Underwriting Cash-on-Cash ROI for owner occupied MFRs?

[Chris Mason]

I've been working on upgrading my toolset to better serve REI, specifically the FTHB owner occupant budding "house hacker" REI that we have a LOT of around here.

One thing that's been bugging me is how to calculate cash-on-cash ROI on owner occupied MFRs that will be cashflow negative if you don't consider the personal savings on rent, but that will be cashflow positive if you consider that you're saving whatever you otherwise would have paid on rent.

If you simply take the "a penny saved is a penny earned" approach, and treat rent savings as income, you get stupid high numbers that can't be right.

Consider the following scenario:

His cash to close will indeed be about $31k. He will get some rental income, but not enough to cover all the expenses of both units as well as his mortgage. In fact, he will be in the hole $20k each year he owns this place.

But, he is currently paying $3200 * 12 = $38,400 per year, in rent.

If you just add -$20k+$38k=$18k and divide $18k/yr by $31k, you get $58% cash-on-cash ROI.

But that feels ridiculous. Like I'm missing something. I don't want to be a smoke-blower. 

Completely ignoring that this person will no longer be paying $38,400/yr in rent also feels ridiculous. 

So, REI, how would you underwrite your own owner occupant MFR scenarios, specifically what do you do with that dollar figure that you are currently paying in rent?