The ROI on the First Year of My House Hack: 82%

by | BiggerPockets.com

Man! That old saying is true. Time really does fly when you’re having fun. It’s crazy to think that I closed on my first house hack over a year ago—an up/down duplex that sits five blocks North of Denver’s largest park and 1.5 miles away from the office.

However, this is not your typical house hack. Because of the high price points of Denver, a traditional house hack where you buy a duplex, rent one unit, and live in the other would not quite cover my mortgage. I went into this saying I wanted to completely eliminate my housing expense, so I had to get creative.

While I rented out the top, I also made a quasi-bedroom out of my living room by sectioning off a portion of it using a curtain and a room divider. This allowed me to Airbnb the bedroom, while I slept behind the curtain (not as bad as you think).

Now, I was more than covering the mortgage, but by how much? What was the purchase price? Mortgage payment? How were the returns? Was it worth sleeping behind a curtain for a year?

These are the questions this article is going to answer. Was this house hack a success—or a failure?

best-day-sell-house

The Numbers

For this house hack, I deployed a different strategy than most. The top half is a full-time rental, and the bottom half is a private room Airbnb. After the first 12 months, I netted $37,145.37 in total rental income.

As for the expenses, I have had 12 mortgage payments for a total of $27,225.68, utilities over the past year of $1,239.92, reserves of $3,000, as well as repairs that have included plumbing $1,922 and some minor issues $150. Note that I am not including vacancy or property management for this year because vacancy is already built in to my income number and I did not use property management.

Taking the income of $37,145.37 and subtracting the expenses $30,653.49, we get a net income of $6,491.88. Remember, I was living for free. To factor that in, I estimate that my rent sleeping behind a curtain in the living room would run me about $400 per month, or $4,800, per year in Denver. Add that back, and my total cash flow is $11,291.88.

The second wealth generator of real estate is loan pay down. Over the course of the year, my principal balance has been reduced by $7,255. This makes my overall return $18,546.88.

This does not even account for the other wealth generators: tax breaks AND appreciation. These are much too complicated for the scope of this article, so we are going to assume $0 for both.

Here is a look at the numbers in a more digestible format:

So, How Is the Deal?

While there are many different metrics used to assess a deal, one of the primary metrics used to determine the health of an investment is called a return on investment or ROI. This tells how much your investment gives you back within an annual period for every dollar you put in. The higher the ROI, the healthier the deal.

For example, if I made a $100,000 investment that paid me $1,000 per month, the ROI would be 12%.

$1,000 x 12 months = $12,000

$12,000/$100,000 = 12%

Make sense? Now, let’s revisit the duplex.

My total return from cash flow and loan pay down is $18,546.88. The property was purchased for $385,000, and with a 3.5% down FHA payment, my initial investment (including closing costs) were $18,619.99. Since I decided to convert this property to an Airbnb, we need to account for the $4,050.50 I spent on Airbnb furnishings.

That brings my grand total invested to $22,670.49.

Dividing the amount of cash flow + loan pay down by the amount invested ($18,546.88/$22,670.49), I get an annual return of 82%.

Remember! This is considering only two of the four wealth generators of real estate. I did not get an appraisal, and I am not an accountant, so it’s tough to say for sure. However, after considering appreciation and tax benefits, there is a high probability that the return is well north of 100%.

Where Am I Now?

After exactly one year, I moved out from behind the curtain and converted it into a full rental. I now have my second house hack, which is a single family home just outside of Denver. I live in one bedroom and rent out the others. Yes! I have my own bedroom. Can you believe it?!

So was sleeping behind a curtain worth it? It definitely took some getting used to, but after the first couple weeks, it really wasn’t that bad.

House hacking for me has turned out to be more than just a way to save exorbitant amounts of money. With Airbnb guests coming in all the time, it has taught me to stay positive and friendly, even when I’m in the worst of moods. Travelers and vacationers certainly do not care of any trouble going on in my life.

Above and beyond, it has allowed me to be so incredibly grateful for the things I used to take for granted. I did not realize how great it is to have a bedroom. You know, one with a door and lights, and a nice 12-inch memory foam mattress.

I will reiterate it again: I don’t believe there is a better risk/reward trade-off than house hacking. If there is another asset class that can produce 80%+ annual returns with relatively low risk, please let me know. I would love to hear it!

What do you think: Is house hacking one of the best strategies out there?

Comment below!

About Author

Craig Curelop

After developing a huge love for real estate investing and personal finance, Craig decided to join the BiggerPockets team as a financial analyst. Over the past few years, he has looked at hundreds of financial models of startup companies. His experience will help BiggerPockets reach the next level as a startup company. Craig has a passion for helping others get out of their “comfort zones” to get what they want and achieve the “impossible.” In his spare time, Craig enjoys traveling, hiking, exercising, and sports of all kinds.

37 Comments

    • Ali Hashemi

      I see where you’re coming from Costin, however since housing is an essential need (you have to have it and are going to pay for it regardless) and owning a BMW is not….means he can factor rent but you can’t factor the BMW.

      • Costin I.

        Ok, if the BMW argument didn’t fly, maybe this will make for a better illustration: one likes to sleep large, in a nice and big bedroom, and in SF, but goes the route of house hacking…should that person maybe count 24-36K in couch rent income??
        You are bringing in the equation non quantifiable benefits, and this is closer to fudging the math than proper ROI calculation.
        The article is still good, it highlights the advantages of house hacking. But claiming 82% ROI is a sensationalist title and misleading for newbies.
        After all, you can push the argument that if Craig was homeless, he would saved $27,225.68 in mortgage payments, utilities of $1,239.92, reserves of $3,000, as well as repairs of $1,922 and some minor issues $150, thus being richer by some $33K+, not counting all the priceless freedom that comes with that.

        • Ali Hashemi

          I think most people consider it ok to factor in what you would have been paying in rent had you not house hacked. But I don’t consider that “income” so after reading the comments below, I would say factor it but not in the ROI calc

        • Michael P. Lindekugel

          “I think most people consider it ok to factor in what you would have been paying in rent had you not house hacked. ” that would incorrect and lead to material misstatement of net income, cash flow and IRR. the proper way to evaluate rent or no rent is through decision analysis with two models and calculating the IRR for each model. incorrect data, incorrect calculations always lead to 100% wrong result.

        • Craig Curelop

          Ali’s point here is exactly what I am thinking.

          Costin, theoretically, if one was to sleep under a bridge or a tent in the backyard, he would be able to extract more rental income and it would therefore be a better deal.

          Had I not been house hacking, but living in a similar situation, I would probably be paying about $400 per month.

  1. Michael P. Lindekugel

    Income and cash flow are not the same. Two different calculations that are related. Two different financial statements. Income or Net Income is from the statement of operations which reports income and expenses. The statement of cash flows reports the cash flow activity.

    For the statement of operations loan interest is deducted. The mortgage payment is not. For the statement of cash flows the debt service or mortgage payment is included.

    Your “rent” of $4800 should not be added back. that’s economic item not a financial/accounting item. It is not correct to include it in net income or cash flow or any ROI calculation such as IRR, MIRR, or NPV.

    loan pay down is never a wealth generator. That is huge misconception. When you pay the mortgage it involves a three part accounting transaction. On the balance sheet, cash is reduced by the amount of the mortgage payment and the loan is reduced by the amount of the principal portion of the mortgage payment. Operating expenses are increased by the amount of the interest portion of the mortgage payment.

    The principal reduction earns nothing. In fact, it loses value. This finance concept is called the Time Value of Money which also illustrates interest. A $1 today is worth more than $1 in three years when you refinance or returned to you in 5 years when you sell because of inflation. At 3% inflation a $1 today is worth 97 cents in one year. When you refinance to pull out the equity your retrieving dollars with 97% buying power of the principal reduction. It is worth .91 cents in three years. it contributes negatively to ROI because those dollars to do not earn anything. They don’t anything and lose value from inflation. Including the principal reduction in any ROI calculation is wrong unless you also include the associated costs of realizing and recognizing that amount such as the cost of refinancing or the cost of selling. You can’t recognize and realize income or gain without realizing and recognizing the matching costs without materially misstating net income, cash flow, and ROI.

    there are different metrics such GRM, capitalization rate, etc. ROI is calculated exactly the same way for every asset class. The financial statements are the same.

    Airbnb furnishings should be not be included in investment to acquire the asset. The furnishings have nothing to do with acquiring the asset and are not part of the adjusted costs basis of the asset. The furnishings are depreciated at 5 or 7 years unless the section 179 deduction is taken not 27.5 years for residential real property.

    • Brian Rickard

      You know, I was about to give you a hard time about being so critical and technical in the comments of someone’s *first* house hack… but then I read that this guy is one of Bigger Pockets’ financial analysts, so I’ll change my tune slightly: Go ahead and give him an education since you obviously know your stuff.

      However, if this was a true newbie, I would highly recommend you soften your message with something like “Hey, great work on your first house hack! Living behind a curtain takes a special kind of dedication! But let’s take a look at some of these calculations, because I think you might be off on a few points, and I’d hate to see this come back to bite you in a future transaction!” And maybe you realized the same thing I did about the author and decided that a financial analyst should know better — I can’t say for sure.

      What I can say is that I read all your comments on this post and each one just made me realize that you’re a source of very precise technical knowledge, but I also realized that each one of your messages also put me off. It’s entirely possible that you don’t care, but on the chance that you’re on here to advertise your services, I thought getting an outsider’s perspective might help you become even more successful in your future endeavors to build your client-base.

      • Paul Tacoronte

        My initial thought was the same. But after reading the entire response I learned so much more and have some work to digest the other more detailed nuances. Facts should never be negative, unless they are wrong. They are opportunities to learn more.

        • Michael P. Lindekugel

          Brian and Paul,
          none of my comments are meant to say the author is bad. not all. it is point out that there is “no different way” as some real estate gurus want to the public to think. its being called technical, but it is not technical. it is either right or its wrong. what is taught in business school applies to any asset class and any real estate strategy – buy hold, flipping, development, REITs, single family rental, 400 unit apartment building, tax lien certificates. calculating interest on the investment or ROI is exactly the same every time. probably 75% of the stuff i read on the internet about real estate investment is crap.

          no, i am not on hear trolling for business. i dont normal work with new investors. i teach non matriculated community finance classes.

    • Charles Bellanfante

      I think that you make some great points but i believe that they are a bit overwhelming. I think thta your correct about the $4800.00. But i think that from a simplified point that his principal reduction is valid. Yes you must take into effect the PV and FV of $1, but that has a small effect on someone reason to invest in real estate and view of principal reduction. If that was the case we would all be stop investing based on the Time value of money princples. At the end of the day if you owe me $1000 today, but pay me back 2 years from now, I am going to be just as happy that you paid me $1000 that day in the future. Even if turns out to be $1000 x (.84862 – FV of table).

      Note to number guys: I just made up the FV .84862. I am not running around life with FV and PV equation running through my brain. It not that serious, really.

    • Scott A Smith

      Not only the statements mentioned above, but only a single person in their pre-dating/marriage life cycle could pull off such a thing, which is NOT the majority again, which AGAIN is another misleading headline for the majority of investors. Taking a minority experience and representing it as a majority possibility is bad business. This is the biggest problem I have with BP is that they’re mostly millennials pitching what they know to people like them, which isn’t most investors.

      I’m 42 and my wife is 30 and we’re not going to live behind a curtain where we rent out the other side via ABNB and nor would any sane couple, so while we most certainly would traditionally house hack with a du/quad plex, we wouldn’t be couch surfing in our primary residence.

    • Craig Curelop

      Michael,

      Thank you for the lesson and well thought out response. I am well aware of the differences when talking about financial statements.

      However, this is not a GAAP compliant financial statement audited by the SEC. This article is articulating what the impact of my first house hack was on my net worth in the last 12 months.

      Taking into account everything you mentioned above would make this calculation far too confusing and would likely scare away many of the readers.

      As for the AirBnb furnishings, that should be included in the investment because that is what I did to garner additional income. It’s the same idea as rehabbing a property before renting it out. You would include the rehab costs in your initial money invested so it seems only fair to also include the AirBnb furnishings.

      Re your principal paydown comment. It should absolutely count. As the principal gets reduced, my net worth increases.

      • Michael P. Lindekugel

        Well, if you are aware the differences, then you should have provided correct information. It is no more difficult than the erroneous information you posted which is a material misstatement of financial information. It is either right or it is wrong. There is no different of doing it.

        You factually wrong about including the furnishings in the initial investment. it is never added to the adjusted cost basis of the real property. The real property is depreciated over 27.5 years. The depreciation is deducted in the statement of operations as part of OpEx. In the year of disposition, the depreciation recapture tax is accounted for. Non realty fixtures are never added to the cost basis of realty. Non realty fixtures are depreciated at 5 years or 7 years unless the IRC section 179 deduction is taken. the non-realty depreciation or 179 election are deducted as part of OpEx. In rehabbing a property only those costs associated with directly rehabbing the real property are added to the adjusted cost basis for the property.

        “Re your principal paydown comment. It should absolutely count. As the principal gets reduced, my net worth increases.” Net worth is based on the balance sheet and not a statement of operations, statement of cash flows or ROI. You are incorrect. The return of principal to the investor only happens in two scenarios in which it is realized and recognized. 1. The asset is sold and cash flow in is accounted for in the ROI calculus along with the costs of sale. 2. The debt is refinanced and pulled out as a cash flow in is accounted for in the ROI calculus along with the cost of refinance. If the principal paydown is not realized and recognized in either of those situations, then is never included in any ROI calculation for the same reason you never include rent income without including the matching OpEx. This is finance 101.

        None of you what posted is taught as part of any business curriculum.

        • Craig Curelop

          It seems like you are getting pretty worked up here, Michael.

          This is a valuable discussion and I think it’s best we just agree to disagree. I hope the readers come down and view this discussion, because they’ll be able to see both sides. Though, I think we are talking about different things.

          The purpose of this article was not to give a finance lesson on ROI. It is to clearly and simply articulate a real life example of how powerful of an impact house hacking has on one’s net worth.

          I’m not going to comment in circles. You’ve stated your point

        • Michael P. Lindekugel

          not getting worked up at all. there is no discussion or two sides as you want to label it. There is nothing for you to disagree with. The calculations are done correctly or incorrectly. there no different ways to do it. that’s great you want to give a real world experience. its takes no more time to do it correctly rather than provide the public with material misstatements.

          I have undergraduate degrees in finance, economics, accounting. I have a graduate degree in finance. I was CPA early in my career. I have taught non-matriculated and matriculated real estate finance classes. i have been an expert witness on the subject matter. I have 28 years of experience.

  2. gregory schwartz

    Both great comments from an accounting perspective. But for a newbie like myself simply looking to grow wealth while comparing house hacking to the alternative of renting I think this is a great perspective. Keep things simple when looking at initial investments, how much money will this cost me vs how much more money do I have now as a result of the decision to house hack.

    • Michael P. Lindekugel

      nothing to do with accounting perspective. its the same financial statements and same ROI calculus regardless of the asset class – bonds, stocks, house flipping, duplex, 200 unit apartment building, KFC franchise, commercial development, REIT, etc. there are no different ways. its either done correctly or its wrong. IRR, MIRR, and NPV are calculated exactly way every time from exactly the same cash flows every time.

      it doesn’t have to be difficult. it has to be done correctly or the results are wrong. there are a lot of bogus and wrong templates. there are a few great templates with great formulas that can be used plug and play to simplify the process for newbies.

  3. Josh Collins

    There are all kinds of accounting “funny-business” going on out there that are technically “right”. I’d rather someone make a claim and back it up with numbers and reasoning and let me decide whether it’s right or wrong. I can’t help but get the feeling we are grading @craigcurelop ‘s deal on whether he did the math “right” or not. Maybe ROI isn’t the right term, but what would you name this article otherwise – “The Global Impact to my finances from the First Year of My House Hack: 82%”? Maybe that’s more apt, but I guess I followed along just fine.

    @Costlorg – I definitely see your argument, however, he didn’t need a new BMW but he does need a place to sleep. Again, I think it comes back to global wealth/income impact and I’m fine with him including it as part of this exercise. If you are house hacking, I find it a natural that you would look at the amount of money you are saving on rent to determine if it’s a good deal financially. It seems to me that you could take that saved rent out of the benefits and still come up with a decent return (still a 60% return if you include his purchase of furniture as part of the investment).

    And speaking of the furniture purchase. I’m okay with including that in his initial investment to make his simple calculations.

    I’d love to hear how others would account for these items if they aren’t to be included in the technical accounting definitions.

    • Ali Hashemi

      Josh, while not all of us are accountants it’s important to have the right calculations if you’ve going to make a claim “82% ROI” . There are others who read this blog who make decisions based on stuff they read. Accountants can sometimes be a little annoying because of their attention to detail, but having a great accountant is crucial!!

  4. Charles Bellanfante

    The amount that you save in rent should not be included in your ROI. Return on your investment is based on the specific investment property itself. You have creatively lowered your living cost in which I applaud, but that is a life expense not related to the expense of the specific investment. Many of the arguments above are valid due to this point. If i was home hacking a 2 family and had a tenant paying my entire mortgage, then decided to be homeless and rent out the other side, then you could use the rental income in your ROI calculation. This would maximize the (specific) investment, but of course you would be homeless. Your personal calculation of how much you are saving cant be added back as a part of (specific) investment. If you sold the property you would only be able to quantify the rental income that you actually and constructively received into your ROI calculation, not what you saved from living in your own investment. The buying investor would not care about how much much you saved in rent, because that would be your life circumstance and unrelated to the (specific) investment. If you moved out of your investment and then showed that you actually and constructively received $4800.00, then you could use this in your actual ROI calculation. As it stands, the 4800.00 would be a little misleading if you cant actually show you received it.

    And since I used terms like specific investments, actual and constructively ……. someone is reading this like he must be an accountant!!! Yes your so smart……..

    Still a great post that I enjoyed reading, I enjoyed the comments as well.

    • Craig Curelop

      Thanks for the comment, Charles.

      My response to this would be similar to my response to Michael’s comment above. The $4,800 is, in my opinion, a reasonable estimate as to what one would value my living situation.

      While this may not be a completely accurate ROI on my property. A house hack is kind of a blend of an investment and a home. This is the overall impact on my net worth.

      Thanks again for adding to the discussion!

  5. Jeff White

    Congrats Craig! This is a simple article illustrating the power of being creative and generating as much cash flow for a unique duplex in Denver, Colorado. It makes it even more impressive when you said you lived in your living room because each unit was a one bedroom, you are the ultimate house hacker!

  6. Joseph Campbell

    Congrats on your second house hack and new bedroom Craig! I’m sure the walls and mattress feel even sweeter knowing that you made the hard choice to defer them for the incredible savings. I’m also looking to house hacking my way into a higher savings rate and will use this as inspiration. As always, I enjoyed your insight on the topic.

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