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AFTER PENNY READ about lower stock market valuations abroad, she bought an exchange-traded index fund focused on European shares. She showed the article to her friend Peter, who purchased the same fund. But the next day, a large French bank reported difficulty meeting customer withdrawals, stoking fear of a bank run.
The U.S. stock market was down slightly, but European shares got clobbered. Penny was disappointed but believed the government would take steps to ease the crisis and vowed to stay invested. Peter was more worried and sold out, berating himself for his inability to manage money.
What’s going on here? Why the difference? Penny grew up in a family where money wasn’t a source of conflict, and that made her feel confident about handling her finances. In Peter’s home, money was a source of friction between a frugal mother and a wasteful father. He emerged from adolescence unsure how to deal with money.
Nobel laureate Daniel Kahneman discovered the phenomenon of loss aversion, which holds that the pain of losing is about twice as powerful as the pleasure of winning. People with backgrounds similar to Peter’s may be even more sensitive to financial missteps, often leading them to pass up opportunities for monetary gain. Peter suffers from a syndrome I’ve come to call money shame.
In my family, money served both as a source of pride and as possible protection from religious persecution. Its importance was magnified by a well-intentioned but overbearing father whose deft money management left me feeling I’d never measure up. I’ve dealt with my money humiliation in professional training and personal therapy, and believe I’ve gained valuable insight into its negative impact on my investing habits, including how I handle my real estate investments.
All landlords grapple with the dilemma of whether, when and how much to raise rents. Increases compensate for many of the troublesome aspects of real estate ownership. Besides capital appreciation, the investor’s ultimate goal is to maximize net income and maintain a steady cash flow. In times of high inflation like now, raising rents is necessary to offset the greater cost of repairs and maintenance. Tenants whose rent payments are chronically late, who constantly complain or who have damaged the unit become prime candidates for an increase.
But a rent increase can also backfire. Some tenants think an increase is an invitation to make more requests of their landlord. The bigger danger is losing a good renter who’s on a tight budget. Departure of a responsible tenant is almost always an unwelcome development and can be a fiasco. The landlord must deal with any issues the outgoing renter was willing to overlook and prime the property for a new occupant.
Often overlooked is the loss of rent for, say, two months to allow time for the ongoing work and the search for a new tenant. By the time you factor in the property manager’s finder fee, you’re not dealing with chump change anymore. To be sure, the bump in rent for an incoming tenant is usually higher than for a continuing one. But what’s a 10% increase on a $1,000 rent when new carpet or paint can easily run $3,000?
Because of the risk of losing a cooperative renter, I rarely raise rent more than 6%, barely enough to keep pace with today’s inflation. What else, beyond the rational fear of forcing out a pleasant renter, might influence my conservative rental policy? I’d like to think my restraint is rooted in part in the empathy modeled by my mother and grandmother. What budget item will the single working mother have to forgo to make room for that rent increase? Yes, concern for others is definitely part of it.
But there may be another factor at work. Perhaps I keep my rent increases small to avoid the painful self-criticism I’d experience if a reasonable renter vacates and sets in motion the money mayhem of re-renting. Am I so anxious to avoid the sense that I’m failing as an investor that it prevents me from maximizing my rental income? Consistent with Kahneman’s notion of loss aversion, I’m face-to-face with the consequences of my need to avoid the money humiliation I experienced as a teenager.
You certainly don’t have to own real estate directly to be familiar with the discomfort of money shame. Suppose you’re a long-term buy-and-hold investor in broad market index funds, but you expect the Federal Reserve will soon cut interest rates. You yield to the temptation to make a sector bet on beaten-down real estate investment trusts. Instead, a surprise increase in the Consumer Price Index results in another hike, battering your real estate fund.
How is your mood affected? Are you awash in self-reproach? How long do you ruminate over the reversal of fortune? Your answers to these and similar questions will tell you how susceptible you are to the money humiliation syndrome.
Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.
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Steve–As a long time landlord, I go through the same calculation when raising rents. One thing to keep in mind though, is that raising the rent $100 while spending $3,000, is that you’ve increased the value of the property. I use a quick (but surprisingly reliable) rule of thumb that a property is worth 100 times the monthly rent. So a $100 rent increase adds something like $10,000 to the value of a property.
The discussion of both real estate and money shame reminds me of the dumbest financial decision we ever made. When we moved to our second home, we briefly kept our first home as a rental property. We didn’t want to be landlords, but we didn’t have enough equity in the home at the time to sell it and break even after paying the sales expenses, and we needed every penny to buy the second home. So we became reluctant landlords, and it wasn’t that bad—we live in a college town with a perennially tight rental market, and we were able to rent our little place to two young men who were attending veterinary school. The rent basically covered our mortgage payment, and our tenants were studious and responsible.
A year later, the housing market improved enough that we were able to sell the place and walk away with a whopping $10,000 profit. We felt pretty good about that, and we didn’t have the hassle of being landlords anymore.
That was 1999. The California housing market took off, and in 2000, our town passed a slow-growth measure, which made existing housing even more valuable. That same little starter house is now worth 3-4 times what we sold it for. We could have put both kids through college with the amount of equity we would have had by now. We also would have long ago paid off the mortgage and would have had the (now much larger) rental income.
We were at a family gathering the other night, and I talked to two relatives—my sister-in-law and my husband’s cousin—both of whom also kept their first home as a rental when moving to their second home. But unlike us, they didn’t bail on the idea. My sister-in-law and her husband long ago paid off their rental and now are using the rent to pay off their primary home before they retire. I definitely felt money shame over all of this. Ah, well.
Dr. Lefty. I bought Apple at $14 in the 90’s and quickly sold at $23 thinking how great that was.
Early in her career, my wife worked at S&P. An analyst whispered a tip to her one day about a new company called Apple. She didn’t have any money to invest and thought the company name was silly (these were the “Big Apple” days in NYC.) She Never took it seriously and we’ve laughed about lost chances over the years.
DrLefty, I interpret Steve’s term “money shame” as having your investment decisions dictated by emotion.
I can’t see “money shame” as a factor in selling your house in 1999. At the time, you made a reasonable decision based on your then current circumstances. You had no way of knowing how the California housing market would evolve.
We’re often admonished to not confuse process with outcome. The thought process leading to your decision to sell was valid given your situation at the time, regardless of how the housing market later turned out.
Sure, it would have been much better in the long run to have kept your house as a rental. But you only know that with hindsight. You may suffer regret, but not money shame.
There are other scenarios to ponder had you kept your house as a rental. It might have burned down, or been vandalized requiring thousands of dollars in repair costs. Maybe you could have been sued for discrimination after refusing to rent to a specific individual. I’m sure Steve Abramovitz would tell you that not every rental agreement has a happy ending.
Thanks for that. I’d say our decision to sell our little starter home in 1999 was primarily about not wanting to be landlords, mainly because we were very busy—both building careers, two young children—not mainly financial. In hindsight, I’d still say it was a foolish decision. We made the decision that would make our lives easier. That’s not necessarily a terrible choice—priorities are important. But we could have done more research on the long-term pros and cons of owning rental real estate, projections on where the California housing market might be headed, etc. But we were young and quite ignorant on the topic of personal finance at the time.
Hi Steve, it sounds like you have a real love-hate relationship going with real estate! You love the diversification it provides, as well as the potential for current income and long-term capital gains. Balanced against this is the down sides of dealing with difficult people, not-so-pleasant surprise repairs/demands, complicated taxes, and so on. It sounds like the reason you stick with it is…better deal with the devil you know, vs the the alternative.
I get it, I’ve run a small business for several years and a lot of the same concerns apply. When do you raise prices, and for how much? Will this infuriate my customers? Will they unfairly malign me on-line? Will they go somewhere else? And on and on. Money psychology is a fascinating subject, thanks for your insights as well as your personal travails in dealing with this ever-changing landscape, I find it very useful and very informative!
Yup, it’s real love-hate. I suspect almost everyone (except maybe the gifted handyman folks and rent gaugers) who’s managed real estate or any other labor-intensive (like yourself) consumer-sensitive business shares a little bit of ambivalence. I’m glad you broadened what I said to the psychological/moral conflicts of the business owner—-what I go through applies to so many entrepreneurs as well as just day-to-day decisions we all must make.
Steve, I have to say I really enjoy your articles, which are always at the intersection of personal finance and psychology. I can’t directly relate to the landlord themes (would NEVER be a landlord), but even there your insights are interesting. I’ve certainly had many opportunities for money shame over the years, but these days I don’t waste too much time kicking myself. Those who learn to laugh at themselves will never cease to be amused.
Hi Nuke Ken
Yes, being able to forgive yourself is such a wonderful attribute. Rumination over mistakes once thought of as horrendous seem almost ludicrous once we’ve been able to “cool off” in hindsight. Sometimes afterthought can be a helpful way to make adjustments to problematic patterns, but we need to remember that missteps are just part of the human condition. They’re not reason to abandon the self-esteem built up over the years by our good decisions and good deeds. Like you said, we need to be generous toward ourselves as well as toward others.
Are you sure you were meant to be a landlord, Steve? Your articles seem to say real estate has been a source of stress and conflict throughout your life.
Why bother with it at this stage of your life?
Hi R Quinn
You’re on the right track! But I’m hanging in there. We’ve owned these properties for over 35 years and I want my wife Alberta and son Ryan to benefit from what will be a very large step-up in cost basis when I take my final leave. Real estate has,at least financially, been good to us, but I must admit just last weekend Alberta and I went over how she would go about slowly moving stuff over to REITs (Vanguard’s real estate index fund). She should be able to reap an average annual return close to 10% (6.5% capital appreciation and 3.5% dividends), get to sleep and vacation well.
I’m with Richard on this one, as I’ve posted before. Sounds like letting the tax tail wag the investment dog. Also, putting what sounds like a lot of money into a REIT fund is a sector bet. I do hold Vanguard’s REIT fund, but I keep it at no more than 2% of my portfolio, and I’m thinking of dropping it altogether in favor of total market.
Hi MyTimeToTravel
You’re so right again. If I heard she was putting it all in VNQ (or any sector fund), I think I’d have to come back again! She’ll be putting most all of it in broad market VOO.
Another great one, Steve. Your ability to lay yourself bare makes for great articles.
Still looking for that book some day…
Hi Nate
Thank you so much! Transparency sometimes isn’t easy and it’s always nice to hear from a compassionate reader.