I'm not new to investing, having spent well more than half of my life with money in the stock market. In fact, I remember when Charles Schwab and its discount trading model was a novelty disrupting the old Wall Street regime.
Which helps explain why I was so shocked when I sold my rental property a few months ago. I made money on the transaction, but I just can't help but feel like I got hosed anyway.
Stock trading
I've been investing since my father got me into the market when I was a teenager. The first stock I ever bought on my own was a utility that had cut its dividend. I remember calling up the broker and telling him what I wanted to do. I mispronounced the name of the company I bought because I was so nervous. I acquired fewer than 100 shares, but the commission was around $100 or so, if my memory serves me right. That's an almost unthinkable sum today, but it was a long time ago.
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Since that point (and thanks to discount brokers like Charles Schwab, which has grown into an industry giant with $18.5 billion in revenue), commissions have plummeted. In fact, in many cases, investors can trade commission-free! Don't fool yourself -- the broker is making money off your trading by directing the order to certain market makers; you just don't directly pay the price. Which means that for most investors, that cost to trade is effectively zero today.
That's what I'm used to. Selling a property is entirely different.
The numbers add up
When selling a property, the first and biggest cost is the broker commission. I wound up paying 5%, split between my broker who listed the property and the broker who lined up the buyer. That's normal and, while I don't like the expense, it makes some sense.
Every share of stock in a company is exactly the same as every other share, so there's no special need to explain what you are selling. A property isn't like that at all, with each one different in so many ways, from location to individual condition. The "market" for a property is also inherently local, so you need someone on the ground to sell it.
Meanwhile, the prices for most properties are fairly large, so it's not like most people can buy on a whim, with a mortgage often required to get things over the finish line. That adds even more complexity to the picture that a broker usually has to help with, if just to organize a sales process that can take weeks or even months to finalize.
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To be honest, buying a real estate investment trust (REIT) with a generous yield would have been a much easier and far more cost-effective call -- say, a W.P. Carey (WPC -1.91%) like landlord.
W.P. Carey, a REIT I do actually own, is globally diversified and has an incredible dividend history. It is a strong investment candidate if you are looking to generate income from real estate.
Only I thought, when I bought my rental, that I would retire into the property, so I wasn't thinking "investment," I was thinking "future home." Things changed. Still, I sold at a generous profit, so I'm not too upset -- though 5% of the sale price went directly into the brokers' pockets.
That, however, wasn't the only cost that I faced. After the deal was finalized, I got a three-page document outlining all of the puts and takes from the deal. I had to pay title fees, transaction fees, a deed tax, and -- because it was a condominium -- a fee to the condo association. At the end of the day, my transaction costs came out to roughly 7% of the sale price.
So, on top of the 5% commission I knew I was going to have to pay, I had to add another 2% or so. That's a very big number for someone used to paying virtually nothing to trade stocks. Moreover, when you are talking about the price of a house, 2% can quickly become a large absolute figure. And to be honest, I don't understand why all of those costs exist, given today's technology and the increasingly free flow of information.
Happy I'm out of it
The sad thing is that I had some negative experiences while owning the property that taught me that owning a rental property isn't worth my time and effort. I'll stick to REITs like W.P. Carey. So while I made money on my rental property, I can't say it was the best experience overall. And the cost of selling the asset was just another hit. At this point, I'm pretty sure I'm going to avoid rental properties from here on out. The costs -- dollar-wise and emotionally -- just aren't worth the benefits for me.
