Return on Investment question

[Stephen Palmer]

Currently my rent is about $1500 a month for my apartment. I am looking to buy a Multi, and I am trying to understand fundamental concepts and definitions. If I move into the first floor, renting out the second with the idea that the tenant pays most of the mortgage. If I am left with a $300 payment after the tenants rent, am I technically making $1200 cash flow since I drastically decreased my cost of living each month? 

[Craig Curelop]

@Stephen Palmer - When House Hacking, I think the correct number to look at is your total net worth return on investment. In other words, how much does your net worth increase in one year after purchasing your property relative to the initial investment. In order to calculate this, there are a few things we need to know: 

1. Initial Costs: Down Payment + Rehab + Closing Costs, etc. 

2. Cash Flow: How much is your annualized cash flow after all expenses, including rent savings.

3. Appreciation: Both forced and natural

4. Loan Pay Down: How much of the principal balance have you paid off in year 1

In order to calculate your net worth return on investment, you add the benefits of appreciation, loan pay down, and cash flow and divide it by the initial investment. The formula looks like this: (Cash Flow + Appreciation + Loan Paydown)/Initial Costs = Net Worth Return on Investment. 

To answer your question of does that mean you're saving $1,200 cash flow? That is a good starting point, but you will also need to factor in associated expenses: vacancy, capital expenditures, repairs, etc. 

If you set aside $400 per month for all of that stuff, your true cash flow might be closer to $800 per month. 

Hope that makes sense!