How to Evaluate a House Hacking Deal

[Kevin Brown]

Hey everyone!  

I wanted to get some insight on how people evaluate house hacking deals.  In some ways it seems a little different since one has the added benefit of living in the house.

We are looking at a deal with asking price of $635K

It is a 4 plex

I have looked through the books for 2025 and excluding items I think count as cap ex (a water heater replacement, gravel added for the driveway [last done 3 years prior] , and some new gutters, fascia, carpet, drywall, and paint because the old fascia rotted and the gutter came of causing part of the house to become water damaged) the NOI was $33,802.45.

A realtor we have worked with, who is an investor, said for our market (Winfield, IL), a cap rate of 5.75-6% is fair.  His minimum cap rate is %5.5.

With the sellers asking price we'd be looking at a %5.32 cap rate based on current operations.  Based on two other 4plex comps in the area within the last 6 months it is arguable that he could get $700K or more if he listed it in on the market (overvalued but plausible).

From our perspective if we can get an FHA loan we are looking at $22,225 in downpayment + ~$5000 in closing costs. With that much down it looks like our Principal, Interest, Taxes and Insurance + PMI is going to be about 5362.02. If we occupy one unit the other renters will contribute $4,795 towards the monthly expenses, leaving us to come up with $567.02 in mortgage payments and $573 in utilities; meaning our living expense will be about: $1,140.02/mo and we will be responsible for any maintenance expenses that come up (which could be notable as it is an older building.)

This is how we've been thinking about it.  The market rent for this unit is $1675 which is well below the local rent for comparable more updated units (3bd 1 bath).  To buy a house in this market would put us at a mortgage payment of at least $2500 unless we made a very large downpayment.  By these standards if we paid $1500 each month, we'd be contributing to some modest reserves, and we'd be able to live in this market far below what it might cost in other circumstances.  We are currently living 30+ miles away and there are very limited options for affordable ways to move closer to activities/communities we are a part of.

If we later move out and all values stay the same we'd only earn $211.48/mo renting all 4 units, after %5/rent set aside for reserves, giving us cash on cash of %9 and a cap rate of %9 once all the debt service is excluded.

So, the main questions is how would other people look at a deal like this?  Obviously, the ideal scenario would be that we don't pay anything for our monthly living expense, but is paying considerably less than market value to live in a premium location good enough?

This property is quite unique for the area and to get control of it would be desirable.  Demand for rentals is high, and supply of affordable housing is low.  There is very low vacancy at the property.

Thanks for taking the time to offer any thoughts you might have!

[Rod Hanks]

@Kevin Brown 

You’re actually looking at this the right way. House hacking deals don’t pencil the same way a pure investment property does because part of the return is the reduction in your living expense, not just cash flow.

A few things I’d personally look at.

First, the cap rate. At the seller’s price of $635k with NOI around $33,800, you’re right that it’s about a 5.3% cap. If your local market trades around 5.75–6%, then strictly as an investment it’s a little rich. But the moment you factor in FHA financing and living in one unit, the analysis changes because you’re controlling a 4-plex with very little money down.

Second, your effective housing cost. Right now you’re estimating about $1,140/month all-in to live there after the other units pay most of the mortgage. In Winfield that’s pretty attractive compared to the $2,500+ you’d likely pay to buy a single family home. That difference is real money every month and it’s part of the return.

Third, I’d stress-test the numbers a bit. Make sure the rents you’re using are realistic, and don’t forget to include vacancy and maintenance reserves. A lot of first-time house hackers underestimate those. An older building can easily eat a few thousand a year in repairs.

Fourth, think about the exit scenario. Your numbers show that once you move out the property roughly breaks even or produces a small amount of cash flow. That’s not bad for a four-plex bought with an FHA loan. Many investors accept very low cash flow on small multifamily in good areas because the long-term play is appreciation and rent growth.

One other practical thing I always tell investors to check is the insurance situation on small multifamily. Older 4-plexes sometimes have prior roof, plumbing, or electrical claims that make coverage more expensive or harder to place. Make sure you get a real insurance quote during due diligence so it doesn’t blow up your numbers.

If the rents are stable, the building doesn’t have deferred maintenance surprises, and you’re comfortable living there for a few years, this is exactly the kind of deal house hacking was designed for: low money down, most of your housing covered by tenants, and a property that can stand on its own once you move out.

Paying a little out of pocket to live in a good location while controlling a four-plex isn’t a bad outcome at all.