Does house hacking still work?

Question

Right now, I'm pending a duplex for a client: 3241 N College Ave. I cannot reveal the contracted price as that's not allowed but asking price was $410,000. Mortgage is around $2500 when you factor in taxes / insurance / some seller help with paying down some costs. The rent for the tenanted side will be $1500.

All in all, he's looking at a live-in monthly cost of around $1000 to live in half the side of a large $410k duplex in Indianapolis.

I still get people telling me, "House hacking won't work now." But my response is, reducing your housing payment, while still paying down the mortgage and receiving appreciation IS the win.

My question is, would you do this deal as a first time investor? Do you think house hacking is viable in this market?

Julien Jeannot · Answer

Yes it does and like all real estate wealth building strategies, its a long term game.

Rents will catch up to produce adequate return. You don't retire on cash flow, you retire on wealth build strategies which converts into cash flow.

Henry Lazerow · Answer

I work with a ton of house hackers in chicago. We look for same thing now basically living cheaper then rent while getting the mortgage paydown, rent growth and appreciation. Here the days of living fully for free stopped around 2018 so it’s been a while.

Denis Ponder · Answer

It's working for me right now.  My wife and I bought a house with an ADU for the purpose of house hacking.  We currently list on AirBnB and that brings in about 50% of our mortgage each month.  Huge win for us as we can put more into savings and purchase another property faster.

Alecia Loveless · Answer

@Tyler Lingle House hacking definitely works. I house hack a duplex and we pay the heat because it’s a shared expense that can’t be separated and then our personal expenses. We use our tenants rent to make improvements to the building and property.

Last year we put an insulated roof on which cut the heating bill significantly. This year we’re putting in new windows.

My ideal goal is to buy a primary residence for myself down the road once I’ve got more investment properties and get my side of the duplex rented as another poster mentioned and then the property becomes an absolute cash cow as my side is an almost impossible to find 3/3!

I think when you house hack you always need to be looking towards your future plans and goals for the property.

Mathew Pezon · Answer

Hello Tyler,

Here is how I look at it: If the rent for the type of property your client is looking to stay at in that market is $1,500, the total monthly income for the duplex could be $3,000. If the expenses and the debt service amount to $2,500 a month, this property is producing $500 in excess cash flow.

If your client wasn't "house hacking" and rented for himself somewhere else for $1,500, he would still be at -$1,000 in terms of the income this duplex is producing and his living expenses. However, it does not make sense to incorporate your living expenses when determining the strength of this asset and this number is therefore irrelevant.

I suggest evaluating the strength of this asset as if both sides were being rented out. It cash flows at $500 after debt service. Depending on what the down payment is, this is likely a solid asset. Some good metrics to look at may be cash on cash return and the cap rate compared to what the local market's cap rate is.

Hope this helps!

Nick Giulioni · Answer

100% in agreement! It might not always completely cover your housing payment - but if you are getting your housing subsidized, that's a huge win!

Stephen Barton · Answer

Tyler I could not agree more. Yes house hacking is still possible. I mean, anytime you can buy a property where you live in one side and rent out the other half is a great idea. People do not think far enough ahead. In my opinion having cashflow is nice. However, if it does not have a crazy amount of cashflow- who cares! Even if it is just helping you to pay some/most of your mortgage that is a win in my book. You have to think about the longterm play here: Eventually, you could rent out the entire property and find another one to buy. Bam! Now you would have 2 houses. You just keep adding them as you can. Appreciation is the real long term play here. You are going to see the value on your home go up and up. That is the "gold" here. That is what you want to see. Just buy in a decent area, and try to make it better than the other houses in the area if possible. I think you are on the right track!

Simon Ashbaugh · Answer

As long as your paying less than you otherwise would, its working!

Tyler Lingle · Answer

I agree completely. But what's his alternative? Wait for perfect deal at 2018-prices / rates that doesn't exist or take action now? Yeah I would agree it's super challenging to find properties that cash flow in general in this higher interest rate climate. If he refinances at a 5% rate (which could happen) that gives him significantly more breathing room.... TBD.

Dan H. · Answer

>But what's his alternative?

There are countless.  Many syndicators are still producing near 20% return, s&p500 has lifetime return near 10%, CDs and money market are higher than in many years.   these are all significantly more passive than residential RE.  Because residential RE is not passive, for me to choose residential RE as an investment, it has to not only meet the expected return of more passive options but exceed the expected return by enough to justify the effort.

>If he refinances at a 5% rate (which could happen) that gives him significantly more breathing room.... TBD.

As you imply 5% could be years from happening.  I would not recommend investing expecting a significant rate decrease.  If there is a significant rate decrease, it will be because the economy is struggling and needs the boost that lower rates can provide. This is looking increasingly unlikely in the near term.

I have not purchased since Dec 2021 (I purchased $4m that month).  My actions show what I think of the RE investment options that I am finding.

Good luck

Does house hacking still work?

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