# Don't Buy a House Hack Until You've Checked These Numbers
House hacking remains the entry point for most first-time real estate investors, but jumping in without running the numbers creates expensive mistakes. The strategy involves buying a multi-unit property, living in one unit, and renting out the others to cover your mortgage and expenses. It works in theory. In practice, investors who skip financial analysis end up underwater on deals that looked profitable at closing.
The core calculation begins with your cash flow. Calculate your gross rental income from all units except the one you occupy. Subtract property taxes, insurance, maintenance reserves, property management fees (even if you manage it yourself now, budget for professional help later), utilities you cover, and your mortgage payment. That number needs to be positive before you account for vacancy rates and repairs.
Most rookies overestimate rental income and underestimate costs. A 5-unit property in Denver renting four units at $1,400 each generates $5,600 monthly gross income. Subtract a 7% property management fee ($392), 25% for maintenance and repairs ($1,400), property taxes ($400), insurance ($150), and a mortgage payment of $2,500. You're left with negative $242 monthly. That property doesn't work, no matter how much equity you'll build.
Vacancy rates destroy inexperienced calculations. Budget 5-10% vacancy even in hot markets. One empty unit for six weeks annually eats into your projections significantly. In softer markets, vacancy runs 10-15%.
The debt service coverage ratio (DSCR) matters more than most investors admit. Lenders want to see 1.25x DSCR or higher, meaning your net operating income covers your mortgage payment plus 25%. If your property generates $3,000 monthly NOI and your mortgage runs $2,800, your DSCR sits at 1.07x. Most lenders won't touch it. You'll either pay cash or accept a hard money loan at punishing rates.
Your down payment and closing costs require scrutiny. A 25% down payment on a $400,000 four-plex in Austin costs $100,000. Add closing costs at 2-4% of purchase price, bringing your total to $108,000-$116,000. Calculate your cash-on-cash return: divide your first year's net profit by your total cash invested. If you pocket $6,000 annually on a $110,000 investment, that's a 5.5% cash-on-cash return. A stock index fund returns 10% historically. Your leverage better justify the illiquidity and effort.
The tax benefits matter, but don't overstate them. You'll depreciate the building value (not the land) over 27.5 years, creating paper losses that offset income. But the IRS phases out depreciation benefits for higher earners. Factor in actual tax liability with an accountant before closing.
Exit strategy separates successful investors from those stuck with problem properties. Can you refinance in five years at a better rate? Will the market support selling the property? Could you convert it to a short-term rental if long-term tenants don't work? Define your exit before signing the offer.
House hacking builds wealth over decades, but only if the fundamentals work. Run comps on rental rates in your target market. Get pre-approval from a lender willing to consider investment properties. Interview property managers to understand true management costs. Then model different scenarios, including worst-case rent declines and higher vacancy. The math either supports the deal or it doesn't.