Running Cash Flow #s by the Four Square Method - Deal or Bust?
New to Real Estate · Chicago, IL · Member since 2023 · 23 posts · 15 votes
Running Cash Flow #s by the Four Square Method - Deal or Bust?
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Investor · Miami, FL · Member since 2015 · 355 posts · 268 votes
2yI've said this a number of times before, house-hacking sounds good on paper but rarely pans out as people expect. Namely high prices compared to returns in multifamily and also high interest rates. The biggest thing that few people talk about is the ideal investment property and the ideal place to live rarely overlap. You will almost always sacrifice one for another. I would bet you could make house-hacking numbers work in an the absolute worst neighborhood in your city, but chances are you're not willing to live there.
16 Replies
- Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes2y
Quote from @Jacob Lopez:
Hey BP Community,
I have been diligently running cash flow and Cash-on-Cash return #s from many duplexes and triplexes in the Chicago and Chicago suburban areas. To my dismay, I have found that as someone who wants to live in one of the units (house hack) that significantly reduces my cash flow to next to nothing, or to nothing, or even negative earnings.
BP Community - is this the best way for me to be running these #s, or is this just the new normal and the "live for free" model has slowly disappeared?
Thank you!The truth is you do have to analyze a lot of deals (kiss a lot of "frogs") to make offers on just a few. No doubt that house hacking has become more challenging in the last few years but it is often still a much better option compared to both renting and buying a primary home just to live in. Ideally once you move out you should be getting some cash flow but you usually need to raise rents by doing some sort of rehab.
But without seeing your pro forma assumptions, I can't say what's realistic or not for you. I work with a lot of new investors and house hackers and as you might expect, they usually need guidance on analyzing deals. That makes sense of course, and I provide them feedback on expense estimates and rental comps to estimate accurate rents. In my experience most new investors overestimate rents and underestimate expenses.
Another thing to keep in mind is that when you're house hacking - your CoC return is almost always going to be negative in your first year because you'll be living in the property. Inventory is also pretty low so it's harder to negotiate better terms as a buyer in this seller's market.
- Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes2y
House hacks rarely will ever cashflow. They are meant to reduce your living expenses to save money while getting into a property way under the 20% down threshold. Once you move out then it will have cashflow. The benefit of house hacks is you can do it every year and use low money down. After a few you'll have properties under your belt to launch you into investing. It's a slow but steady way to do it
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2y
@Jacob Lopez, as others noted, house hacking is not really a cash flow play, in a traditional sense, since you are effectively removing 33-50% of the property from the rent roll.
If you plan on living in a unit for a couple years, then holding longer as an investment, I would underwrite it as an investment. If it makes sense to buy as an investment, then it is likely worth buying as a house hack, assuming it is a property/neighborhood you want to live in.
From a current cash flow perspective, the analysis should result in better cash flow for YOU. It still may be negative, but so is paying rent to your current landlord. So, if you are paying, say $1,500/mo in rent now. When you buy this triplex, you are only our of pocket $500/mo for a similar quality of life, that equates to "$1,000 net cash cash flow to you", since you are effective saving $1,000/mo versus your current living situation.
- 2yJoshua ChristensenPro MemberReal Estate Broker · Albuquerque, NM · Member since 2015 · 281 posts · 232 votes
Quote from @Jacob Lopez:
Hey BP Community,
I have been diligently running cash flow and Cash-on-Cash return #s from many duplexes and triplexes in the Chicago and Chicago suburban areas. To my dismay, I have found that as someone who wants to live in one of the units (house hack) that significantly reduces my cash flow to next to nothing, or to nothing, or even negative earnings.
BP Community - is this the best way for me to be running these #s, or is this just the new normal and the "live for free" model has slowly disappeared?
Thank you!Jacob. On smaller deals like this, the valuation is determined by the market demand as appraisers use the sales comp method. Take it or leave it. In my evaluations, I want my smaller properties to have positive cash flow. I plan to hold them long term, so I'm confident that time will be the deciding factor in my returns. I'm a lot less picky on these SFR - 4plex models. Does it pay for itself. The cash flow is negligable on these smaller ones. Typically, maintenance & repair expenses may eat up the couple of thousand you earn annually in the early years. Over time they are much nicer.
Also, when looking at a house hack, I always consider the full rent. You would be receiving that rent if you're not occupying it, so I run my numbers "as if" it is occupied. Consider that the other unit is paying or close to paying the debt service and you have little to no house payment. That is your cash flow as you're keeping it in your pocket vs. paying it to a landlord or mortgage company.
Hope that helps.
- Investor · Miami, FL · Member since 2015 · 355 posts · 268 votes2y
I've said this a number of times before, house-hacking sounds good on paper but rarely pans out as people expect. Namely high prices compared to returns in multifamily and also high interest rates. The biggest thing that few people talk about is the ideal investment property and the ideal place to live rarely overlap. You will almost always sacrifice one for another. I would bet you could make house-hacking numbers work in an the absolute worst neighborhood in your city, but chances are you're not willing to live there.
- New to Real Estate · Chicago, IL · Member since 2023 · 23 posts · 15 votes2yHello Robert,
Quote from @Robert Rixer:
I've said this a number of times before, house-hacking sounds good on paper but rarely pans out as people expect. Namely high prices compared to returns in multifamily and also high interest rates. The biggest thing that few people talk about is the ideal investment property and the ideal place to live rarely overlap. You will almost always sacrifice one for another. I would bet you could make house-hacking numbers work in an the absolute worst neighborhood in your city, but chances are you're not willing to live there.
Grateful for you spreading some wisdom on my post here. I think you bring up a great point about being realistic on what sorts of goals one should or would want to achieve through investing in real estate. At the moment, properties I can afford are in the not-best areas, which I am vehemently refusing to live in, hence the unlikelihood of finding a property I may cash flow in.
The search continues! - New to Real Estate · Chicago, IL · Member since 2023 · 23 posts · 15 votes2y
Quote from @Joshua Christensen:
Quote from @Jacob Lopez:
Hey BP Community,
I have been diligently running cash flow and Cash-on-Cash return #s from many duplexes and triplexes in the Chicago and Chicago suburban areas. To my dismay, I have found that as someone who wants to live in one of the units (house hack) that significantly reduces my cash flow to next to nothing, or to nothing, or even negative earnings.
BP Community - is this the best way for me to be running these #s, or is this just the new normal and the "live for free" model has slowly disappeared?
Thank you!Jacob. On smaller deals like this, the valuation is determined by the market demand as appraisers use the sales comp method. Take it or leave it. In my evaluations, I want my smaller properties to have positive cash flow. I plan to hold them long term, so I'm confident that time will be the deciding factor in my returns. I'm a lot less picky on these SFR - 4plex models. Does it pay for itself. The cash flow is negligable on these smaller ones. Typically, maintenance & repair expenses may eat up the couple of thousand you earn annually in the early years. Over time they are much nicer.
Also, when looking at a house hack, I always consider the full rent. You would be receiving that rent if you're not occupying it, so I run my numbers "as if" it is occupied. Consider that the other unit is paying or close to paying the debt service and you have little to no house payment. That is your cash flow as you're keeping it in your pocket vs. paying it to a landlord or mortgage company.
Hope that helps.
Hello Joshua,
Very grateful for the insight here - as always I am spoiled by the input of great members here at BP. But I had a question regarding what you mentioned:Since you always consider full rent when running #s on a property, for someone like me looking to house hack wouldn't that be more misleading/confusing on what I may be earning on a property? I try to be really conservative (especially in my price range bracket at the moment) for any MFU properties since many in Chicago NEED rehab and those repairs can really hinder your cash-on-cash returns in the long run.
- New to Real Estate · Chicago, IL · Member since 2023 · 23 posts · 15 votes2y
Quote from @Evan Polaski:
@Jacob Lopez, as others noted, house hacking is not really a cash flow play, in a traditional sense, since you are effectively removing 33-50% of the property from the rent roll.
If you plan on living in a unit for a couple years, then holding longer as an investment, I would underwrite it as an investment. If it makes sense to buy as an investment, then it is likely worth buying as a house hack, assuming it is a property/neighborhood you want to live in.
From a current cash flow perspective, the analysis should result in better cash flow for YOU. It still may be negative, but so is paying rent to your current landlord. So, if you are paying, say $1,500/mo in rent now. When you buy this triplex, you are only our of pocket $500/mo for a similar quality of life, that equates to "$1,000 net cash cash flow to you", since you are effective saving $1,000/mo versus your current living situation.
Hello Evan,
I don't know why - but I really understand and appreciate your evaluation of my situation here. Overall, grateful you took the time to respond to the little guys like me.I think that your evaluation of the cash flow perspective in your response is a good forecast of how I should be viewing this investment property, even as I use it as a house hack in (maybe) the first couple of years I decide to live there.
I think overall my best course of action is to keep saving money, keep scouring the MLS and pounce on a good deal for me in an area that I would want to live in, even if I don't cash flow initally.
- 2yJames CarlsonBusiness MemberReal Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
You're not wrong. Duplex house-hacking hasn't cash-flowed in Denver or Colorado Springs for years, even when interest rates were low. Rent-by-the-room house-hacking could cash flow. I imagine it's the same in Chicago.
Unfortunately, interest rates have put those days in the past as well.
But that's not a reason to not invest. Offset as much as you can, save up as much as you can, and repeat in a year or two while renting out the previous place.
I think it's similar to dollar cost averaging in the stock market. Put in a set amount at set intervals to minimize losses from buying at imopportune times.
- New to Real Estate · Chicago, IL · Member since 2023 · 23 posts · 15 votes2y
Quote from @Caleb Brown:
House hacks rarely will ever cashflow. They are meant to reduce your living expenses to save money while getting into a property way under the 20% down threshold. Once you move out then it will have cashflow. The benefit of house hacks is you can do it every year and use low money down. After a few you'll have properties under your belt to launch you into investing. It's a slow but steady way to do it
Hey Caleb,
I'm 23, and I think if I play my cards right I could have a few rental properties cash flowing by the time I am 30, but I need to be patient and do my research so I can play my cards right.
Thank you for reminding me that patience here is key to ensure I don't jump too hastily while trying to secure the "best" deal I can.
- Member since 2024 · 7 posts · 5 votes2y
Hey Jacob! Welcome to the real estate rollercoaster! Living the dream of house hacking can be a budget buzzkill, right? Chicago's a tough market, no doubt. The "live for free" vibe might need some CPR these days. But don't throw in the towel just yet. Maybe tweak your strategy – consider different areas or property types. Get creative with financing, too. It's like dating; you might not find 'the one' on the first date. Keep crunching those numbers, and you'll find a sweet spot. The game's changed, but there's always a loophole or two. Happy house hacking, dude!
- New to Real Estate · Chicago, IL · Member since 2023 · 23 posts · 15 votes2yHello James,
Quote from @James Carlson:
You're not wrong. Duplex house-hacking hasn't cash-flowed in Denver or Colorado Springs for years, even when interest rates were low. Rent-by-the-room house-hacking could cash flow. I imagine it's the same in Chicago.
Unfortunately, interest rates have put those days in the past as well.
But that's not a reason to not invest. Offset as much as you can, save up as much as you can, and repeat in a year or two while renting out the previous place.
I think it's similar to dollar cost averaging in the stock market. Put in a set amount at set intervals to minimize losses from buying at imopportune times.
Thanks for taking the time to respond to my post here - it's at least comforting to know that my Chicago market area isn't the only area facing this issue to the extent it has been.
As for your recommendation, saving up money, minimizing almost all of my costs, and working multiple jobs has been my mojo for quite some time now and I am simply preparing for the time to find a decent property in a decent area to invest in.
It's been a struggle for almost all of us, but that has not stopped me from wanting to find success in real estate investing. - 2yJoshua ChristensenPro MemberReal Estate Broker · Albuquerque, NM · Member since 2015 · 281 posts · 232 votes
Quote from @Jacob Lopez:
Quote from @Joshua Christensen:
Quote from @Jacob Lopez:
Hey BP Community,
I have been diligently running cash flow and Cash-on-Cash return #s from many duplexes and triplexes in the Chicago and Chicago suburban areas. To my dismay, I have found that as someone who wants to live in one of the units (house hack) that significantly reduces my cash flow to next to nothing, or to nothing, or even negative earnings.
BP Community - is this the best way for me to be running these #s, or is this just the new normal and the "live for free" model has slowly disappeared?
Thank you!Jacob. On smaller deals like this, the valuation is determined by the market demand as appraisers use the sales comp method. Take it or leave it. In my evaluations, I want my smaller properties to have positive cash flow. I plan to hold them long term, so I'm confident that time will be the deciding factor in my returns. I'm a lot less picky on these SFR - 4plex models. Does it pay for itself. The cash flow is negligable on these smaller ones. Typically, maintenance & repair expenses may eat up the couple of thousand you earn annually in the early years. Over time they are much nicer.
Also, when looking at a house hack, I always consider the full rent. You would be receiving that rent if you're not occupying it, so I run my numbers "as if" it is occupied. Consider that the other unit is paying or close to paying the debt service and you have little to no house payment. That is your cash flow as you're keeping it in your pocket vs. paying it to a landlord or mortgage company.
Hope that helps.
Hello Joshua,
Very grateful for the insight here - as always I am spoiled by the input of great members here at BP. But I had a question regarding what you mentioned:Since you always consider full rent when running #s on a property, for someone like me looking to house hack wouldn't that be more misleading/confusing on what I may be earning on a property? I try to be really conservative (especially in my price range bracket at the moment) for any MFU properties since many in Chicago NEED rehab and those repairs can really hinder your cash-on-cash returns in the long run.
Great question.
1. Do you have a housing payment currently? If that goes away in your house hack, I'd factor that into your cash flow.
2. In a house hack, it's your residence so the numbers aren't going to work like a normal evaluation.
3. You're making a buying decision. You have to decide if the future after you move and it becomes a 100% revenue property, is it worth the purchase? Don't over think it.
There's never going to be a "perfect" deal. After you buy, things happen that blow your original analysis for better or worse. Real estate is a fluid industry.
the more you analyze, the more reasons youll talk yourself out of action. Be smart and dont lose money on bad decisions. At the same time theres a point you just have to take action.
- Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes2y
@Jacob Lopez you aren't alone in numbers not penciling out here in Chicago, but in my opinion, getting started period is way more important than having a ton of cash flow.
I always look at house hacking vs. renting, not from a cash flow perspective but just simply whether or not I am paying less rent than I normally would be living in that area.
The better question is when you move out in a year or two will it be positive so that you arent coming out of pocket as you move forward...
No matter what buying in good areas will always be a great move 5-10 years from now...you just need to figure out if you can out last the beginning stages.
Quality Builders4.966 Reviews - Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes2y
@Jacob Lopez early on, a lot of house hack buyers want to live for free AND get cash flow. This is highly unlikely for most folks since as a house hacker you are probably putting down in the 3.5-5% range. Instead, think about how much your monthly living expense will be compared to rent. that helps you figure out if this makes sense or not.
- 2yMelanie P.Pro MemberRental Property Investor · Member since 2023 · 1k+ posts · 922 votes
You should consider the rent you will not be paying in your analysis of these deals. Your expectation should be that you will be moving in 1-3 years and renting that unit. If it seems the project will cashflow at that time, it's probably a safe bet.
You should not expect to cash flow while not paying rent. You will pay some in and (hopefully) this will be less than you would have paid in rent, plus you are building equity/appreciation.
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