The standard formula still applies
Cash-on-cash return = annual pre-tax cash flow / total cash invested. For a house hack, the challenge is defining 'cash flow' when you also live in the property. One approach: treat the entire property as a pure rental (both units at market rent) to get the unleveraged investment return. A second approach: measure your actual out-of-pocket cost after rental income and compare it to what you would otherwise pay in rent.
A worked example
You buy a duplex for $400,000 with 10% down ($40,000) plus $6,000 closing costs = $46,000 total invested. You live in one unit; the other rents for $1,800/month. Your total PITI (principal, interest, taxes, insurance) is $2,400/month. Net out-of-pocket: $2,400 - $1,800 = $600/month, or $7,200/year. Your personal housing cost is just $600/month instead of market rent (say, $1,400/month for a comparable unit). The implicit housing savings of $800/month = $9,600/year can be thought of as return on your $46,000 investment — roughly 21% annually, before equity buildup.
Modeling the full investment return
For a cleaner comparison to other investments, model both units as rentals: $1,800 x 2 = $3,600/month gross, minus all expenses and debt service. That gives the property's pure cash-on-cash return. Then add back the housing benefit. Most investors find house hacking produces substantially higher effective returns than either pure investing or pure renting in the same market — it is why the strategy is often recommended for first-time investors.
Frequently asked questions
How do I calculate cash-on-cash on a house hack?
Divide annual net cash flow (rent received minus out-of-pocket housing expense) by total cash invested. Or model it as a pure rental to see the unleveraged return.
Is a house hack a good investment?
Often yes — offset housing costs plus equity building make it one of the highest-return strategies for beginning investors, especially in expensive markets.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.