The Concept of House Hacking
House hacking is an investment strategy where you buy a primary residence (such as a single-family home, duplex, triplex, or fourplex), live in one unit or room, and rent out the remaining units or bedrooms to tenants. The rental income is used to offset your mortgage payment and housing expenses, allowing you to live for free or significantly reduce your living costs.
From a financial underwriting perspective, the primary objective is to calculate the Mortgage Offset Percentage and the Net Monthly Housing Cost:
Total Monthly Expenses = Mortgage P I + (Annual Property Tax)/12 + (Annual Insurance)/12 + Utilities
Net Rental Income = (Rooms/Units × Rent per Room) × (1 - Vacancy Rate)
Net Monthly Housing Cost = Total Monthly Expenses - Net Rental Income
Mortgage Offset % = (Net Rental Income)/(Total Monthly Expenses) × 100
If the Net Monthly Housing Cost is negative, the property is cash-flow positive, meaning your tenants are paying your entire mortgage and utilities while putting extra money in your pocket.