I've been tracking every dollar in and out of my REI activities for the past few years and decided to back-test the numbers to answer the question: What if I would have put all those investment dollars into a super passive, super low cost index fund such as SPY?

Here's the graph, with explanations and assumptions below (for the personal finance geeks):

REI Total Return - 3 years:

Cash Flow: $25K

Debt Paydown: $26K

Forced Appreciation: $50K

Market Appreciation: $30K

TOTAL Return: $131K return divided by $215K principle = 61%

SPY Modeled Return - 3 years:

TOTAL Return: $38K return divided by $215K principle = 17.6%

Definitions:

• Principle - defined as the total money left in the deal. For example, if I bought a $100K property with a 20% down payment and $5K in closing costs, then my total money in the deal would be $25K. This calculation get's a little more complicated for BRRRR's. Let's say through the buy and rehab, including closing costs, I'm all in for $82K, and I get $76K back. My principle in this scenario would be $6K.
• Cumulative cash flow - Total cash flow for this time period (Total Income minus total expenses, including PITI)
• Debt paydown - Initial debt balance at purchase minus current debt balance
• Market appreciation - an increase in appraised value without extensive rehab. These were properties that I obtained HELOC's and re-appraised for more than I paid for them. For example, if I purchased for $100K and it appraised for $105K at a later date, I logged that as "market appreciation" of $5K.
• Forced appreciation - a property appraised for more than I paid for it after extensive rehab (a.k.a. BRRRR). Using the example above, if I'm all in for $82K and the property appraises for $100K, then my forced appreciation is $18K.

Assumptions:

• To create the Hypothetical SPY graph, I modeled what would happen if I invested the exact same principle with the exact same timing into SPY instead of into a property. Every time you see the principle increase, it means I bought a property that month. You will see the impact of the market tank at the end of 2018.
• The Historical SPY graph is similar but assumes that SPY goes up at a consistent (and in my opinion, generous) 10% annual rate.
• I only count appreciation if I have a new appraisal. This is conservative. Some of my properties have probably gained market value in the last few years since I bought but I don't want to make that assumption in this analysis until I have a new appraisal.
• Taxes have NOT been taken into account, but I think you all know that real estate beats the stock market hands down in this category.

My biggest takeaway is that you need appreciation to achieve outstanding returns in real estate. We focus so much on cash flow - which I think we should, for many reasons - but I think it's also important to be in a market that has good appreciation prospects AND/OR force appreciation through BRRRR's.

Also, BRRRR is clearly the superior buy and hold strategy. I started doing them about a year ago which is where you see my forced appreciation really shoot up in 2018. Plus the amount of principle is drastically reduced.