How important is ROI and Cash on Cash Return when house hacking a multi?

Question

So, I've been doing a lot of research on house hacking and rental property investing as a whole. My plan is to house hack a duplex or triplex in the near future, and in doing research I'm finding a lot of emphasis being placed on ROI and Cash on Cash return, but from my understanding those are most important if you're analyzing profitability on a rental property that you're not planning on living in and are planning on solely using as an investment/extra income.

My question is this...when house hacking, would you say that the most important factor is cash flow since the goal is to essentially just live for free and have your tenants pay your mortgage while potentially making extra cash on top of it? Or would you say that ROI and Cash on Cash return is most important even though the calculations will amount to a lesser percentage if you're only calculating with the rent collected from the other unit(s).

I'm wondering which calculation should be top priority to figure out if a property will be a good investment for a house hack or not. I understand this is all relative to my personal goals, but let's say that my goal is to just live for free and get my mortgage paid for by my tenants (and make a couple hundred in cash flow on top of it). I just don't know if I should be focusing on ROI & Cash on Cash Return or Cash Flow in my decision making process.

What are your thoughts? Thanks!

Lawrence Potts · Answer

Eventually you are going to move out of the property and have it act solely as an investment property. So I would run your numbers as if you are not living their and just as an investment property. If it can work that way, then it will definitely work as a house hack.

@Ryan Thomson has a house hacking calculator that's designed specifically for this, you should contact him for that spreadsheet, it's great! I use it all the time now.

Hope that helps!

Adam Bartling · Answer

Laura, I work with lots of first time investors due to I work with ADPI.  The answer comes down to you and your priorities.  Most duplex owners, who occupy 1 unit do not make much above their mortgage.  Every now and then we find someone who does makes a DSCR 1.50+  which is great.   But when it comes down to it... If you find a property you like and you only live their for Free, you are still better off than majority of people because you no longer have you home as a liability.

Ryan Thomson · Answer

....If that's what you are asking for:

I wonder if your criteria may be a little unrealistic for the current market.

House hacking is tough to cashflow in year one (with current house price run-ups and interest rates) for a couple of reasons:

1. You are living in one of the rentable units

2. You are only putting 5% down so your loan amount is much larger and therefore your mortgage payment.

I would consider your net worth ROI. What I mean by this is considering how much your down payment returns to your net worth (appreciation, loan paydown, tax benefits, AND rent avoidance). Don't forget to include rent avoidance in your numbers! You have to live somewhere.

You may need to lower your return or cashflow expectations so you can get into a house hack that will allow you to avoid throwing rent money away every month. You know this, but don't forget all the other ways real estate makes you money. Paying down your mortgage and owning an asset that will appreciate over the long term.

Also, whenever running ROI calculations you have to consider the alternative. In this case it is "throwing your money away on rent every month". What's your ROI on that? It is very negative. When you consider all of these things and start with the assumption that you need a place to live, House Hacking often comes out as a clear winner even if your "cash flow" is actually negative but you are paying less towards a mortgage than what you would be paying towards rent.

Simon Ashbaugh · Answer

For me, as long as I'm breaking even or paying substantially less in rent than I would otherwise, and it will cashflow when I leave, it's good with me. I'm also looking in nice areas with good schools since I have young kids. Depends on your personal needs.

Cody Mitchell · Answer

I wouldn't focus too heavily on ROI for a househack. If you're starting out and your stated goal is to live for free, or cheaper, than you would normally live then strive for that. ROI doesn't calculate how much money you're saving from not paying rent/mortgage. I would be cautious though and make sure you get something in a good area that will cashflow once you're out of it. Buying in a warzone may look good on paper but you'll have a harder time renting it out, more damage, etc, and buying something that won't cashflow once you're out of it doesn't help you towards your goals. Make sure to factor in capital expenditures, vacancy, maintenance, and property management (if you aren't going to manage it yourself) in when running your numbers. Good luck!

Tanner Pile · Answer

@Laura Romaniello I have always believed house hacking short term should be to lower your personal housing expense and get as close to living for free as possible. The long term goal for house hacking is to get you into owning real estate but still be a good deal to when you move out it has a ROI and cash on cash return you're happy with.

Ryan Thomson · Answer

@Laura Romaniello You are right, It is absolutely relative and completely depends on your financial and lifestyle goals. You said your goal is to cashflow and/or to live for free. This answers your question on what the most important metric should be for you. However, it sounds like maybe you are asking for advice on different ways to think about house hacking returns.

Chris Davidson · Answer

@Laura Romaniello these are great questions and it really comes down to your personal finances and goals. Doing a househack that has low cashflow but in a highly appreciating rental area for an individual with large excess funds each month makes more sense then with an individual living paycheck to paycheck. What most investors forget is real estate is usually long term, and Y1 numbers mean very little in a house hack unless you are paycheck to paycheck. In that case get a higher CoC return build up a reserve and go from there.

At the end of the day folks don't become millionaires off cashflow. However you need cashflow to some degree to reach your net worth goals.

Hope this helps!

Michael Brattelli · Answer

@Laura Romaniello Here’s my opinion. In the first couple years cash flow is not that important because you’ll be living on one side. Make sure you run all your numbers to include both sides rented out with you not living there. If there is room to do improvements and increase rent over the next few years that is ideal. You have to remember you’ll be offsetting your own expenses. Capex is important, make sure you can weather any storms and have the funds when things go wrong. If the numbers make sense with both sides being rented and cash flowing in a few years I see that as a positive. Always remember real estate is a long game. That being said, to me cash flow and ROI are both important. Make sure you pick a good market that you know.

John Warren · Answer

@Laura Romaniello this is such an important question in today's world. I think you need to identify your goals and see how house hacking plays into them. I have clients who have purchased 2-4 unit buildings to live in who have been in the same building for four or five years. I also have had clients who are onto the next deal as soon as the initial required period of owner occupancy is over.

If you are looking to live in the building for a few years, then you will likely want a better quality of life over massive COC returns in a dodgier area. If you are looking to build a portfolio quickly with low money down, then you may be ok looking at tougher areas.

One thing I can tell you is that when you move out, you will want the building to be making positive cash flow. Even if the number is small, you will feel ok about your investment. If you are negative, this game gets old very quickly.

How important is ROI and Cash on Cash Return when house hacking a multi?

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