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I’VE NEVER RENTED TO cats. The opportunity came my way recently via an email from my property manager. An elderly couple was interested in renting our flagship duplex, which would become available in August.
The prospects were smitten by the location near their church and grandchildren, and they seemed like a landlord’s dream. No undergraduate mayhem and no complaints from neighbors about beer cans strewn on the front lawn. They were also likely long-term renters, so I could say goodbye to the seasonal campus merry-go-round. And they wanted to move in as soon as the current tenants vacated.
But there was a hitch: They had four cats.
Pending their safe passage through our standard application and credit screen, I savored the prospect of reeling them in. My reasoning was good-part rational but—with the clarity that comes from time and emotional distance—also disconcertingly irrational. The couple was anxious to move in “as is” as soon as the current renters left and the place was spiffed up—but there would be no new paint ($3,500 saved) and no new carpet because of the cats (another $3,500 saved), plus the applicants were referred by the departing tenants, meaning no re-rental fee to a realtor (half the first month’s rent of $2,500).
Over the years, I’ve learned not to minimize the prohibitive cost of a conventional renter turnaround. It’s more than just a month’s lost rent, along with the expense of repairs and primping for the new occupant. Property investors chronically underestimate the length of time required to complete the re-rental process, and hence the pinch to their cash flow.
Often, the property manager and repair person have trouble connecting. Or the vacating tenants aren’t motivated to find a mutually convenient time to meet the technician or make the home available for an applicant’s walk-through. There’s also the time needed for parts to arrive and to complete the various projects. All the while, you’re casting the line for a good catch. Sure, you may be blessed with a quick bite, but how far in the future does she want to start her tenancy?
All that’s the rational component. Here’s the flipside. When I got the email, I was in Upstate New York, accompanying my wife Alberta, who was attending a writers’ conference. Unless there are other travel-phobes hiding out on HumbleDollar, it seems like I’m the only one who has a problem “going away.” What’s in the mail, I worry, and did Jerry remember to recycle the new Barron’s at the foot of the driveway?
When the note arrived, I felt jubilant. Just a click and no more vacancy. Knowing I had rented the unit and that the next mortgage payment was covered, my travel ennui lifted. Alberta wanted to know why I had a mischievous grin. I told her, expecting a hug and congratulations. I can’t quote her verbatim here, but let’s just say she’s not into cats. Four cats? On a carpet and wooden floors? Was I crazy? I was sacrificing the long-term value of one of our best properties for a few months’ rent and some anxiety relief.
Most vacations have a rough moment or two. This was ours. We landed some good verbal punches, pointed fingers and dredged up some below-the-belt resentments. Fortunately, exhaustion and 34 years of experience with compromise prevailed. We managed an uneasy truce. I could have my cat people if an investor friend, along with my former and current property manager, thought I was in my right mind. But no other pet would litter our premises ever again.
Well, my friend and retired property manager of 40 years confirmed my sound judgment. But my current manager—the person who would actually conduct the rent-up—recounted vivid stories of cat nightmares and strongly advised us to turn down the couple’s application. I relented.
To those who have counseled I release myself from the bondage of privately owned real estate, I maintain I’m still hooked by its potential outsized financial rewards. In 2018, the average value of the duplex was about $780,000, according to Zillow. As I write this, its value is estimated to be $1,065,000, a 36.5% gain over five years. Topping that off is five years of 5% annual net income. By contrast, Vanguard Real Estate ETF (symbol: VNQ) appreciated 24% over the same time period, a not insignificant sum. But that’s total return, so it includes dividends.
In another life, I was a crackerjack data analyst, so I’m well aware this paper-and-pencil demonstration is by no means an open-and-shut case. Residential property values vary hugely based on geography, location, economic conditions and myriad additional factors. I’ve only compared Vanguard Group’s real estate fund to a lone investment within a single time frame and in a particular setting. But this sketchy example suggests how well a prudently purchased and managed investment can perform when situated in a favorable environment like a thriving campus community.
It also shows how it can detonate your vacation. Next time, I’ll try dogs.
Is private ownership worth all the angst and travail? That depends on your investment priorities and temperament. The investor needs to weigh the prodigious tax advantages and lesser volatility of directly held property against the diversification and far greater liquidity of real estate investment trust (REIT) funds, the zero commission in and out, and the freedom from hassle, worry and liability. If I get another go around, I’d lean toward REITs, with some diversification into a privately held residential income property that requires relatively little hands-on involvement.
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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Disclosure: I have owned a residential rental since 1996. While I’m in a great market at the moment, the long term return has been good, but not nearly as good as equities. I have had professional managers but I am now my own manager. Ultimately I’m grateful it has worked out okay, I’ve earned a lot over the years, and it’s great to have an asset with current income even though residential rental real estate is highly illiquid.
As a long-time (30+ years) landlord, I’ve had different pet polcies for different properties. The very first building that I bought had a basement apartment that was difficult to rent. Once I started accepting a dog in that apartment, problem solved. Another building that I own is strictly no pets. A third building, I allow pets with a higher rent and security deposit.
I would come at this in another fashion and that is what great pleasure you must bring to the neighbors. They would have missed the noise and trash generated by the college students, although it looks like no cats just more noise and trash.
We had that situation next door years ago and visited the owner (I am being generous with that word) and asked if he would enjoy living next to the students he was renting to. Within a year he sold the house to our super neighbors. What is the cost to the neighborhood and is it tax deductible?
I don’t do tenants and toilets only dividends. I assume one cannot sell a unit if one wants a Viking River cruise? I had cousins that owned 21 units in central MA and they were very open about court trips–eviction notices–and many repairs. Like you they did well but here was a cost.
To each his own but for numerous reasons when I had the chance to rent I passed on it for a few good funds.
When we were young marrieds, we didn’t get pets because we were renters who moved frequently. Most rentals, it seemed, didn’t allow pets, and we didn’t want to be unfair to an animal by adopting it and then maybe having to give it up if/when we moved to a no-pets rental. We didn’t get our first pet, a dog, until we bought our first little halfplex.
Now it seems like every young adult we know has a pet(s). Both of our millennial daughters do, and so, it seems, do most of their friends—all renters. I take it that many landlords have relaxed their rules, which is surprising when it seems like rental housing is tighter and more expensive then ever.
So where’s the nightmare cat rental story implied by the title and lede? What happened?
~~~~~~~~~
Aside: While house-shopping 20+ years ago, my wife insisted on looking at big old two story just that needed a lot of work. Before the elderly owner even opened the door, the cat urine smell was detectable. When she did open it was overwhelming. There were more than a dozen, maybe two dozen, and they had turned the place into a total tear-down. I’ve never seen anything like it.
~~~~~~~~
Aa a former small-scale landlord I never had cat problems, and would have regarded a prospective four-cat tenant as asking for trouble.
Thanks for the article Steve! I appreciate your writings about rental property. I think I’ll stick with a no pets policy.
An additional advantage of private real estate ownership is some level of control. Examples include choices about how you’ll handle the application process for potential tenants, timing of certain improvements, and potential “sweat equity”. I periodically enlist my kids to help with landscaping at our rental properties. It’s a decent way for them to earn a little spending cash, provides an opportunity to talk to them about investments and specifically how rentals work, and avoid the cost of a landscaping company as well.
Boy, you really have a smooth operation. I think you’re right about the attraction of control over your own investment. REIT management presumably have a lot of skin in the game and reputations to protect, but in the end you don’t really know if their best interest is your own. I also like the trust and confidence in your “team,” who surely are working in your favor. I do think, though, you have to be realistic about the amount of control you really have. Just like in most aspects of life, randomness can upend even good rental operations (think mold, liability, etc.). Thanks for joining in the conversation.
You’re right, I’m not experiencing life to the fullest. I just can’t abide by all the indignities of the plane, unpredictable delays and the hassles of negotiating airports. But I’m getting less symptomatic—driving to LA to see my son. Thanks for writing in again.
See the comments on this article: https://humbledollar.com/2023/08/in-different-places/
A wonderful post and comments. Thank you.
The Four Tees of Rental Property:
If you can’t deal with these then you’re better off not owning rental property.
Ha, ha. Let’s add to your list—turmoil
We had a cat who often urinated outside his litter box. In two carpeted bedrooms on the second floor we even had to replace the subfloor (after he died). On the first floor he ruined an Oriental rug and the hardwood floor beneath it . We have installed new hardwood throughout- no more cats. I can’t imagine four cats!
Another vote against my anxiety-driven impulsivity! Thanks for chiming in.
You don’t seem to have accounted for the carrying costs – taxes,insurance, maintenance, repairs, salaries to managers, not to mention the costs of selling. Even if Zillow is accurate, you wouldn’t see 100% of that million. And I just noticed you still have a mortgage on the property, so subtract the balance and all those interest payments. Also, please tell me that you wouldn’t have put all $700,000-odd into a REIT fund!
There is no way to calculate the psychic costs in monetary terms, but you wouldn’t have had that argument with your wife if you had the money in a Boglehead three fund portfolio instead of physical real estate.
Why do I get the idea you’re not a big fan of privately owned real estate! I’m often skeptical myself. But I must have caused some confusion.
All the carrying costs have been included, The 5% annual income figure is net after all those costs.
There is not and has never been a mortgage on the property. Hence, no interest payments.
You are absolutely correct about the prodigious retail selling cost of private real estate, which in this case would be about $50,000.
Unless you actually enjoy being a landlord I don’t see the point. Put the money into index funds with an appropriate asset allocation (including up to 5% in a REIT fund if you absolutely insist) and forget about it. Surely you can spend your time doing things you enjoy more.
Sorry about the mortgage reference, I misread. I suppose there’s another argument available there about leverage.
Edited to add: BTW, the five year return for the S&P 500 is over 60%, long term average return 44.50%. See Ycharts.
Steve, thanks for the interesting article. We live in a beach community with lots of short-term rental properties. It seems more and more folks want to bring their pets on vacation, mostly dogs. Some owners have realized they can increase their renter base by allowing pets, but with a substantial weekly premium added. I love dogs, but am very allergic to cats. When I vista a cat home I have to be pretty careful where I sit, or pre-medicate.
It also seems like many of the full-time residents, many seniors, have one or more dogs. I’m thinking of an encore career as a dog-walker for locals!
Thanks for writing in. Pets serve so many different psychological needs for people—giving and getting love and just plain joy, to name a few. But, boy, do they cause problems for us owners. Incidentally, I have shared this cat story with many friends and property owners, only to come away with one conclusion: I was wrong!
Well, Steve as an intense cat disliker and allergic to boot, NO CATS. I say that from years of experience walking into a relatives house who has four cats👎
Now on to the serious stuff. You don’t like to travel? Oh my. By the way, there are several HumbleDollar folks who shun travel along with a few of us who never want to stop. It’s pure learning with new experiences and interesting people.
As far as the mail goes, sign up for the USPS service INFORMED DELIVERY that sends you photos of what’s in your mail box each day via e-mail. It’s free. And Steve, isn’t there a digital version of Barrons?
See, no excuse to not see the world. 😸🙀
Yes, there is of course a digital version of Barron’s. But have you ever tried to navigate it!
Next time around, maybe I can be an extrovert and avid traveler. But for now, I’ll just have to play with the hand I was dealt!
I’m a life-long introvert, but it didn’t stop me enjoying travel. Just remind yourself you will never meet any of these people again (well, only those few with whom you establish a connection).
Steve, one of my favorite Dick Quinn articles stars a cat lover. I’ll add this one to my list. Hang in there, baby.
Ha ha! I’m going to have to check that article out!
Uh oh; I can feel the wrath of cat lovers coming your way to defend their furry friends, Steve. 🐈⬛
Kidding aside; I’m glad that the property has been so profitable for you over the last few years. I don’t think I have the disposition to own rental property but I can certainly understand the appeal.
Same here. I know myself, and I know I have no patience for any of this. We rented for years and left places as good as they were when we arrived. If I had to rent a place out for some reason, I’d look for an edge. There is a religious college very near us I’m familiar with. That demographic is a cut above in the respectfulness and discipline category. If I had to rent I’d advertise there for students who love quiet to live and no pets. It wouldn’t guarantee no problems, but I think the demographic would swing the risks much more in my favor than otherwise. But the general public renting my sweet place? Nah, hard pass for me.
I agree. I rented my vacation home for the first few years we owned it. Nothing but aggravation and too many of the renters did not respect the property.
So much aggravation. I hope it’s helpful for readers to see the wide range of opinions about the pluses and minuses of owning real estate privately (vs. reits). If only for the benefit of diversification, I don’t think it needs to be an either-or proposition.