting for the next 25 years!

But the results are clear. House-hacking is so far and away the financial winner that it isn’t even a comparison.

## Costs of House-Hacking

Now, Joe’s a pretty smart guy and doesn’t forget to consider the subjective costs of house-hacking. He knows that as a landlord, he will have to screen, vet and address the issues that come up with his tenants. As a renter or homeowner, he won’t have to do that. He also acknowledges that he will be responsible for maintaining his house as either a homeowner or a house-hacker. That is definitely less convenient than remaining a tenant and making the landlord do all of that. Finally, he acknowledges that house-hacking is going to be slightly less awesome than living in a single family home with twice the available square footage (he’ll only live in one of the two units, instead of a huge SFR, which might have twice as much living space for him).

Joe considers those expenses, but he dismisses them systematically. He understands that dealing with property management issues will be way easier for him than for any competing landlords or property managers — those guys actually have to get in their car and drive both themselves and their equipment to their rental properties, while his tenants are right next door!

He also accepts the duties that come with homeownership by reasoning that he has no more responsibility in managing his home than any of the almost 75 million homeowners in the United States. Lastly, living space is a matter of priority. Joe reasons that since his unit would rent for \$1,500 per month, and that this is almost twice the average national rent, that he can still live very luxuriously, even in his favorite place in his favorite city. Living luxuriously, instead of living really luxuriously, is the price he will pay for the \$850,000 he will make in his sleep over the next 30 years.

## Joe’s Next Steps

Joe is a pretty savvy financial analyst and recognizes a good investment when he sees one. Joe immediately stops goofing around with the stock market, mutual funds, retirement accounts or any of that other hogwash. A 200% return on investment is available! After all, you can be sure that any financier like Joe would consider an approximately \$20,000 increase in wealth on a \$10,000 down payment a 200% return on investment.

In fact, as a finance nerd, Joe will probably end up spending less time managing his property than he did ridiculously attempting to pick stocks. There is just so clearly nothing else he can do with his money that is even remotely close to having as large a financial impact as house-hacking will.

Joe’s going to house-hack. Are you?

Related: The Boring (& Completely Effective) Way to Build Wealth: A Case Study For Young Investors

## Conclusion: Taking the Next Step (More Financial Math!)

Joe couldn’t help himself and had to factor yet another piece of the puzzle into his equations. You see, since the renter and the house-hacker are spending less cash on their living situation than the homeowner, they have the opportunity to invest that cash in something else, like the stock market.

If we extrapolate that every available cash dollar available, over and above what the SFR homeowner has, is invested immediately in the stock market (at 11.5% long-term returns), the picture changes in an interesting way:

The renter actually has a leg-up on the homeowner from a cash position and has more cash to invest in the stock market. This lessens the true wealth gap between the renter and the homeowner and suggests that given the transaction costs of homeownership, that it may be better to rent than to buy in the short-medium term.

The homeowner has the least amount of cash available, and most of their wealth is tied up in their property. This results in less opportunity to invest and makes owning a home even less favorable.

The house-hacker has the lowest net cash outlay over time (although not in year one compared to the renter, given that a down payment is involved), and thus their net worth accelerates over the long term as they plow that extra cash flow into other investments. The differences, calculated in this manner, can be seen below and exaggerate the conclusions drawn previously:

Looking to set yourself up for life as early as possible and enjoy time on your terms? Scott Trench’s new book Set for Life, slated for release April 23, 2017, is now available for pre-sale! Whether you’d like to “retire” from wage-paying work, become less dependent on your demanding nine-to-five, or simply spend time doing what you love, Set for Life will give you a plan to get there. This isn’t about saving up a nest egg. It’s not about setting aside money for a “rainy day.” Set for Life is an actionable guide that helps readers build the accessible wealth they need to achieve early financial freedom.

Investors: What do YOU think? Is house hacking clearly the best financial choice, or are their other factors of this argument not considered here?

Let me know your thoughts with a comment, and let’s start a conversation!

Scott Trench is a perpetual student of personal finance, real estate investing, sales, business, and personal development. He is CEO of BiggerPockets.com, a real estate investor, and author of the best-selling book Set for Life. He hopes to now share the knowledge he has acquired with others so that they will have the tools they need to repeat his results in just 3-5 years, giving them the option to go anywhere they want in the world, work any job, start any business, or finish out the journey to financial independence and retire young. Scott lives in Denver, Colorado and enjoys skiing, rugby, craft beers, and terrible punny jokes. Find out more about Scott’s story at JoeFairless.com, MadFientist, and ChooseFI.

1. Yea I agree Scott, I mean anyway you look at it househacking is the way to go. Better ROI for sure. Great Blog!

• Thanks Feriz!

2. House hacking is where it’s at! I’m in escrow on a house with a detached garage. Above the garage is a 2 bed, 1 bath unit and behind the garage is a studio apartment. My \$1,300 mortgage will be reduced to \$250 after rents are collected. That’s living in a 1,400 sq. Ft. house for \$250!!!! Hard to beat that. It’s a no-brainer.

Btw, I’m paying \$1,295 in rent for a house of the same size.

House-hacking for the win!

• Nathan – yes! Great work! This is the point of this article – you nailed it. House-hacking is not necessarily about buying the greatest traditional rental property in the world and hacking it as a live in. It’s about living in a spot that you think is awesome for free or super low cost and with minimal extra work.

I’m sure that living in that spot at that price makes the place even nicer.

• Hi, I might be missing something, but what is the financial difference between house hacking (living in a part of the property ) and just buying a buy to let while renting your own home?

If the rent you receive is more than you pay out you are still winning.

I ask because I am currently in Singapore and expats are not allowed to buy and rent a landed property. You can in effect only buy condos.

Regards,
Thomas

• I’ll take a stab at this. I assume you mean you will be renting your living space while buying a condo to rent out. The difference would be that you are still paying rent on your living space rather than that money going into the mortgage payment. You will still be better off than not having the rental, but not as well off as you would be if you owned both spaces.
If you could afford to buy two condos close to each other, you would be slightly better off (assuming rent is similar to ownership costs for your space), than you would be if you only own one and rent one.

3. I found a seller who wants to move out of state. She showed me her fourplex yesterday, I made her an offer, and she is reviewing this weekend and will get back to me on Monday. Wish me luck!

• Good luck!

Are you planning on moving into 1 of the units if she accepts your offer?

• Best of luck – let us all know later today if you get it accepted!

• Go Go Go!

4. Great article! The challenge for me will be to find a duplex in a desirable neighborhood!

• Thanks! Yeah it is definitely a bit of a search above and beyond finding an SFR or apartment, but well worth it (I searched for about 6 months before finding my ideal duplex!)

5. This seems to work well for a single guy or young couple. What about those who have that big home already. Not as easy to uproot your kids and wife and downsize them into a duplex.

• I see your point. A generic duplex or triplex probably wouldn’t work for a family. But you could look more for a SFR with mother-in-law quarters or like the property I mentioned above that I’ll hopefully be closing on. A 3 bed, 2 bath house with apartments above and behind the detached garage. It has it’s own large backyard as well. I don’t have a family, but I have pets (2 dogs, 2 cats, and a tortoise) and I wanted a very specific type of property. So I think more of those properties are out there than people think. It takes a little sacrifice any way you look at it.

But I would agree that house hacking is probably more ideal for a single person or a couple.

• Hi Mark – like I mentioned earlier, I actually live in a duplex within eyesight of an elementary school. Families live up and down the block and all around. I’d personally be proud to live on that block with a small child.

Understandably, uprooting the family is a painful and stressful situation. But I’m curious – if the uprooting were to take place because of a move/new job/family issue, would house-hacking then still not be viable for a family? In other words, if you were going to move anyways, why not house-hack with the family?

It really, truly is not much more work than owning a home, and you can see the tenants as little or as often as you choose – just like any neighbors you’ve ever had.

I have no idea so maybe I’m being naive, but I’d hope that the wife would understand that ~\$18,000 in low work income per year to offset housing costs could mean a nice \$100 date every week, and a \$2,500 trip to the Bahamas, with enough left over to max out both of your Roth IRAs, your HSA, and max out Junior and Missy’s college 529 savings plan.

6. Awesome article! I love numbers and analysis. I could see this working for a lot of people if you could find a nice duplex that would be suitable for raising a family in. Pretty rare around here, but I’m sure they exist somewhere!

• Thanks Stephanie!

You might be surprised on how common they actually are if you make this a priority. I thought they didn’t exist either and then I asked my agent to send me every duplex that came on the market and began keeping an eye out for them as I drove and biked around town. Opportunities seemed to multiply exponentially!

• I’ve been reading a lot of your articles and digging them. It took me 5 years to find the right duplex for me to house hack. But I have liked it tight near a park in a small town that I grew up in.

7. A definite no brainer if you don’t have a family . This won’t work for me as I already own a home and have a family. But, I’m continuing looking for other ultimatums on purchasing a duplex.

• Mitchlyn – thanks for the comment. I am certainly young and single, but I live on a block with lots of other families and children. In fact, my duplex is just a block away from an elementary school, and I see families and children walking past it every morning (not in the summer right now though).

I’d be very happy to live in this place with a small family. But maybe that’s because I lack the life experience that would make me change my mind later on.

8. I am very lucky where I bought, and didnt even see the potential till I had lived in the home for 2 years! Its a big 4 br 3 ba home with a den & a seperate detached 1 room apt. I bought it for when my dad was ready to move into the apt, but rented it till then, and after he passed. I rent 3 bedrooms with 2 baths upstairs and the den, as well as the apt and it averages about \$30k a year income from all the rentals, and they dont have access to my private area because theres a door between the front door & my area that I put a dead bolt on. I provide them with a nice efficiency kitchen upstairs, & they have access to my laundry area with notice. Of course I pay all utilities and provide the rooms furnished, and it works fantastic! The best part is I hardly ever even see them, & I only rent to folks who pass my “requirements”, & agree to my house rules!

• That’s fantastic! Great work.

I’m sure it makes your living situation just that much better to know that you are offsetting costs by \$30K per year!

9. I just looked at two duplexes in a great area this past week. This is my goal! One needs substaintial work and is a great price but will require rehab. The other is move in ready and 1400sf each. I’m going to go for it!

Thanks for the spreadsheet! and great article.

• Thanks Kat! I think that you will be hard pressed to be worse off financially going with either of those properties than renting or owning a comparably sized SFR in your area!

10. This is an amazing article! Thanks @scott for explaining this concept so clearly! There are other good examples, but this is my favorite for laying out why real estate is a great option. I love how you used reasonable numbers as well, ones that can apply to most of the country.

• Thanks Taylor! I’m of the opinion that no matter what assumptions you go with, they are always wrong – the best you can do is be “reasonable” and let others change those at their will. I hope that the spreadsheet will be close enough to reasonable in your area to give you a good understanding of the financial impact of house-hacking there!

11. I bought my very first home four years ago and it is a duplex. I didn’t know the term “house hacking” back then, but I did know it sounded pretty fantastic to have renters pay my mortgage. It turned out to be the best financial decision I have ever made. My mortgage, including taxes/insurances, is \$728/month and I rent my other side out for \$1200/month. I live for “free” AND earn an extra monthly income.

Now I’m hooked! I am closing today on my first non-owner occupied property. Another duplex, except I’ll be renting out both sides. All thanks to my decision four years ago to forego a “bigger, better” SFH just for me and get a duplex instead.

• Jennifer – this is what inspires me to keep proceeding with this house-hacking plan. It seems like a pretty unbeatable way to build wealth with minimal effort.

I would be thrilled to have repeated your story in a few years.

12. Great article that just further proves what a great idea house-hacking really is. It is insane that more people are not doing this!

• Haha I couldn’t agree more Walker!

13. 1. If zoning in your area allows it, as it does in my county, you can convert a SFR to a duplex. You just need to find a floor plan that can be “duplexed” inexpensively.

2. You can save even more by finding a house with a mother-in-law apt and, if you are single or newly married, be content to live in the apt and rent out the house. I did this as my first house in 1988. Payment was \$350 on a 15 yr fixed. I rented the house for 400 and lived in the apt. I got a free place to live, someone paying my mortgage, and \$50 cash to boot! Sold the house about 15 years later for 3 times what I paid.

3. Going for the minimum space you need instead of the maximum you can afford is smart. The Bible says if we know God and are content with what we have we are wealthy! (1 Timothy 6.6)

• Rick – these are great additional points. I imagine it must feel pretty awesome to live in the apt and rent out the nicer parts of the house. I bet the renters might even feel bad for you living in the smaller space…

14. Great article!
My wife and I have been house hacking without knowing it for the last year and half and we sure are glad we changed our business model. We no longer feel like we are working for the long term tenants or the bank. We are rapidly showing real results in term of how the improvements are paying off; i.e. owners equity, curb appeal, etc. We actively manage two well appointed Home Away single family homes on our farm property and live in the third and smallest unit. Soon we are rolling profits from a sale in Idaho to continue on with our plan to grow to three units in Texas next year. We are getting real good at what we do and may end up becoming even more creative by living in a fifth wheel or R.V. park or even tent camp for fun during peak season. During slack season we can play hop scotch amongst the three homes and enjoy the whole compound, and, at the same time, maintain it to a level that was never possible with long term tenancy arrangement.
The results are tangible and very quantitative.
Brian

• It seems like its a great way to start the wealth building snowball doesn’t it Brian?

Thanks for the comment and support!

15. This would be a great strategy, but it doesn’t apply to all the cities! No way could I afford a Los Angeles duplex, even with a 3.5% downpayment. I am saving aggressively, but even the cheapest duplex in a not-great-area is 500K.

I’d love to do this if I could!

• Francesca – the point is to live where you want, but to subsidize it by house-hacking. San Francisco is a great example of an area where a lot of folks have kind of given up on the house-hacking idea.

The great thing about San Francisco is that if you are living there, you likely earn a high income to offset the high costs of living and housing. Hopefully that high income can allow you to save up for the downpayment on one of those more expensive \$500,000 – \$750,000 Duplexes. Sure it will take a little longer – perhaps a year or two longer than it took me to save up for my duplex, but it will hopefully be worth it as I suspect that you may enjoy more appreciation than folks in other cities over the long term..

• Scott, the San Francisco real estate market is far beyond \$500,000 to \$750,000 for a duplex. Try double that amount – at a minimum. Furthermore, the FHA maximum loan amount is ~\$625,000 and jumbo loans are going to be much more strict with LTV requirements (not to mention higher interest rates because of the increased risk).

I can think of better investments, but to each their own.

• Francesca says, in her comment above, that the cheapest duplexes are ~ \$500K. I don’t know San Fran. I’m going off her comment.

Even if not, then buy a 2Bd condo and rent parts out. Or buy a duplex in your indicated price range with 20% down.

If the strategy really won’t work in San Fran, then move. Or justify that you don’t have access to this unbelievably powerful method of wealth creation by saying that you are willing to pay incredible amounts of money each month to live in the Bay Area because thats just where you want to be.

16. Word of caution to anybody using the spreadsheet in this article – it is a good start but overlooks several points.

1.) Depreciation is not mentioned
2.) Taxes on rental income
3.) Upfront mortgage insurance premium (MIP) for newly-minted FHA loans
4.) Model calculates rents rising in lock-step with property value. Not true for some markets.
5.) IRR calculations missing

• Sorry you didn’t enjoy the spreadsheet. The goal here was to demonstrate the material impacts on wealth creation. While what you mention are true, I thought that my inputs gave the best interpretation of value to the user vs unnecessary complexity. I apploaud your pointing out these flaws.

I think that if you include the 5 points you make here, you must also include additional points:

1) I mention that joe is claiming standard deductions. Since this property is not in an LLC and I don’t have an end sale in my model, I deemed depreciation an unnecessary complexity.
2) Taxes on rental income is left out. This study is pre-tax. That said, in a real scenario (like my own), depreciation and interest/deductible PMI largely offset all rent collected. While the homeowner will look slightly better relative to the house-hacker if we factor in taxes, it won’t have a massive relative impact on the study vs the renter.
3) You are right – upfront mortgage insurance should have been baked in. That will have a perhaps 1% impact on the homeowner/house-hacker in comparison with the renter. I deem it to be immaterial to the conclusions of the model, though I may go back and bake it in. It will have perhaps a 1% impact on the overall conclusions of the model.
4) IF you don’t want rents rising in lock step with property value, then you have to add several additional layers of complexity which I deemed to be unworthwhile. The material conclusions from this spreadsheet can be gleaned by changing the rent/price ratio of 1%, and no one can accurately predict how rents will rise over 30 years anyways. I deem this unnecessary complexity.
5) IRR is only useful in determining the value of an investment relative to another. This model by definition compares the only three possibilities that my limited brain could come up with for living in the desired dwelling. As it is a comparison by its nature, I felt IRR was unnecessary – not to mention unlikely to be understood by the mass audience that this article is intended for.

• Fair points Scott and I appreciate your reply. My suggestions would add complexity to the model, but I do have to disagree on suggestions one and five.

1.) IRS rules clearly state that you must claim allowed or allowable depreciation. When you sell the home (assuming you won’t hold it forever) and if you didn’t claim depreciation, they’ll still tax you as if you did upon final sale. http://www.irs.gov/publications/p946/ch01.html

5.) IRR is always relevant. Your model clearly goes beyond three possibilities in mentioning investment in equity securities and the reader deserves a deeper look at the returns and risks involved for each.

“Not to mention unlikely to be understood by the mass audience that this article is intended for” – if you claim the target audience of the article cannot understand IRR, why are you suggesting that investing a large sum of money into a highly-leveraged, illiquid asset is “clearly the best financial choice”?

• True – but if we go by the idea that this is all pre-tax, depreciation is moot. If we don’t, and if Joe has any family at all, depreciation, dependents, and his married status create a situation where his standard deductions are likely to be greater than his itemized deductions (like depreciation) anyways. It will be a case by case basis for a single house-hacked property if and when depreciation may come into play. Baking that into this model would have been a huge pain in the ass and at fractional benefit to cash flow and net worth (net worth is still calculated with market value – the tax savings merely reduce cash outlays for the house-hacker slightly) in specific cases.

IRR is a concept that few investors understand well. Browse around the forums for evidence of that. Whether or not you are aware of how to calculate NPV or IRR is unnecessary in the context of the net worth study I did here. Comparing net worth produces the intended result, just as IRR or NPV would. One of the three choices MUST be made for Joe to live in his ideal spot. Clearly, a house-hacker is better off, even if he doesn’t understand IRR, than the homeowner or renter.

You might as well argue that anyone that doesn’t understand IRR shouldn’t buy a home. And I’d bet that 65 out of the 70 million homeowners in the US don’t. They are at just as much, if not more risk than the house-hacker.

*Please note that I love discussing the validity of my financial models and am very happily nerding out thinking through this.

17. Excellent article! This has always seemed like a great strategy; it is really helpful to have it researched and analyzed to this extent. Kudos to the author!

• Thanks Mike – I appreciate the support!

18. Scott, This is a great analysis on the benefits of house-hacking over other methods. Thanks for the detailed explanation.

• Thanks Gianni! I’m glad you enjoyed!

19. Great article Scott. You demonstrated the benefits of house hacking very well. I think it is a great choice financially if you are in a position to make it work.

• Thanks Andrew!

20. Great article Scott! Thanks for the spreadsheet! I live in Hawaii, and every property that I have purchased is a “multi-family property”. That is what these properties are called in HI. If a property does not have 2 or 3 separate living areas, I will not buy it. I learned early on (like you have) that it is a “no brainer”. If I have one property with 3 separate rentals, and one tenant moves out, I don’t have to worry, because I still have rental income from the 2 other units. The rents in Hawaii are extremely high (due to the military bases) only second to San Francisco. There is a scarcity of rental units, so it’s very common for people to convert their houses into multi-units (or “house hacking” as you call it). When I moved to HI in 2002, I purchased a beautiful 5 bedroom, 3 bath house on the beach. I immediately transformed the house into a duplex (3+2 and 2+1). My goal was to live on the beach for “FREE”. Everyone thought I was crazy (including the real estate agent, who informed me that the max I could get for rent was \$1,200/mo). I proved the agent wrong by getting a military officer that rented the 2 bedroom side of the house for \$1,700/mo. Now I rent the 3 bedroom side and get \$3,600/mo in rent, and I live on the 2 bedroom side for FREE! It took me about 3 years to achieve my goal of living on the beach for free. As an added bonus, I figured out a way of maximizing my rental income by renting the 2 bedroom side for \$300/night, while I’m away on vacation! So my house produces income, while I’m away on vacation!

• Gloria – this is an awesome awesome comment and it typifies how well this strategy can work in everything from the lower income cities to the most expensive places in the country! Great job, and I bet that living on the beach is all the sweeter since you can do it for free!

21. I found this article to be very interesting to me and I’d like to know a little more. This is actually my very first post here on BiggerPockets.com. Can you do all of this with a triplex, 4-plex, or any other bigger unit complex besides a duplex? Is it possible to get an even higher ROI depending on the size and income of the multi-unit complex?

• Gilbert – yes, this can be done with a duplex, triplex, or fourplex. While it can also be done with larger units, it’s a little harder to qualify for financing on structures with more than four units. That’s because anything 5-units and up is considered “commercial.”

I would say that a triplex or fourplex might be even better than a duplex! For me, here in Denver, it would have been very difficult to qualify for financing on a structure with that many units, and still been in an area that I wanted to live in. That’s why I went with the Duplex. Give me a little bit more time, and I absolutely expect to be buying properties with more units and doing what you say here!

22. I love this article. One point that really made we think was: “Joe would like to fit in and believes that he too can just barely qualify for (afford?) a mortgage to live in a large, nice single-family residence.” To a degree I am Joe in this situation as so are most of the guys I work with. Even though we all have really nice houses we hardly ever see the insides of each others houses. When we do it is probably just the family room/kitchen area. I can honestly say I’d be far more impressed to hear about your million in the bank then your fancy house. Plus most people I know that live in awesome houses are living paycheck to paycheck even thought unlike Joe are all 6 figure incomes. Nice work on this.

23. Buying a two family is the oldest way in the book to get started.

The best thing you can do if you have the patience is to buy 2-3 this way than move into a proper house. My buddy did this moving into a new one every two years.

Back before the war it was very common for entire families to come over from say Italy and live in a 2-3 family.

Now if you make money that depends entirely on how good of a landlord you become.

I find it hilarious that you throw a buzz word on something like “hack” and now it’s new and cool. In my world a hack is a crappy contractor who ruins a property

24. Hold on a sec.
What about the value of missed opportunity not shown on the charts?
Suppose Joe Rents or owns but invests (not in the traded markets) in … say Passive Real Estate?
I Love the idea of house hacking. Not at all a bad idea. I just want to see the effects of investing compared!
Good article.
Thanks

• You should read the conclusion 🙂

25. This is what we did last year although at the time we didn’t know it was called “house hacking”. We just new we wanted to lower our cost of living so we would have more time to pursue our passions. After some searching we found a large duplex (each side is over 2000 square feet) in a great area of town. Our family of 6 is quite comfortable but we moved from an RV (we traveled the country for four years in our RV by choice) so the duplex feels HUGE to us! I could see how it might be harder for a family coming from a more traditional setting. We made this decision bc we wanted to continue pursuing simplicity and intentional living. The reduction in our housing costs (our duplex is even less expensive than our RV expenses) has allowed us to do that. Before the RV life, we lived in southern CA for 12 years and hated “living for” our high house payments. We love the extra freedom our duplex has given us and we are currently trying to learn as much as we can about investing and money so we can make wise choices in the future. Number crunching is really hard for us since we both are “creatives” but worth the effort. Anyway thanks for this article! It’s been very affirming to our choice to “house hack” even with a larger family!

(Oh yeah a few people have been like “Why didn’t you want to buy a NORMAL home?” Then we explain our low cost mortgage and then they think we are genius!!)

26. Right on the money man! I’ve been doing this for 8 years accidentally in a SFR. Bought a 3200 SF 5 bedroom house in an awesome part of town, rented out 3 rooms to some buddies. I’m a contractor so I’ve slowly remodeled the house. Bought for \$400K, just appraised at \$750K and my average monthly expenses have been about \$650/mo. Of course I’ve had rehab costs but those directly increased the value of the home plus I could pay cash for the materials/improvements because my cost of living was so low. People always say “awe man you have to deal with roommates, what a pain in the ass, I wouldn’t do that”. I just smile and say “OK, you don’t have to”, then think about how much money they’ve spent on housing in the last 10 years.

27. Would a Multi-Family House Hack be the same thing? There is many Multi-Family homes in my area that I am considering to house hack. I know the rents would easily negate my mortgage and I would be living for free. In fact, all or most of the homeowners are living virtually for free or nothing in my neighborhood because of this.

• 3-4 units would work as they are available for FHA and conventional loans. 5+ is commercial. Correct me if I’m wrong but generally more units would mean a larger portion of the mortgage and expenses are covered. You are dividing the total rent 3 or 4 ways instead of 2 (duplex). Make sense?

28. Great article! Thanks for your info. I going to keep looking for a duplex, tri or 4plex.

29. I’ve been obsessed with House Hacking since I learned about it last year. I put a couple of offers but had no luck. Today I put an offer for a duplex. Wish me luck!

30. Is there a way to get other types of financing to fund the purchase of a multi-family unit? I am receiving a similar income to Joe but am in an area where the average multi-family unit goes for around \$500,000 and would make it very challenging to get qualified for a traditional mortgage at this price point.

31. Awesome article thanks for sharing looking forward to making some offers soon