I got lucky with a condo I bought in Florida, and I really can’t complain too much now that I’m selling it. Yes, I had wanted to retire, but it just wasn’t meant to be at this point. Now that I’m selling, though, I can honestly say there are three things I’ll be glad I never have to do again.
As I write this, I am under contract to sell a two-story condo overlooking Market St. in Celebration, Florida, the town disney built. In fact, I bought it without seeing anything more than the location and the photos, having already looked at the units in the city. I also happened to have a solid relationship with a real estate agent who confirmed that the unit was as good as it looked. I was lucky in more ways than one, but the biggest plus was that I paid what would now be considered a very low price.
It was interesting for me to read, years later, a Federal Real Estate transcript of the conference call in which the CEO of the company explained that buying low is a huge safety valve. Essentially, for the real estate investment trust (REIT), this lowers the bar for creating strong returns. For me, it provided me with protection in a lawsuit because even during the worst legal troubles facing the condominium complex, I could have sold just about what I paid for and, all along of my property, I didn’t have huge financing costs to cover.
I didn’t go there with that in mind, but it resulted in what is now a positive result for me, as I was able to hold on despite the headwinds. Now, on the other side of that legal issue, I’ve decided it’s time to sell, and I’ve been able to list it for way more than I bought.
And while this legal issue is the only thing pushing me to sell, there have been issues along the way that I’m happy to get out of under. And these problems are quite comparable to the normal course of owning a rental property.
1. Bad tenants
I had a really bad tenant, and that’s all it took for me to constantly worry. It appears that the tenant’s child has locked himself in one of the two bedrooms in the unit. I don’t know why, and I don’t care. The child’s parent broke down the door. Then, according to the tenant, exactly the same thing happened with the door to the other bedroom! The tenant chose to break it because “he knew he could”. At least that’s what they explained to me and my property manager during an annual inspection of the unit. Personally, I cannot explain how difficult it was to contain my anger.
But that was just the worst tenant. Each of the other tenants decided at the last second, either after verbally agreeing to renew or with a signed lease, to move out. It left me struggling to find a new body to fill the empty apartment – quickly. It’s a great location and I was able to rebook it, but there’s a breach of trust that’s hard to swallow. I understand why every tenant did what they did, but that doesn’t make it any better.
Then there are repair requests and issues that you know are the tenant’s fault but have to pay for. Even the best tenant sometimes becomes a sore point. When you own a REIT, you never have to consider all of that.
I knew walking in that I was buying something that I couldn’t easily sell. So it’s no surprise, but it’s still a big issue to consider. For most people, property is a relatively large asset, and if you need cash fast, there’s no easy way to tap into it. Of course, you can take out a loan using the property as collateral, but that’s usually quite a time-consuming and expensive way to access money considering that some stockbrokers offer margin loans. at extremely competitive rates.
With a REIT, I could simply transfer money from my brokerage account, using the margin guaranteed by the REITs that I own. It would take five minutes and at least some of the interest costs would be covered by the REITs’ dividend payments. Also, there would be no need to pay the principle unless I needed or wanted to.
Then there is the issue of diversification. You know diversification is important, but most small investors can’t afford to buy a large enough collection of rental properties to be diversified. With a REIT, diversification is built in.
Going back to Federal Realty, it owns about 100 malls and mixed-use assets. I could never build a diverse portfolio of properties without making it a full-time job. But the same goes for all categories of REIT properties, from apartments to warehouses. Once again, REITs win in my book.
3. The tax headache
Owning a REIT in a taxable account means that the dividend income you receive is treated as regular income. There’s no crazy accounting logic to it. With a rental property, you have to deal with depreciation. And you need to track and calculate your costs against your revenue to determine your profit. And you have to pay property taxes on the property and maybe even get a license from the local government to rent it out.
I hate taxes the way they are (who doesn’t?), and owning a rental property made April 15 even harder to deal with. I’m happy to go back to just treating dividends as income.
For some, but not all
I complain, but in the end, my experience of owning a rental property has been generally positive. Of course, this view would be very different if I hadn’t bought the property at such a low price.
However, even knowing how lucky I was, I can’t help but be happy to no longer have to deal with tenants, to know that I have a property that is not liquid, and to end (after the 2022 tax year) with the tax implications of being a landlord. Some people don’t care about these issues, but I do, and I’m glad I’m almost done with them.
As of now, unless something material changes, I’m sticking with REITs.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.