House Hacking: Should You Buy If It Doesn't Cash Flow?

When considering purchasing a house hack property, one important consideration is whether or not it will cash flow. 

Today, we'll talk about how important (or not important) cash flow is and whether or not you should house hack a property that does, or doesn't.

Cash flow refers to the income generated by the property after deducting ALL expenses. 

Not just the mortgage, or the mortgage and utilities - but everything - including property taxes, home insurance, reserves for repairs/maintenance, and even vacancy.

So what's leftover after you subtract the rent from all expenses, that is your cash flow.

And this is the point where people get a little confused on what cash flow is - or what it should be.

Cash flow is really not intended for you to live off of.

It's there to act as a cushion in allll market conditions - whether the real estate market is up or down.

If the property experiences a temporary decline in value during a downturn, positive cash flow ensures that you have the necessary funds to cover expenses and sustain those fluctuations. 

This is an example of why account for vacancy!

Having the stability and cushion allows you to weather the market - and hold onto your investment until the market recovers - and even then, you are still paying down your loan!


Now, of course, cash flow is clearly very important

But, it shouldn't be the only metric you're looking at to evaluate whether you should purchase or not

It is just one of the positives that come with owning a rental property, especially house hacking. 

Here are some examples,

You've got Loan Paydown - every month a portion of your payment goes towards paying down the principal on your mortgage. 

Over time this reduces your loan balance which builds equity - and your tenants are paying for it

I like to call it "invisible cash flow"

But loan paydown is a form of "forced savings" and little by little - each payment increase your net worth and equity in the property

Now, this isn't cash flow obviously - and almost every loan type, except for a few, pay down your loan.

But again, along with looking at if a property cash flows - it's important to look at the return on your equity too - not just cash flow. 


You've also got Appreciation - Historically home prices have appreciated in value over the long term. Now, appreciation is not guaranteed - but by owning a property in an area with strong growth potential -  increases the likelihood of its value appreciating over time.

Sometimes, the appreciation of a property with little-to-no cash flow - will net you a higher return when sold - than the cash flow would generate over that time.

such as, say, a $200,000 property that cash flows you $500/mo and sells for 250 over 10 years

which is 60,000 in cash flow and a 50,000 gain in value - totaling 110,000

versus, 200,000 property that breaks even but sells for 350 after 10 years.

the property that didn't cash flow gave you a higher return in the long term - than the property that cash flowed.


Then we've got Tax Benefits: Turning a primary residence into a rental property - will offer various tax advantages once it is turned into a rental property.

You can deduct expenses such as mortgage interest - property taxes - and repairs and maintenance -  which will reduce your taxable income. 

Additionally, depreciation allows you to deduct a portion of the property's value each year - 

which will further lower your tax liability.

With little to no cash flow - in theory - you may be able to deduct enough where you record a "loss" on paper. Meaning - not only will you not pay taxes on any income generated - but you may pay less or get a return after tax filing - depending on how you purchase your house hacks - personally or with an LLC (or business)


Moving along - owning a rental property adds diversification to your overall investment portfolio.

House hacks and real estate investments in general - have the potential to perform differently than other asset classes - like stocks or bonds - providing a hedge against market volatility.

So whether you're cash flowing or not on your house hack - it provides an extra layer of stability - if you own other assets.

Stock market tanks but your property remains stable or rises in value - it offsets a little bit of the burn when looking at your entire portfolio of investments - no matter what the cash flow looks like


Lastly - Rent Increases:

As you start to build up your rental property portfolio - rental rates tend to increase over time with inflation. 

It's important to look into your local rental regulations when it comes to increasing rent

Different areas and cities have different rules to follow on how high you can raise your rents

And this also applies if you decide to turn your house hack into an Airbnb or short term rental

So - be sure to follow short term rental regulations as well

But if you lock in on a property that isn't cash flowing on day 1 - it may cash flow later down the road as rents naturally raise over time - while a large majority of your monthly expenses - are fixed expenses

After all expenses are accounted for - and if you're breaking even with the rental income to cover them - the monthly rent amount - at some point - will likely exceed your total monthly expenses.


So the moral of the story here as we wrap this up

Cash flow is clearly important to have. It's a great indicator to how safe and strong an investment property is. 

The more cushion the better - And that's why I think House hacking is the greatest way to buy an investment property. 

By house hacking, you will almost always get the highest cash flow possible on any particular property. Not gauranteed - it depends on your financing terms - but I often have trouble finding a house hack property - with worse numbers than with investment financing

But, cash flow isn't everything. Positive cash flow is preferred, obviously - but there are many other factors to consider when deciding to buy a house hack that in total - could be more important or outweigh what the cash flow amount could be.

As always, it depends what you want your house hack portfolio to look like.

All high cash flow? All high appreciation? Or, a mixture of both?

It's important to nail down a plan and what your goals with your house hacks are before you start looking









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