House Hacking: A Wealth-Building Supercharger

By Robert Leonard •  Updated: 11/02/22 •  30 min read

House hacking is not a get-rich-quick scheme, it won’t make you wealthy overnight, nor is it as fancy or flashy as the next big tech startup in Silicon Valley. 

It does require hard work and sacrifice. It may even seem like those who followed the traditional path are “winning” in the short run. House hacking is going against the crowd. However, house hacking is a high-probability, high-impact strategy that everyday people can implement. 

It can truly supercharge your wealth-building process if you let it. 

In this post, you will learn everything on how to house hack, such as:

Most importantly, you will be opened to an entirely new world of possibilities. You will learn and realize there are different ways of doing things than just what is popularized. Your confidence will be built to go against the grain and be different. Even if you’ve never purchased or invested in real estate, you will see that it is possible for you too. House hacking lets you build the financial future you truly want.

All that’s left is to get started. It’s time to start down the road less traveled, the different path.

What is House Hacking?

The house hacking definition is when you purchase a property with four units or less, live in a portion of it, and rent out the remaining area, with the goal of reducing your personal living expenses, or potentially even profiting.

House hacking means you are making your property an asset for yourself, rather than the traditional strategy of most homeowners, where it is a liability.

It is often assumed that one’s home is their greatest asset. But is that a fact, or just a common misconception that has been passed down from generation to generation, without knowing any better? Putting aside the debate of “greatest”, is one’s home even an asset? One of the most well-known real estate investors and best-selling real estate authors, Robert Kiyosaki, argues that one’s home is not an asset, rather it is a liability. Kiyosaki keeps the definition and difference between assets and liabilities simple. Assets are anything that generates cash for you, while liabilities are anything that takes cash from you.

Realize, in the traditional sense, a house is a liability. Just because there is a common narrative passed around that a house is an asset, and many believe it, does not make it true. Reframing the way you view assets and liabilities can have a substantial impact on your financial future. Understanding how and why a house hack is an asset is the mental reframe that can help you build significant wealth.

The Benefits of a House Hack

When considering ways to build wealth, there are few strategies that are as powerful as house hacking. It is flexible and can be made to work in nearly any situation for nearly everyone. It’s a proven strategy with a repeatable blueprint. It is not a get-quick-scheme, but it is a true supercharger for your wealth-building machine.

The benefits of the house hacking strategy include reducing your largest expense, starting without a lot of money, shortening your time to financial freedom, flexibility with your lifestyle, learning with training wheels on, and it allows you to receive tax benefits from your primary residence.

Reduce Your Largest Expense

According to a report released by the U.S. Bureau of Labor Statistics, the largest category of spending for the average American is “housing” at 33.1% of their pre-tax income. It’s not close, either. Housing costs are the largest category by more than two times the second largest category, transportation. If you were to look at this data on an after-tax basis, the percentage in which housing costs requires would be even higher. 

The top three spending categories for the average American are housing, transportation, and food. On average, Americans spend 33.1% of their pre-tax income on housing, 15.9% on transportation, and 12.9% on food.

The key takeaway from this data is not the percentages themselves, as those will change from person to person and location to location, but rather the relationship between housing costs and income. The exact percentages will change, but housing costs being an individual’s largest expense frequently holds true. The overarching problem this causes is that many individuals do not have enough money left over after paying their bills to do the things they are truly passionate about. 

By having rental income coming in to offset your mortgage cost, assuming you buy a good house hack deal, the house hacking strategy can reduce or eliminate your largest expense and allow you to go on offense. 

House hacking itself can generate significant wealth for you, but the additional opportunities that house hacking opens up to you certainly assists in making you truly wealthy.

Start Without a Lot of Money

When it comes to real estate, there is a common misconception believed by many who have not actually invested in real estate yet: you need to be a millionaire, or at least have a lot of money, to invest in real estate. Many assume it takes $50,000 to $100,000+ in cash to start investing in real estate. Decades ago, maybe that was true. Even today, sometimes, in some deals, that can be true. But it certainly is not the only way.

This misconception often comes from two things. The first is the assumption that when discussing real estate investing, it means buying large apartment buildings, or flipping run-down properties, which can take a lot of cash.

The second is that the commonly touted loan structure for investment properties of 20-25% down is the only option to acquire real estate investments. Investing in apartment buildings or flipping properties is a real estate investing strategy you could pursue, and 20-25% down loan products are also very common, but neither of these items are the only option anymore, and that is one of the biggest benefits of house hacking.

Because you are living in the property and claiming it as your primary residence, you are able to take advantage of financial products that require the property to be owner-occupied. Traditional investment properties are often considered to be riskier than owner-occupied properties, which is why loan products for traditional investment properties typically require a higher down payment percentage and almost always have a higher interest rate.

While it can vary from institution to institution, and even deal to deal, investment property loan products typically require 20-25% as a down payment, the interest rate is 1-2% higher than owner-occupied mortgages, and sometimes the loan term is required to be shorter. By house hacking, you are able to buy an investment property while still getting all the benefits of one of the best mortgage loan products available. 

Instead of having to put 20-25% down, which is often a major barrier for many people, you have the opportunity to put potentially 0-5% down, depending on your qualifications. 

Let’s assume you are going to purchase a $400,000 property. If you were purchasing this as a traditional investment property, you are most likely going to need between $80,000 and $100,000 just for the down payment, if not more. Whereas, if you purchase that same property as a house hack, you are able to put down between $0 and $20,000. While the upper end of that range is still a lot of money, $20,000 is a lot more attainable for more people than $80,000-$100,000. 

You may be wondering how you can take advantage of the 0% down loan products. Unfortunately, they are not available to everyone or work in every situation, as they often have eligibility requirements for the borrower and/or the property itself. One of the most commonly known and utilized 0% down loan products is the VA Loan. If you, or your significant other, fit the eligibility requirements for VA Loans, this can be one of the best ways to purchase a house hack, and make the already-great benefits of house hacking even better. 

Shortening Time to Financial Freedom

What if you could retire, or achieve financial freedom, in three to five years, just from house hacking? This is one of the biggest benefits of house hacking — it can dramatically shorten the amount of time it takes for you to achieve financial freedom.

One of the most common properties used is a house hacking duplex, so this property type will be used to illustrate exactly how house hacking can shorten your time to financial freedom. Once you have learned how the process and numbers work with a duplex, you can extrapolate that out over more units, such as a triplex or a fourplex, and also to fit your exact income and purchase price situations. You can use our free calculator for your deal analysis here.

As an example, let’s assume you purchase a two-bedroom, one-bath duplex for approximately $350,000 with the intention of house hacking. You will live in one unit and rent out the other side. Market rents in this area are about $1,500 per month for two-bedroom, one-bath units. Your all-in cost for your mortgage is approximately $2,000 per month, including principal, interest, taxes, insurance, and PMI. While you live in one of the units, your portion of the mortgage is $500 per month, since you will be receiving $1,500 in rent.

Remember how you learned that house hacking reduces your largest expense — your living costs? This allows you to live for $500 per month, in the same, or similar, house as someone who lives directly next door for $1,500 per month. Being able to do this saves you $1,000 per month that can be put towards saving, investing, or even splurging here and there.

You have lived in the property for more than twelve months and decided you enjoyed house hacking, especially living for so cheap, but you are ready to move on to another property. Instead of selling the duplex you currently live in, you rent out your unit at the same market rent as the other unit, $1,500 per month, and now collect $3,000 per month in total monthly rental income. Your mortgage is approximately $2,000 in total, so you now have a gross profit of $1,000 per month.

If you remember, the average American makes about $60,000 annually. This equates to approximately $4,000 per month on an after-tax basis. You can use a simple calculation to back into how many duplexes are needed to replace your current income.

If you earn $4,000 per month, that can be replaced by just four house hack duplexes that have a monthly profit of $1,000 per month. To perform this calculation for your income and profit, calculate your monthly net income and divide it by your rental property’s total monthly profit. The resulting number tells you how many of those properties you would need to replace your income. 

There can be nuance to this calculation when you start to consider the benefits your employer may provide, such as a 401K and health insurance, as well taxes and property repairs, but the idea remains true. A few, high-quality house hacks can significantly shorten the time it will take you to achieve financial freedom.

Since you are only required to maintain a property as your primary residence for twelve months when using an owner-occupied loan, you are able to repeat this process nearly every year. If you are 25, that means you could be financially free by 30. If you are 30, it means you could be financially free by 35. No matter your age, this strategy shows you could reach financial freedom in five years. 

Flexibility with Your Lifestyle

You just learned quite a bit about how house hacking can shorten the amount of time it will take you to achieve financial freedom, but what if you are not in a rush to achieve financial freedom? What if you are one of the lucky ones that truly enjoys your work and has no intention of stopping anytime soon?

House hacking does not require you to quit your job. You do not have to actually retire as soon as you hit your financial freedom number. You have the option to do that if you so choose, but you do not have to. Instead, what you would have is fantastic flexibility. 

You could go on offense by taking advantage of an awesome career opportunity you otherwise would not have been able to. An opportunity becomes available at a new, exciting startup that is working on a product or mission you are very passionate about — you have the flexibility to go on offense and give it a shot. The flexibility and security that allowed you to take the risk, oddly enough, can lead to even more flexibility and security when it’s successful. It can be self-fulfilling. 

Your boss won’t approve your time off request for something that is really important to you? You can do it anyway because you are not worried about the potential repercussions. You have taken control and would have the flexibility to pursue other jobs that would not put you in that situation. Maybe it is not just a time off request; maybe it’s a toxic boss, coworker, or corporate culture. Whatever the negative situation is that is not allowing you to be happy with your work, you have the flexibility to go elsewhere and find true enjoyment in your work.

Flexibility with work is a great benefit house hacking can provide, but it also provides flexibility in other aspects of your lifestyle. You have probably heard of the concept of being “house poor.” What this means is that someone purchased a home that requires a significant portion of their income to pay for, and in turn, they do not have much income leftover to do other activities. 

On one hand, it is understandable to want to have a house that you really love. After all, you spend a significant amount of time there. But, is it worth it if you are unable to do other things? Would you be happier if you spent less money on your housing costs so you could do other things?

Rather than having to skip out on an amazing girl’s trip, or postponing that dream vacation you’ve always had, wouldn’t it be worth it to participate in those activities just by taking an untraditional approach to home ownership? What if you never had to miss an event your child has — a soccer game, dance recital, or school play? Is house hacking worth it?

A benefit of house hacking is that it gives you a lot of flexibility in your life. It provides you flexibility with your job, it allows you to travel more, spend more money and time doing the things you truly enjoy, and it can even reduce your stress and guilt. 

Learning with Training Wheels On

As there are misconceptions about how much money is required to start investing in real estate, there are similar misconceptions about the difficulty of managing investment properties and the experience required to do so. Many aspiring real estate investors worry that they don’t know enough or don’t have enough experience to get started. Understandably, it can be daunting to manage rental properties without ever having done it before.

House hacking can solve this problem. A benefit of house hacking is that it allows you to learn and gain experience in a low-risk, easier way. For that reason, house hacking is often referred to as “learning with the training wheels on” or “land lording-lite.” 

Rather than jumping into trying to purchase and manage an apartment building, you are able to learn on a smaller scale with more control. All of the different strategies of house hacking will be discussed in just a minute, but the most common situations include a single-family home where bedrooms or a basement is rented out, or a duplex where one unit is rented and the other is occupied by you, the owner. In both of these cases, you’re starting on a much smaller scale and are able to learn in an easier way. 

Receiving Tax Benefits from Your Primary Residence

A major benefit of house hacking is that it can help reduce your annual tax bill. It’s likely not going to reduce the amount taken automatically from your paycheck each pay period, but it can have an impact on how much you’re required to pay in taxes at year-end, which can still be a substantial saving.

When you’re house hacking, your rental unit(s) are technically considered a business, even without having a registered legal entity. This is typically done through a Schedule C in your tax return. Therefore, you are allowed to deduct expenses related to that business, which you could not do if you were a traditional homeowner. If you want to learn more, check out our guide to house hacking taxes.

Now that you’ve read through many of the benefits of house hacking, is house hacking worth it?

Who House Hacking is Good For

Arguably the most common reason, or limiting belief, potential real estate investors state as to why they do not get started in real estate is insufficient funds or a lack of capital. Others state it is because they lack the experience, and therefore, confidence, to buy real estate. 

If this is you, house hacking may be a great fit. 

The house hacking strategy is a great option for those without a lot of money or experience, and makes it a much simpler way to get started as a real estate investor. 

A house hack is likely also a great fit for the person who is looking to supercharge their wealth-building process, is willing to sacrifice in the short-term for long-term gains, and for those who are looking to build passive income. 

House hacking is right for the person who is able to temporarily put aside their wants in the short-term in order to achieve what they want in the long-term. 

As a house hacker, you will likely have to sacrifice the quality of the property you live in or the neighborhood you buy. It is uncommon for a house hacker to have the best of both worlds — their dream home while house hacking. 

There is a relationship between the amount of comfort you give up and a property’s profitability when it comes to house hacking. You can read more about it here.

Why You Shouldn’t House Hack

House hacking is not for everyone. There are a lot of people who it is good for, as was just discussed in the previous section, and it is possible for nearly everyone, but the truth is, there are just some people that house hacking is not good for. There are reasons why you shouldn’t house hack.

It is not a great fit for someone who is a short-term thinker, extremely risk-averse, does not want to be a landlord or have investment exposure to real estate, or someone with a significant other that is not on board.

As was discussed in the previous sections, there are going to be sacrifices that have to be made in order to be a successful house hacker. 

Typically, these sacrifices are made for a minimum of one year, to upwards of five to seven years, although there is no cap. This is going to be hard for someone who focuses on the short-term and thinks in weeks and months rather than years. You shouldn’t house hack if this is you.

As with nearly any investment or real estate transaction, there is inherent risk involved. A reason why you shouldn’t house hack is if you are someone who may not be able to sleep well at night knowing they own investments, and therefore the underlying risks that are associated. 

After all, it is freedom and happiness we are all after, right? If your investments keep you up at night, it likely is not worth the financial gain you could receive.

Whether it is the inherently increased risk from being a landlord as just discussed, or a different aspect of it, if you are not comfortable with being a landlord, that’s a reason why you shouldn’t house hack. 

It can also be difficult to house hack successfully if you face too much pushback from important people in your life. Often times this is an issue between significant others, where one is willing to make the sacrifices necessary to house hack, while the other is not. However, this is not the only relationship issue that can arise with house hacking.

Depending on the dynamic with your parents, or friends, their potential hesitation towards house hacking and their attempt towards steering you in a different direction, in which they believe is the correct way, could be a reason why you shouldn’t house hack.

This is not to say that someone battling with these relationship dynamics cannot house hack, more so that it is not the perfect fit and will be more difficult.

Ways To Use The House Hacking Strategy And How To House Hack

Multifamily properties and ADUs are generally the default assumption when someone learns about house hacking for the first time. House hacking multifamily is when you purchase a two- to four-unit property, live in one of the units, and rent out the others. 

The term multifamily can have quite a broad meaning in the real estate industry because it can include properties with two units, such as a house hack duplex, all the way up to apartment buildings with hundreds of units. Just as a house hack duplex is called a multifamily property, so is a large apartment building. To delineate between the two, properties with four units or less should be considered small multifamily. 

Accessory Dwelling Unit, also known as ADU, is simply a housing unit that is secondary to the main living space. ADUs could fall under the categories of multifamily or single-family finished basements. There are many different types of ADUs, such as garage attic space conversion, garage conversion, basement conversions, detached, or additions.

Some ADUs, such as garages and detached are completely separate structures from the primary property, while others are attached, or part of, the primary property. ADUs are similar to separate units in a small multifamily property in that it typically has their own kitchen, bathroom, and living area(s). 

House Hack Single-Family Finished Basements

Utilizing a single-family finished-basement that is not an ADU would be providing an area that is inhabitable but may not have all the necessities to be considered an ADU.

For example, a finished basement may not include a kitchen or bathroom, in which it would not be able to be considered an ADU, but you could still rent out the basement as its own “unit.” There would need to be an understanding with the tenants of what is and what is not included, and you likely would not be able to demand market rents.

Similar to ADUs, this strategy gives you the opportunity to house hack if you may not otherwise be able to with the property you have selected. One of the main goals of house hacking is to reduce your living costs, which this strategy will allow you to do. However, one of the downsides to this approach is that you will not be able to use the income generated by the finished basement to qualify for the loan to purchase the property. 

House Hack Single-Family Rent-by-the-Room

If the basement is not considered an ADU but is still finished and rented out to tenants, you could consider it under the “Single-Family Rent-By-The-Room” category. However, this strategy specifically relates to a more traditional sense of “bedrooms.” Meaning that you purchase a three- or four-bedroom single-family home, live in one of the bedrooms, and rent out the others. A basement area is a bit more separated and secluded, whereas the bedrooms are typically all quite similar and closer together.

Live-In-Flips

A live-in flip is a house hacking strategy where you purchase a property that is not in perfect condition, but it is livable, you renovate the property while living there, and then sell or rent the property when you decide to move on from the property.

When you purchase a property to complete a live-in flip, there is obvious maintenance, repairs, or renovations that need to be completed, but you are able to live there safely without much hindrance to your daily life — it just may not be up to your standards, yet.

While you live there, the renovations are completed, the property is brought up to your standards, and you are gaining equity through forced appreciation. This work is often done by the homeowner since they are living there and it often seems easiest to complete weekend projects instead of hiring a contractor, but it does not have to. You can still complete a valid live-in flip without ever lifting a hammer, by hiring out the work to contractors.

Short-Term Rentals

There are a few different ways that you may be able to incorporate short-term rentals into your property in order to house hack. The first strategy is to rent out the additional units in your multifamily property, or bedrooms in your single-family home, as a short-term rental instead of a long-term, traditional rental. 

Throughout this post, it’s been assumed that all tenants were long-term tenants, but you can actually incorporate a short-term rental component into the house hacking strategies you’ve read about as well.

Instead of renting out your spare bedrooms or your basement to long-term tenants, you can rent them as short-term rentals. Most third-party short-term rental platforms allow property owners to designate whether the space be listed is for an “entire space” or “room.” You could select “room” or “shared space” and list your property for rent to short-term renters.

Before implementing a short-term strategy, you need to consider whether or not you, and other potential roommates, are comfortable with inviting strangers into your home while you live there. You can vet short-term renters before you accept them, but there is a difference between choosing a few people to live with long-term and having a revolving door of short-term renters. Some reading this post may be comfortable with this situation, others would never consider it. It is a strategy that is available to you — you do not have to utilize it.

Short-term rentals can also be utilized as a part of your house hacking strategy by renting out your space when you are not using it. If you travel frequently or if you know you are going on a trip, you can list your space as a short-term rental.

In this case, it is important to be cautious of your personal belongings and also the amount of time and effort it takes you to prepare your home for a short-term renter in comparison to what you receive in income. But, it can provide you a bit of additional income and even offset some of your travel expenses.

Vacation Properties

This strategy here, vacation properties, may be the most exciting and fun of all. However, it is also the least like true house hacking. In this post, and my book, it is being considered house hacking, just not in the truest sense; you are house hacking, you are just not house hacking your primary residence. You are house hacking a vacation property.

Some people have dreamt of having a vacation home somewhere tropical with fantastic beaches, some have dreamt of having one in the mountains where they can take advantage of the best skiing conditions, and others may want to be in a major city to enjoy all it has to offer.

While the locations and goals of these vacation houses may be different, there is one underlying trait that is often similar across these people and their situations — they think it’s just a dream and unlikely to be achievable. They believe they must be rich to be able to own something like that. It takes hard work, and likely even some sacrifice, but by utilizing a house hacking strategy, obtaining a vacation property is more attainable than you may imagine. 

How exactly does house hacking a vacation property work?

To house hack a vacation property, you would purchase the property of your choosing, rent it as a short-term rental when you are not planning on using it, and then using it whenever you so choose for your own personal use. There is no right or wrong in terms of how much, or when, you choose to use the property yourself. However, depending on your choices, you may sacrifice some profitability. 

House Hacking Summary

As this blog post comes to an end, let’s summarize everything you’ve learned so far.

What is house hacking? The house hacking definition is when you purchase a property with four units or less, live in a portion of it, and rent out the remaining area, with the goal of reducing your personal living expenses, or potentially even profiting.

The benefits of the house hacking strategy include reducing your largest expense, starting without a lot of money, shortening your time to financial freedom, flexibility with your lifestyle, learning with training wheels on, and it allows you to receive tax benefits from your primary residence.

House hacking is great for people who are willing to make short-term sacrifices to achieve their long-term financial goals. Reasons why you shouldn’t house hack include you being too risk-averse, not wanting to be a landlord, needing to own a traditional single-family home, or even unsupportive friends and family.

House hacking can be implemented in many ways, including, but not limited to, single-family homes renting out bedrooms and basements, multifamily properties renting out additional units, and vacation properties. Most of these house hacking strategies can be done by utilizing long- or short-term tenants.

House hacking is a different path than most take, but as Einstein insinuated, if you want different results than other people, you have to do different things.

This can be that different thing. House hacking can be your wealth-building supercharger.

Frequently Asked Questions About House Hacking

What is the house hack method?

The house hack method, according to Robert Leonard at Everything House hacking, is when you purchase a property and rent out any additional space you’re not using to reduce your house costs.

Is house hacking a good idea?

House hacking is a good idea for many people. It’s not for everyone, but it’s certainly a good idea for those who are willing to do the work necessary to house hack successfully. You can learn everything you need to know about house hacking in this post.

Is house hacking exploitative?

No, it’s not exploitative as long as you are handling things appropriately. This includes providing a safe and clean place to live for the tenants at a market rate rent.

How much money do I need for house hacking?

In many cases, you only need as little as 3.5% for a down payment, plus 1-2% for closing costs. On a $300,000 property, that’s $10,500 for the down payment and $3,000-$6,000 for closing costs. You can reduce how much money you need for house hacking by using a seller credit!

What is the best loan for house hacking?

An FHA owner-occupied loan is generally the best loan for house hacking.

What is the benefit of house hacking?

We cover all the benefits, in-depth, in this post, but to put it simply, the benefit of house hacking is that you reduce your largest expense (housing costs), purchase a rental property with low money down, can receive tax benefits, house hacking provides financial flexibility, and it allows you to learn how to be a real estate investor with training wheels on.

Does the 1% rule apply to house hacking?

The 1% rule is mostly used for traditional rental properties, but it can also be used as a quick rule of thumb when analyzing a house hacking deal. If a property meets the 1% rule, it’s probably going to be a good house hack deal.

Can you house hack a single family home?

Yes, you can. This is most commonly done by living in one of the bedrooms and renting out the others.

Can you house hack with an FHA loan?

Yes, you can! In fact, it’s one of the best loans to house hack with.

Can you house hack 2022?

Yes, you can. The real estate markets are a bit all over the place given the instability in the economy, but as long as you find and buy a good deal, you can house hack in 2022.

Is house hacking real?

Yes, house hacking is very real. There are many, many people who are doing it currently, and many more who did it before it was even called “house hacking.”

Is it possible to house hack in NYC?

Yes, it is possible to house in NYC. It’s harder than in most other places, but it is certainly possible.

Can you BRRR a house hack?

Yes, you can BRRRR a house hack! It’s a bit complex for a brand new house hacker, but it can certainly be done.

How long do you have to live in a house hack?

In most cases, an owner-occupied loan requires you to live in the property for at least 12 months, unless you meet one of the rules for an exception, which means you have to live in a house hack for at least 12 months.

How do you hack a multi family house?

To hack a multi family house, you live in one of the units and rent out the additional units that you’re not living in to reduce your house costs.

Can you house hack in Canada?

Yes, you can house hack in Canada! The loan products and tax laws likely change depending on which country you live in, but you can implement the strategy of house hacking all over the world.

How do you hack a house in San Diego?

You can hack a house in San Diego by utilizing any of the house hacking strategies, such as buying a house hacking duplex, a triplex or fourplex, or a single-family rent-by-the-room. Given that San Diego is a vacation destination, a house hack with a short-term rental component would likely do well. Since San Diego also has a large military population, you can also do house hacking with a VA loan.

What is a house hack?

A house hack is when you purchase a property and rent out additional space you’re not using to reduce your house costs.

Is house hacking legal?

Yes, house hacking is legal, as long as you do not violate any terms and conditions of your loan agreement.

How many times can you house hack?

The number of times you can house hack is generally considered 10 because that is how many mortgages you can get in your personal bank before you’d get cut off. However, technically, you could do 10 in your name and 10 in your spouse’s, making it 20 in total. This is the theoretical limit, but very difficult to do in the real world.

Robert Leonard

I am the founder of Everything House Hacking, author of The Everything Guide to House Hacking, a real estate investor, and host of two top 1% business podcasts — Real Estate 101 and Millennial Investing.

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