House Hacking brings worse cash flow ?!?!?!?!?

Question

I’ve been underwriting deals this month with a goal to analyze 5 properties using an Excel model I built. I recently ran the numbers on a 4-unit property using two strategies:

• Traditional buy and hold
• House hacking (living in one unit)

Traditional buy and hold

House hacking (living in one unit)

What I found surprised me:

The cash flow was actually worse when house hacking!!!

At first, this seemed backward, but it made sense after I thought it through. When house hacking, you’re giving up one unit’s rent, which drops the property’s gross income and overall cash flow. But on a personal level, you’re saving a ton by living for free or at a reduced cost — it’s basically trading property cash flow for personal cash flow.

Now I’m considering bringing in a private lender for my first deal, and it raised a question:

1. Wouldn’t house hacking reduce returns for a passive investor or lender?
2. Since the rent from one unit is gone, the investor doesn’t get compensated for my personal living benefit. The deal is better for the person living in the property, but not necessarily for the investor.

Curious how others have handled this. Have you structured a house hack with private lenders involved? How do you fairly compensate the investor when house hacking lowers rental income?

Rick Albert · Answer

Of course cash flow is worse, you are putting less money down. If the numbers work with 3.5% down, an investor putting 20%-30% would jump on it and likely pay more.

In real estate, you make money 4 different ways:

1. Cash Flow

2. Appreciation

3. Tax Benefits

4. Loan Buy Down

So you may not be getting cash flow, but you are still getting the other three. And as already mentioned, it is better than renting.

Private Lenders are going to be more expensive than conventional loans.

What I've done with my two LA house hacks is leveraged the equity. Used a HELOC to buy the second and then used another HELOC and 1031 exchange to buy out of state.

Because you are in a high cost of living area, your appreciation dollar is higher. 3% appreciation on a $1M asset is $30K. If you used the FHA loan you got almost all your money back in the first year. That's an amazing cash on cash return on equity.

From a rental standpoint, a 3% appreciation on $3K a month is better than 3% appreciation on a $1K a month rental out of state.

House Hacking is more about lowering your overall expenses and playing the long game.

Warren Powers · Answer

@Trevor Brouelette from the private lender’s side: I can only lend money to LLC’s for business purposes. I would not consider long term loans. I would only lend for flips or bridge financing. I would only lend for interest plus points not a split of the rent. It sounds like you might be after a JV partner to supply the money while you handle deal source, rehab, tenant placement and management? Could work with the right deal but a lot of blanks to fill in to make it investable for a partner.

Drew Sygit · Answer

@Trevor Brouelette you're not really comparing apples-to-apples.

Of course the property's income will be less if you're living there and NOT paying rent.

Not sure if you fully understand, "house-hacking"?Goal is to lower your cost of living/rent.

When running u/w numbers, you should be using market rent for the unit you plan to occupy.
The goal of house-hacking is to eventually rent out the unit you live in, when you scale your portfolio by buying the next rental.

Caleb Brown · Answer

I would not bring in a private money lender on a house hack, doesn't make sense. You can utilize FHA or conventional sub 5% down payment. You should be able to save that up and go that route. The whole point with house hacking is reducing your housing expense(which is the largest for most) while getting your foot in the door on a deal. This also helps you save so you can rinse and repeat. You also utilize low DP compared to non owner occupant where it's 20% plus. Once you move it out it should cashflow but that's a separate thing.

Bill B. · Answer

Your cashflow is better because you’re not paying rent. (Unless you’re living for free with friends/family.)

For partners or for “pretend land” you have to pay fair market rent in to the property’s account. Then you can do the math if you own it solo, or you can split the profits if you have a partner. You can’t live there for free and then split the left overs. You can’t even take 1/3rd of the rent plus live free that would give you one guaranteed tenant every month and one unknown, while the other person has two unknown. Even if the partner moved in to one of the remaining units. You should split the income/expenses for the building after you each paid fair market rent, not each take one unit

Good luck

James Jones · Answer

You’re spot on, house hacking nearly always looks worse on the property’s cash flow because you’re removing one income stream. But lenders/investors don’t care about the property “looking worse” as long as the deal structure still protects their return.

Here’s how most people solve this when bringing in a private lender:

1. Treat the private lender like a lender, not a partner.

If you structure it as debt, then your choice to live in one unit doesn’t affect their return at all.

Typical terms:

Fixed rate (8–12 percent depending on market)

Interest-only monthly payments

Balloon in 12–36 months

They get paid identically whether you:

live in one unit

rent all units

keep, refi, or sell

Your personal living benefit is irrelevant because they’re not sharing equity.

This is the simplest and safest structure for a first deal.

2. If you DO want them to be an equity partner, you must “replace” the missing rent.

If you structure as equity (profit share), then yes, you can’t just delete one unit’s income and expect the investor to take that haircut.

Two clean solutions:

Option A: Pay a “house hack offset” each month.

You basically pay the partnership the amount that unit would have rented for.

Example:

Unit would rent for $1,500

You pay $1,500/mo into the deal

→ Keeps the underwriting true

→ Investor gets the same return as if it were fully rented

→ You still get the benefit of living where you invest

Option B: Give the investor a larger equity share.

If you don’t want to make monthly payments, you can give them:

60/40 instead of 50/50

Or preferred returns with catch-ups

You’re “paying” for your living benefit through equity instead of cash.

3. The big idea: lenders want predictability, not occupancy.

House hacking only becomes a problem when:

The investor is equity-based AND

You remove income without replacing it

If you’re using private debt, house hacking doesn’t hurt them at all.

If you’re using equity, just compensate for the missing rent.

What most beginners miss:

House hacking isn’t about the property cash flow, it’s about the personal cash flow delta.

A deal that cash flows $500 less on paper may still put you $1,500 ahead monthly because you eliminated your housing expense.

Investors don’t care about that benefit because it’s your benefit, not theirs. You just need to structure the deal so they’re made whole.

Jordan Moorhead · Answer

@Trevor Brouelette yes househacking is worse cash flow but you put significantly less money down (3-5% vs 25%) and you save a ton of money while living there, plus you gain experience and credibility. My househacks I did launched me into being able to build a strong portfolio and show private lenders I knew what I was doing. Why would a private lender loan to you with no experience?

Graham Nadler · Answer

Hey Trevor, Great post! The biggest benefits to house hacking are putting much less down (3.5-5% typically) compared to 20-30% down as a true investment mortgage. So it's less about cash flow than it is to your point reducing your money spent at closing. Using a private money lender would be hard to get through underwriting but would depend on how you set it up. If it's your first investment I would probably try and do a house hack yourself (great boots on the ground experience, reduce your own housing bill, eventually cash flow, low down payment to start). With a private money lender would be easier to not occupy yourself but not impossible just depends on how you set it up.

Trevor Brouelette · Answer

@Warren Powers thanks Warren. This helped my understanding a lot!

Adam King · Answer

Hi @Trevor Brouelette,

I can certainly appreciate your attempt to underwrite these deals, but they are very different strategies, each with their own benefits and drawbacks. You will likely need to use 2 seperate excel models and use a metric that is easily comparable(relative cash flow, IRR, net cost).

Traditional Buy and Hold: Typically requires 20-25% down, and will come with a slightly higher interest rate .75-1.5% over prime. In multifamily in San Diego this represents a massive cost, likely $200-500k for the majority of the county when talking about 4 units. The large down payment though can lead to increase access to cash flow, and a lower monthly payment despite the higher cost up front.

House Hacking: Can require as little as 3.5% down though I do recommend 5% as it avoids the means testing required by the FHA loan. When using this method account for the rent that you would be paying, even if the property covers a portion of that amount. When using a lower down-payment, appreciation and loan paydown are accelerated in relation to your initial equity, this greatly increases your IRR.

PML is not likely to loan to you, if your intent is to house hack. The way around that would be to pay rent to an entity that you control and then pass that through to the PML. Though PML is likely not going to pencil out as their rates are significantly higher than a traditional Commercial loan, and even higher still than a federally backed conventional loan.

I have helped many clients, and myself, through both traditional investment purchases and house hack purchases. I would be more than happy to help answer any questions for you!

House Hacking brings worse cash flow ?!?!?!?!?

House Hacking brings worse cash flow ?!?!?!?!?

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