Here’s How It Played Out 19 years later.

Recently the Nasdaq hit a major milestone. It broke through the 9000 barrier. This got me thinking about my oldest house hack. A duplex I purchased in April of 2000 just as the dot-com bubble was about to burst.

Let’s compare the return on my sticks and bricks duplex to the world’s most innovative stock index, along with Amazon for kicks and giggles.

The end result may surprise you.

Before I go into the nitty-gritty, I’d like to provide you with a little backstory on the purchase. Mainly, why I bought it and what the financials look like when you own a rental for nineteen years.

In the interest of fair disclosure, the property management fees will be excluded since I manage all my units. Your returns would be lower if you hired a third party since the manager would not maintain it as well as you would, while charging at least 8% of gross rents.

However, I feel anyone could manage a single property in their spare time as long as they don’t mind the work. Once stabilized, you could easily manage this deal in less than 2 hours per month on average if you lived nearby.

Here we go.

Imagine it’s the turn of the millennium. February 2000 to be exact. You are considering two different investment options and you only have approximately $6,000 to invest.

The first investment represents 100 of the most innovative companies in the world. We are talking cutting edge firms like Intel, Apple, and Microsoft. To harness the compounding power of these firms, you simply buy the Invesco QQQ ETF.

This low-cost index fund tracks the largest 100 non-financial stocks on the Nasdaq exchange.

Here are the top ten holdings per Morningstar.

In 2019, it was up 38.96%. This thing is a compounding beast.

Back in the ’90s, I watched the Nasdaq more than triple and all of my friends were raving about the returns they were obtaining on their tech stocks. Some were even considering early retirement.

When I mentioned to them that I was going to house hack another income property, they all laughed and wondered why on earth I would do such an odd thing. Everyone knows stocks always go up!

Oh…did I mention I was envious of their returns? Nah, let’s not go there.

The second investment is a brick duplex in a small midwestern college town. Here is a photo from 2014 after I had just replaced the upper deck and railings.

Your fiancee has just told you she is pregnant and wants a bigger place. You currently reside in a 1br apartment.

To put it bluntly, Momma wants a baby room and you have no choice but to expand your living space to a two-bedroom unit or suffer the wrath of Momma.

The way I perceived it, if I invested in the ‘tech index, I could double my money in a year or two. If I invested in the real estate, I’d make momma happy and offset the mortgage payment by having a resident in the second unit.

While the potential return wouldn’t be as great as the Nasdaq, it was a “win-win.”

Momma is happy and I could rent out our old place while continuing on my ten-to-million journey.

Our first house hack was already a success. When I purchased the 3-unit property two years prior, it was in such sad shape it made my girlfriend cry.

These were not tears of joy!

I promised her we would make it work and plowed ahead with the $5,000 down payment and the rest financed by the owner, Bill.

After we stabilized the property, we resided in the 1br on the main floor and rented out the 2br above and the studio below. The note with Bill was only $470.84 per month amortized over 15 years when we included the tax and insurance payment.

Here is a recent photo of the property. In addition to major interior upgrades, I added a roof and a driveway in the back. It looks even better now due to a series of new owners.

We not only lived for free, but cash flowed a few hundred a month before maintenance and vacancy expenses.

Later, I ended up selling this deal via a 1031 exchange. This allowed me to pick up two more properties from the proceeds of the sale without paying a dime in taxes.

Back to my dilemma.

From a stupid guy standpoint, I thought our living situation was perfect. We had little overhead while I expanded my two companies. As far as I was viewing it, the baby could be in a crib next to the bed while we saved up for a bigger place.

Honestly, why does a baby need her own room?

After weeks of nagging, I finally caved into Momma’s demands and called my realtor, Mike. I told him to find a duplex in a decent neighborhood. The ideal property would be a cosmetic fixer-upper with 2 or more bedrooms where the residents pay all the utilities.

Mike, worked fast. In less than a week, he found the perfect property and scheduled a showing.

As soon as we toured the property, we made the classic mistake of falling in love with it.

The lower unit was 50% bigger than our current apartment. Plus, we got our own private basement with a free washer and dryer and plenty of space to store all our adventure gear.

For some strange reason, I don’t have any decent advertising photos of the interior since it always rents word of mouth. Here is a photo of the living and dining room as a tenant was moving out last year.

I’m a sucker for a 1920’s style craftsman duplex with built-in hutches and stained glass. Behind the couch is a beautiful fireplace with a captain window between the chimney.

Better yet, the upper unit was rented to an internal medicine doctor in residency. He turned out to be one of my best tenants. He left early in the morning and came home late in the evening.

I will never forget the day I headed up to his apartment on my first maintenance call and saw the Harvard diploma hanging in the office. Here I am, a California State Chico guy, renting to a Harvard graduate.

From an investment standpoint, I considered the property OK. Not great, not terrible, just OK. This is why it was sitting on the multiple listing service for a few months.

I ended up purchasing it for $85,500 with the seller agreeing to upgrade the main electrical service for $1,825 along with some other minor repairs. The original list price was $89,900 and I felt it was a fair deal..

To fund the purchase, I ended up investing $6,020 including closing costs. It was an FHA loan; hence the low down payment. This is the equivalent of putting $9,013 down in today’s dollars. Technically, most of the down payment was funded by the FHA loan and I didn’t have to come up with the entire amount at closing.

Again, I’m keeping things conservative.

The FHA owner-occupied loan is the same program I encourage new investors to employ. In the perfect world, you would do this with a four-unit versus buying a two-unit like I did. Just make sure you refi out of the loan after a year or two to wipe out the FHA insurance premiums that are added to your payment.

Here’s a decent article on the concept and how you could pick up an income property for only 3.5% down. Bigger Pockets: How to use an FHA Loan For an Income Property

In investing circles, we call this a house hack. You live in one of the units to qualify for favorable financing with next to nothing down.

Rents were $575 per month for each unit back then. Today they are $850 per month. Here is a summary of the initial investment at purchase. Note, the down payment includes buying costs. This is why the purchase price is higher than the initial market value.

As you can see, the property netted $268 per month if we were to move out of the lower unit and pursue our next home.

From a house hack standpoint, the upper tenant was paying the mortgage, while we paid taxes, insurance and all utilities for our unit. The tenant also paid their own utilities. This is why the expense ratio is so low.

Under the assumptions section, I’m using actual numbers over the last 19 years. I normally run 3 percent for appreciation and income; the same for the expense growth rate. Looks like I would have been off by a substantial margin on the income appreciation rate.

To keep things conservative in comparison to the Nasdaq QQQs, let’s assume I never refinanced the loan. At the time of purchase, I had a 30-year ARM that reset every 2 years based upon a factor of 2% plus the 1-year Treasury rate. Had I held on to this loan, the current rate would be 3.52% versus 7.125% at purchase.

Another reason I’m modeling the original mortgage is I refinanced it to pull out cash for a purchase five years later. Next, I added an equity line of credit to buy a 6-unit multi-family and replace the roof. Finally, I consolidated the line and the mortgage with some other loans with my commercial banker four years ago.

Bottom line, this little gem became one of the keystones to helping me build a portfolio that grosses 1.2 million in annual rents as a result of buying one property a year since my first house hack in 1998.

In terms of capital expenditures (CAPEX), I tuck pointed the front exterior for $6,250 in 2002. I got a sweet deal on this from a tenant who worked as a union bricklayer.

Next, I had to replace the flat rubber roof for $14,950 in 2005. This was paid for by the equity line of credit that I mentioned earlier. The interest-only line of credit was for $26,500 and I used the leftover amount for a down payment for another property.

Lastly, I had to replace the front decks in 2014 since they were literally peeling away from the building.

Oh, the joys of real estate investing-LOL!

This cost me an additional $4,604. My guy Thor, is a rockstar and rebuilt the deck over a weekend.

Today, the property is easily worth $165,000. While It has almost doubled in value over the last 19 years, this is only a 3.5% annualized appreciation rate. Can you hear the sad violin playing in the background?

Worse, who wants to wait almost two decades to double their money while dealing with tenants, taxes, and toilets?

Fortunately, we get to add in the mortgage payments by residents along with the cash flow (after subtracting 10% for maintenance and 3% for the vacancy) from gross rents.

These latter two percentages are based upon my local market and over 21 years of experience managing small multi-family’s. This number does not include the CAPEX that I previously mentioned.

Here is the final tally over the entire 19 years using my financial modeling software. The CAPEX shows up under improvements in years two, five, and fourteen.

While I don’t have precise numbers from 2000 to 2008 for maintenance and improvements, the numbers are actually conservative compared to my actual records from April 2009 to today.

Better yet, the longest a single unit has ever been vacant has been 45 days. Both units have always been rented for 2 to 6 year stretches. It’s a perfect location for young professionals.

This is way better than I expected and outperforms my prior blog post where I modeled investing in a 401k to a single-family home.

I hit an annualized return of 28.3%.

This represents the power of leveraging a loan with a small down payment and not having major CAPEX in the beginning.

Had I paid cash, the return would still be higher than the Nasdaq, but only at 8.3% annualized-the cap rate in year 19. This was not an option with a new baby on the way while working in my startup.

Despite the tepid 3.5% appreciation rate on the property, along with rents that have barely kept up with inflation, it was like investing Amazon in 2000 without all the drama-see upcoming maximum price drawdown table.

Better yet, this does not factor in the tax benefits of owning real estate. If you were to compare the tax benefits of directly held real estate to Amazon, real estate wins by a long shot.

How did my lost opportunity in the QQQ’s fare?

Hmmm…who would ever predict the most innovative stock investment in the world would only compound at 4.12% per year?

This is worse than buying government bonds without having to see your investment implode 81% (max drawdown).

Oh, for those of you that wished you bought Amazon (portfolio 3) back then, could you have held on while it dropped 91.09% and then waited for 7 years and 2 months to recover?

This is why I despise those articles that tell you if you invested $1,000 in the most successful company 10 years ago, you would be a multi-millionaire.

If you are entertaining this “if only thought,” you have never lived through a market implosion.

Trust me, no one buys when stocks are on sale.

I have been working with investors since 1994 and have navigated all the market declines. The smart investors hang on for dear life and hope for the best while continuing to make contributions to their portfolio. The majority panic and sell on the way down.

Check out the slope of the stock returns. While the Nasdaq looks impressive, the 4.12% annualized return is nowhere near as impressive as a boring sticks and bricks duplex in a small Midwestern town that turned $6,020 into a $161,589 net profit after expenses-assuming I sold it.

The actual profit is $173,095 when I add back the selling costs in year 19.

Better than buying Amazon in 2000 without having to be a genius stock picker, or getting your face ripped off from April 2000 to Sept 2001.

Six years later, it happened again when it suffered another 54.2% plunge.

One more thing, had you invested the same amount of money in the Vanguard Total Stock Market Index (the de facto recommendation of all those early retirement/FIRE bloggers) the results would have been slightly better than the Nasdaq.

At 6.18% per year, it seems like the FIRE folks may want to build up a larger cushion if they are planning on pulling the ripcord on full-time work right now.

In sum, sometimes you can make it big on little deals in real estate. I never would have imagined my $6,020 investment in a boring duplex would compound at 28.3% per year; especially in a small college town where rents and appreciation barely keep pace with inflation.

Imagine if you bought ten of these real estate ATM machines over the ensuing ten years? This is the “Ten to Million” philosophy.

On a side note, Momma finally got her dream home four years later. A 4 bedroom Georgian Colonial with a fenced yard in a nice part of town. Unfortunately, this was part of the divorce decree.

By that time, I had hit my tenth property goal and was happy I could keep the rentals. This allowed me to continue to expand the portfolio while focusing on the added responsibilities of being a single parent.

That “baby” girl? She is heading off to New Zealand today as part of her college gap year. It will be an epic trip and I’m of proud of her.

Now go out and find yourself a deal. In nineteen years, your future self will thank you. Just make sure you buy for cash flow. It’s getting a bit frothy in my market right now as the out of town investors bid up prices.