How house hacking works

The usual version is simple. You buy a duplex, triplex or fourplex. You move into one unit. You rent the others. Rent from the other units goes toward the mortgage, taxes, insurance and repairs. What you pay out of pocket for housing drops, and sometimes it drops a lot.

Later you can move out, rent your old unit too, and keep the building as a regular rental. That is why many people treat a house hack as a first step into rental investing.

Why people use it

Buying a home you will live in can qualify for loan programs that investors cannot use. Some owner-occupant loans allow a small down payment on a two to four unit home. The details, limits and rules change, and lenders set their own. Ask a lender what you qualify for before you count on any number.

A smaller down payment means less cash up front. That is the main draw for first-time buyers. The price you pay is mortgage insurance, which adds to the monthly payment, and you have to actually live there.

The numbers to check

For a house hack, watch four numbers. Run each in the calculator.

  • Cash to close: down payment, closing costs and any repairs you pay up front.
  • Monthly payment: principal, interest and mortgage insurance.
  • Effective housing cost: your payment plus running costs, minus the rent from the other units.
  • Cash flow after you move out: the full-building picture, when you collect rent on every unit and might pay a manager.

The second pair matters most. A deal can lower your cost while you live there and still lose money once you move out. You want to know that before you buy.

Worked example

Made-up round numbers, run through the house hack calculator's math. They are not its starting numbers. A duplex, FHA loan.

Price: $350,000. Down payment: 3.5%. Closing costs: 3%. Upfront repairs: $4,000. Rate: 6.5% for 30 years. Financed upfront mortgage insurance: 1.75%. Annual mortgage insurance: 0.55%. Property tax: 1.1% of price. Insurance: $2,400 a year. Utilities you pay: $150 a month. Vacancy: 5%. Repairs and CapEx: 5% of rent each. Management after you move out: 8%. Your unit would rent for $1,800. The other unit rents for $2,000.

  • Cash to close: $12,250 down + $10,500 closing + $4,000 repairs = $26,750
  • Loan with the financed insurance: $343,661. Payment: $2,172 principal and interest + $155 mortgage insurance = $2,327 a month
  • Running costs while you live there: $1,051 a month (tax, insurance, utilities, and repairs and CapEx on both units' rent)
  • Rent you collect: $2,000 x 95% = $1,900 a month
  • Effective housing cost: $2,327 + $1,051 - $1,900 = $1,478 a month
  • A comparable place would cost you $1,800, so you save about $322 a month

Now the other side. After you move out and rent both units for $3,800 a month, the building's cash flow, with a manager, is about minus $57 a month. It is close to even, but not positive. So this deal helps you while you live there and is thin as a plain rental.

Risks and trade-offs

  • You live next to your tenants. Pick the unit and tenants with that in mind.
  • Vacancy hits you directly. One empty unit can swing your housing cost.
  • Owner-occupant loan rules can require you to live there for a set time. Read them.
  • A small down payment means a bigger loan, a bigger payment and less cushion.
  • Repairs on a multi-unit are real. Set aside money for the roof, the boiler and the like. See CapEx reserves for rental properties.

Before you buy

Use realistic rents, not the best case. Check what similar units actually rent for. Add vacancy, repairs and a reserve even though you live there now. Run the deal twice: once for living there, once for after you move out.

You can read the key return numbers in cash-on-cash return explained. If you plan a lender-style check, see DSCR explained. This page is general education, not loan advice.

Try the house hacking calculator with your own price, rents and loan. It compares FHA and conventional loans side by side.

FAQ

Can I house hack with a single-family home?

Yes, in other ways. Renting out rooms or a basement apartment is a form of house hacking. The numbers work the same way: tenant rent lowers your cost. Check local rules and your lender first.

How many units can I buy?

Most house hacks use two to four units. Loan programs and local rules set the limits, so ask your lender.

Do I have to live there?

For an owner-occupant loan, yes, usually for a set period. Ask your lender how long.

Does the rent count when I apply for the loan?

Some lenders count part of the expected rent from the other units. Rules vary, so ask each lender how they treat it.