Your housing payment is probably your largest monthly bill. House hacking goes straight at it: you buy a small multi-unit property (or a house with spare rooms), live in one part and rent out the rest, so a tenant covers part of your payment. Working out how much takes more than subtracting rent from the mortgage. Below is one duplex, worked through in order. All figures are pre-tax, meaning before any income tax effects.
The deal
You buy a duplex for $380,000, move into one unit and rent the other for $1,700 a month. If you did not buy, you would pay $1,600 a month to rent a place of your own.
The owner-occupied loan
Because you will live in the property, you can apply for an owner-occupied loan. These commonly allow a smaller down payment than an investment property loan. This example uses 5% down at 6.75% interest over 30 years.
Down payment = $380,000 × 5% = $19,000
Loan amount = $380,000 minus $19,000 = $361,000
The usual price of a small down payment is mortgage insurance, called PMI on a conventional loan. Here it costs $120 a month. Down payment minimums, mortgage insurance and how long you must live in the property all vary by lender and loan program, so confirm the rules before you plan around them.
The full monthly payment
Do not stop at principal and interest. What leaves your account each month is the whole payment, which is PITI plus mortgage insurance:
- Principal and interest on the $361,000 loan: $2,341
- Property taxes: $350 ($4,200 a year)
- Insurance: $150 ($1,800 a year)
- Mortgage insurance: $120
Full monthly payment = $2,341 + $350 + $150 + $120 = $2,961
Rent from the other unit, after reserves
The other unit brings in $1,700 a month, but you will not keep all of it. Tenants move out and water heaters fail. This example sets aside 10% of rent for repairs and vacancy.
Reserves = $1,700 × 10% = $170 a month
That leaves $1,530 of rent you can count on in an average month.
Your net housing cost
Take the full payment, subtract the rent collected, then add the reserves back as a cost.
Net housing cost = $2,961 minus $1,700 plus $170 = $1,431 a month
You are living in a duplex you own for $1,431 a month, not $2,961.
The comparison with renting
Saved compared with renting = $1,600 minus $1,431 = $169 a month
A saving of $169 a month is modest. It is not free housing. The monthly comparison also leaves things out on both sides. Part of every payment pays down your loan, and the property may gain or lose value. A renter gets neither. On the other side, a renter does not tie up a down payment or take the repair calls.
The cash needed
- Down payment: $19,000
- Closing costs, assumed at 3% of the price: $11,400
Cash needed = $19,000 + $11,400 = $30,400
Closing costs vary by lender and location, so treat 3% as a placeholder. The $30,400 also leaves out move-in repairs and a starting cash cushion. Some lenders require you to show reserves in the bank at closing.
The test: does it still work after you move out?
You will probably not live there forever. The day you leave, the duplex stops being your home with one tenant and becomes a rental with two. Test it that way before you buy:
- Add a realistic market rent for the unit you live in to the $1,700 from the other unit.
- Keep the full payment, including mortgage insurance if it will still be in place.
- Add the costs a landlord carries on both units: vacancy, repairs, CapEx, and management if you will not do it yourself.
- Look at monthly cash flow and DSCR, which compares the property's income after operating expenses with its loan payments.
If total rent covers all of that with room to spare, the duplex can stand on its own as a rental. If it does not, you are buying a home you will have to sell or subsidize when you move. There are no numbers for this test on purpose. The answer depends on what your unit would rent for, and that figure has to come from your market.
What could go wrong
- One vacancy is a full vacancy. With a single tenant, an empty unit means you cover the whole $2,961 yourself. Make sure you could carry that for a few months.
- Reserves can run thin. Setting aside $170 a month may not be enough for an older building. One roof or furnace can use up years of it.
- The rent estimate carries the deal. Everything leans on $1,700. Check it against comparable units that have leased, not asking rents alone.
- Costs move. Property taxes and insurance can rise after you buy, and you have limited control over either.
- Taxes are not modeled. Rental income and an eventual sale have tax consequences this analysis ignores. Ask a tax professional about your situation.
Where to go next
- House hacking calculator: change the price, down payment and rent to match your deal.
- Rental property calculator: run the move-out test with both units rented.
- DSCR calculator: see whether the rents would cover the loan payments.