I got lucky with a condo that I bought in Florida, and I really can't complain too much now that I'm selling it. Yes, I had wanted to retire into it, but that just wasn't meant to be at this point. Now that I'm selling, though, I can honestly say there are three things that I will be happy to never deal with again.
As I write this, I'm under contract to sell a two-floor condo overlooking Market St. in Celebration, Florida, the town Disney built. I actually bought it without seeing anything more than the location and photos, having looked at units in the town previously. I also happened to have a solid relationship with a Realtor who confirmed that the unit was as nice as it seemed. I got lucky in more ways than one, but the biggest benefit was that I paid what would now be considered a very low price.
It was interesting for me to read, years later, a Federal Realty conference call transcript in which the company's chief executive officer explained that buying at a low price is a huge safety valve. Essentially, for the real estate investment trust (REIT), it lowers the bar for creating strong returns. For me, it provided protection during a lawsuit since, even during the worst of the legal issues facing the condominium complex, I could have sold for roughly what I paid and, throughout my ownership, I didn't have massive financing costs to cover.
I didn't go in with that in mind, but it has resulted in what is now a positive outcome for me, since I was able to hold on through the headwinds. Now on the other side of that legal issue, I've decided that it's time to sell, and I've been able to list it for well more than what I bought for.
And while that legal issue is the one thing that is prompting me to sell, there were issues all along the way that I'm happy to get out from under. And these issues are just par for the normal course for owning a rental property.
1. Bad tenants
I had one really bad tenant, and that's all it took to make me worry constantly. It seems the tenant's child locked themselves into one of the unit's two bedrooms. I don't know why, and I don't care. The child's parent broke the door down. Then, according to the tenant, the same exact thing happened with the other bedroom door! The tenant chose to break it because "they knew they could." At least that's what they explained to me and my property manager during an annual inspection of the unit. I personally can't explain how hard 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 having verbally agreed to renew or with a signed lease, to move. That left me in the lurch to find a new body to fill the empty apartment -- fast. It is a great location and I was able to re-rent it, but there's a breach of trust that's hard to swallow. I understand why each tenant did what they did, but it doesn't make it any better.
Then there are the requests for fixing things and the problems that you know are the tenant's fault but that you get to pay for. Even the best tenant becomes a sore spot at times. When you own a REIT, you never have to consider any of this.
I knew going in that I was buying something that I couldn't easily sell. So this isn't a surprise, but that's still a big issue to consider. For most people, a property is a relatively large asset, and if you need cash in a hurry, there's no easy way to tap into it. Sure, you can take out a loan using the property as collateral, but that's generally a fairly time-consuming and costly way to access money when you consider that some stock brokers offer margin loans at extremely competitive rates.
With a REIT, I could simply transfer some money from my brokerage account, going on margin backed by the REITs I own. It would take all of five minutes, and at least some of the interest costs would be covered by the dividend payments from the REITs. Moreover, there would be no need to pay principle unless I needed to or wanted to.
Then there's the issue of diversification. You know diversification is important, but most small investors can't afford to buy a big-enough collection of rental properties to be diversified. With a REIT, diversification is built in.
Going back to Federal Realty, it owns roughly 100 retail shopping centers and mixed-use assets. I could never build a diverse portfolio of properties without making it a full-time job. But the same is true of any REIT property class, 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 gets treated as if it were regular income. There's no crazy accounting logic to that. With a rental property, you have to deal with depreciation. And you have to track and calculate your costs against your income to determine your profit. And you have to pay property taxes on the property and, perhaps, even get a license from the local government to rent it out.
I hate taxes as it is (who doesn't?), and owning a rental property made April 15 even harder to deal with. I'm happy to go back to just dealing with dividends as income.
For some, but not all
I'm complaining, but in the end, my experience owning a rental property has been generally positive. Of course, that view would be vastly different if I hadn't bought the property at such a low price.
Still, even knowing how lucky I've been, I can't help but be pleased to no longer have to deal with tenants, know that I've got an asset that isn't liquid, and be done (after the 2022 tax year) with the tax implications involved in being a landlord. Some people don't mind these issues, but I do, and I'm glad I'm almost done with them all.
From now on, unless something material changes, I'm sticking with REITs.