I’m no newcomer to investing, having spent well over half my life with money in the stock market. In fact, I remember when Charles Schwab and its discount trading model was a disruptive novelty to the old Wall Street regime.
Which explains why I was so shocked when I sold my rental property a few months ago. I made money on the trade, but I can’t help but feel like I got hosed anyway.
I’ve been investing since my dad introduced me to the market when I was a teenager. The first stock I bought on my own was a utility that had cut its dividend. I remember calling 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 bought less than 100 shares, but the commission was about $100 or so, if I remember correctly. That’s an almost unthinkable sum today, but that was a long time ago.
Since then (and thanks to discount brokers like Charles Schwab, who has become an industry giant with $18.5 billion in revenue), commissions have plummeted. In fact, in many cases, investors can trade commission-free! Make no mistake about it – the broker makes money on your trading by directing the order to certain market makers; you do not pay the price directly. Which means that for most investors, this trading cost is effectively zero today.
It’s what I’m used to. Selling a property is quite different.
The numbers add up
When selling a property, the first and biggest cost is the broker’s commission. I ended up paying 5%, split between my broker who listed the property and the broker who lined up the buyer. It’s normal and, while I don’t like the expense, it makes sense.
Every stock in a company is exactly the same as every other stock, so there’s no need to explain what you’re selling. A property is not like that at all, each being different in 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, prices for most properties are quite high, so it’s not like most people can buy on a whim, with a mortgage often needed to get over the finish line. This adds even more complexity to the picture that a broker typically has to help with, if only to organize a sales process that can take weeks or even months to complete.
To be honest, buying a real estate investment trust (REIT) with a generous yield would have been a much easier and much more profitable decision – say, a WP Carey (WPC -0.86%) as owner.
WP Carey, a REIT I own, is globally diversified and has an incredible dividend history. It’s a solid investment candidate if you’re looking to generate income from real estate.
Only I thought, when I bought my rental, that I would retire into the property, so I didn’t think “investment”, I thought “future home”. Things have changed. Still, I sold at a generous profit, so I’m not too upset – even though 5% of the sale price went straight into the brokers’ pockets.
However, that was not the only cost I faced. After the deal was finalized, I received a three-page document outlining all the buy and sell options in the deal. I had to pay property rights, transaction fees, deed tax, and – because it was a condo – fees to the condo association. In the end, my transaction fees were around 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 about another 2%. This is a very large number for someone used to paying next to nothing to trade stocks. Also, when talking about the price of a house, 2% can quickly become a big absolute number. And to be honest, I don’t understand why all these costs exist, given today’s technology and the increasingly free flow of information.
Happy I’m doing
The sad thing is that I have had negative experiences while owning the property that taught me that owning a rental property is not worth my time and effort. I’ll stick to REITs like WP 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 now on. The costs – in dollars and emotionally – just aren’t worth the benefits to me.