House Hacking - Include money saved on rent?

Question

Hi All,A newbie here just beginning to wrestle with a lot of these concepts. I've got a deal analysis question about a buy-and-hold rental property. I'm practicing Brandon's "Four square" method on a bunch of different places (you can find it on youtube, it won't let me linke). As I'm going through these I'm wondering if, for house hacking specifically, you include the money you save on rent in calculating cash flow? For example, imagine a deal that requires $43,250 up front. The rented out portion of the property cash flows $166/mo or $1992/year making the CoC ROI = 4.6%. If your personal cost of capital is ~7-8% then I imagine it'd be a no.  However let's imagine I'm paying currently $1250/mo in rent and if I didn't move on the deal I'd continue to pay this for the foreseeable future. Imagine further that I could rent out the portion of the property I intended to live in for $1000. How, if at all, would I factor in the money I  saved on rent in to the final deal analysis and my own CoC ROI? THANK YOU for the help :)

Dan Weber · Answer

Run your numbers as if you are NOT living in the property. You won't be living in this duplex forever, and as so, run the numbers as a pure 100% rental to get an accurate ROI number.

Aaron Montague · Answer

Account Closed

No.

Think of this deal as a sub section of your personal finances. Analyze the deal as a standard rental per @Dan Weber's suggestion. This will give you an indication if this is going to be a good rental when you move out.  Then follow @Ryan Cleary's advice on making sure you have a good idea of which exit strategies are available to you.

Now switch over to your personal finances.  By reducing your rent expense to zero, you have saved $1250.  If I read your post correctly you are making $166 in positive cash flow after accounting for all rental expenses.  This is a net win for your personal finances of $1416 dollars per month.  So this house hack is a good investment for your complete portfolio.

There is a "but" coming though I figured I'd lay this out for your first.

Ryan Cleary · Answer

For me, I would run the numbers in a few ways.  First I would take the outcome that you expect within the first few weeks (having a tenant paying you rent while you live in the other half).  Next I would run numbers on not having tenants at all (Are you able to cover all your expenses during worst case scenarios).  Next I would run numbers for a few years down the line when you look to leave this property and rent both sides out (I always try and get a 10% cash on cash, but each market is different).  Hopefully it works out in your favor and not only do you save money each month but you gain much more equity in the process!

Account Closed · Answer

@Dan Weber @Ryan Cleary @Aaron Montague Thanks so much guys, this is super helpful!

House Hacking - Include money saved on rent?

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