Finding Real Estate Joy

April 06, 2018

A mouse ended my tenure as a landlord. I owned a property in Boston, and had a new tenant who had just graduated from Harvard Law School. I had recently installed a second level of property management for her - one level did not seem to be enough so in the spirit of bureaucracy I threw in another layer. But then a mouse showed up in the condo, and she skipped all of the managers and went straight to me. The conversation went roughly like this:

Tenant: "I need you to come set a mousetrap."

Me: "'I'm in Vermont, roughly 200 miles away. Can you set it?"

Tenant: "How do I do that?

Me: "Put some cheese in it. Pull the lever back 'till it clicks. Put it on the floor, slowly."

Then remembering that she had just gotten out of law school, I added a warning:

"Don't put your fingers in the trap, that's for the mouse."

It didn't happen. In the end she felt like my approach would be harmful to the mouse, an argument which probably didn't require the law degree to make, and my managers went in and live-trapped it. But I was done - I sold the condo and moved the capital to the real estate index we now buy for clients.

Owning a real estate index is a lot easier than owning condos and buildings. As the investor, you have to be willing to put in the effort to look at the dividends rolling in every 90 days, but that's about it in terms of toil. No sinks to fix, no driveways to repair, no mice.

And you get massive diversification, owning real estate all over the nation, in many different forms, from hospital buildings to public storage to cell towers to housing developments to even those dying shopping malls.

There's something interesting going on in the markets now, in real estate specifically, and it has my attention. The first quarter dividend was announced last week, and it's up almost 19% from the prior year period, more than any other index we buy for clients. But that's not the juicy part. The good news, when viewed long term, is the index was also the worst performer during Q1 from a price level of those that we buy.

Dividends going up, price of securities going down. Businesses producing more cash, and other people willing to sell you those businesses for less money. This, my friends, is a happy place.

I know some of you will point out that the price of the index went down because interest rates are going up, and investors expect the future to be less rosy because REITs (real estate investment trusts) borrow a lot of money and hence will owe more interest. Fair point. But let me add a counter-argument to the interest rate chatter from Wall St.

Interest rates are rising in part because the economy is strong, which means that vacancies are low in real estate. As a leveraged industry, a small change in vacancies can lead to a large fluctuation in profits. In addition, while new projects and debt rollovers may be more expensive, existing properties with long-term debt may become more profitable, because rents in low-vacancy markets will rise across the industry. Throw in the topper that our Dear Leader is in the real estate business and just passed a huge tax cut for the boys on the home front, and perhaps it's not all bad news for REITs.¹

Dan Cunningham

1. https://www.forbes.com/sites/adamsarhan/2018/01/03/reits-are-a-big-winner-from-the-2017-tax-cut-heres-why/#29355d3b4979