Don’t Get Catty

Steve Abramowitz

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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