House Hacking and One percent rule

9 Replies

If you’re house hacking in say a duplex and the mortgage is $1,0000 but the rent collected for one side is $800. Does it still meet the one percent rule because if you moved out and rented your side it’d be $1,600 in rent?

Maybe.  The mortgage itself is irrelevant to the "percent" rule.  The percent rule should be based on the entire amount of capital invested in the property.  Purchase price + closing costs + rehab + holding costs = "All in".

Percent = Total Market Rent / "All in".

So a duplex that cost $100,000 to purchase, $4,000 closing costs, $15,000 to rehab, and holding costs were $1,000 would have an "all in" of $120,000.  If the Total Market Rent is $800 per side ($1,600 total), then regardless of whether it is rented or not, the percent is 1.33%.  

If you only count the mortgage, then consider that same duplex that rents for $1,600/month with a $5,000 almost-paid-off mortgage would be 32%, obviously a bit ridiculous.

The reason you asked this question, I think, is to evaluate the investment potential of this duplex.  The potential remains the same--$800 per side--whether you live in it or not.  The potential is still there, and in an owner occupancy scenario rather than putting $800 extra into your rent account every month it is shouldering the burden of your housing cost.

So, to evaluate your property, add up your total costs as mentioned above and then divide one months total market rent potential by that amount.  Then you will know if your duplex meets the 1% rule.  I suspect it will, btw, unless you put a gob of your own cash into renovations that are not reflected in the mortgage balance, which I'm also guessing is $100,000 not "$1,0000".

Don't worry about any of these "rules of thumb." They're a fine benchmark, but they stop so many new people from getting going because someone on BP told them that's how you need to invest. There are many markets where 1% deals just don't happen, but there are other ways and methods that can be very lucrative. You need to worry about whether or not the deal meets your immediate needs and long term investment and personal goals. 

I can't tell you how many "investors" I've worked with, and continue to work with, who are scared to pull the trigger on anything because someone on BP (who has probably never invested either) told them how it's supposed to work. They wait for years looking for a 1% deal or a 2% deal or something with specific ROI or whatever. They wait forever and sit at their desk from 9-5 until they're 70 years old.

Please excuse the slightly off topic rant, I just believe so many of these rules create analysis paralysis for people. Investing isn't hard or scary after you do a couple deals, they don't have to be home runs It's the education and experience that matter. Jump in!

Best of luck!