Rental property and house hacking
Also called Investment property
Real estate owned to earn rent, including house hacking, where an owner lives in one unit of a multi-unit property and rents the others.
What it means
A rental property earns money through cash flow (rent left after operating costs and mortgage payments), plus appreciation and loan paydown over time. Investors often compare properties by cap rate: net operating income, meaning rent minus operating expenses before mortgage payments, divided by the property’s value. Landlords handle repairs, tenant screening, fair housing and local landlord-tenant laws, insurance, and costs when a unit sits empty.
Owners can generally deduct expenses and depreciate the building, not the land, over 27.5 years for residential property, though depreciation is typically recaptured and taxed at sale. House hacking lets a buyer use owner-occupant financing, which usually needs a smaller down payment than an investment property loan, while rent from the other units offsets housing costs. Lender, tax and local rules vary.
Formula
Cap rate = net operating income ÷ property value
- Net operating income = annual rent minus operating expenses, excluding mortgage payments
- Property value = purchase price or market value
Example
Suppose a $300,000 property rents for $30,000 a year and has $12,000 of taxes, insurance, upkeep and vacancy costs. Net operating income is $18,000, a 6% cap rate. After $15,000 of mortgage payments, cash flow is $3,000 a year.
How it’s used
- Building income and long-term wealth through real estate
- Lowering housing costs by house hacking a duplex or fourplex
- Comparing the returns of different properties
Strengths and weaknesses
Strengths
- Potential for ongoing income, appreciation and equity buildup
- Tax deductions, including depreciation
- House hacking can sharply reduce an owner’s housing costs
Weaknesses
- Hands-on work and legal responsibilities as a landlord
- Vacancies, repairs and problem tenants can erase cash flow
- Concentrated, illiquid investment, often with significant debt
Good to know
- Budget for vacancy, repairs and capital expenses rather than assuming full rent every month.
See it in the data: Rent relative to inflation since 1980 →
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.