Are You Prepared to Deal With the Human Side to Real Estate Investing?

“Tragedy is a tool for the living to gain wisdom, not a guide by which to live.”
–Robert F. Kennedy

I’m a big fan of real estate investing, particularly if one of your financial goals is to achieve PIRE. We own several properties ourselves and continue to accumulate rental properties. Given that I have zero mechanical ability and we have no desire to deal with the 2 AM “toilet is broken” phone calls from our renters, we use a property manager.

We also use a property manager because she acts as a buffer between us and the renters. Even though it’s quite simple to look on the record of deeds and find out that we own these properties, we’d prefer to keep some distance between ourselves and our renters. We try to be good owners and landlords, rent for fair prices, and provide good, clean, affordable housing, and, by and large, our renters stay in our properties for longer periods of time – which I think is a situation that benefits all parties involved.

However, there are times when we can’t maintain that distance.

Investing in rental properties and psychopathic numbing

As we saw in the article “Novocain for Monkey Brain,” psychopathic numbing occurs when our limbic system shuts down in the face of a tragedy of large proportions. We respond to the face of one starving child but don’t react when we see a paper that discusses millions of starving children. When we have financial decisions, it’s easy to let psychopathic numbing take over and cause us to make poor choices. In that context, psychopathic numbing is bad.

However, as a real estate investor, psychopathic numbing can help you.

There are two areas where it can help you.

Psychopathic numbing can help you buy properties

I do not purchase properties at retail prices. I am a believer in the maxim that you make your money on the purchase. I can take advantage of informational inefficiencies and irrational seller behavior when buying a house – something I cannot do when investing in the stock market.

However, in many cases where a seller is not getting market value, there is a sad story behind the situation.

It’s in my nature to be empathetic. There are times, such as I describe in “Why Me Caring About You Makes the Medicine Go Down a Little Better,” when a little (or a lot of) empathy goes a long way.

It does not go a long way when trying to extract the best price possible in the purchase of a rental property. The moment that you allow emotions to enter into your investment decisions (be it investment real estate or other investments like the markets) is the moment that you compromise your ability to make the best decision possible.

Remember, a fair market price is one that both sides accept without undue external pressure (meaning a goon named Vinny threatening to break some kneecaps). Both sides might not be as happy as possible with the deal, but both sides accept the deal of their own free volition.

By getting sucked into the story of the other side and why they’re in a distressed situation, you open yourself up to the possibility of adjusting your negotiating position. You have a duty to yourself and to your family to get the best price possible, and empathy increases the chances that you will not get the best price possible.

Psychopathic numbing helps you as a landlord

This one has been a more difficult step for me and my wife.

I could not tell you the names of any of the people who rent our properties.

However, in the past few months, we have had to deal with human issues.

One of our renters is a family with three children, one of whom is a special needs dependent. The husband died unexpectedly a few days before Christmas. He was the income earner in the family, as the mother stayed at home to take care of the special needs child.

We pitched in and sent money along with our property manager to ensure that Santa still came for the kids. We gave them a month rent free, and our property manager raised funds from charitable organizations to cover another month’s rent.

By then, the life insurance proceeds had come in. At first, the woman thought that between Social Security and the life insurance, she’d be able to make ends meet.

After a couple of months, she realized that she couldn’t.

She asked for a reduction in rent of about 22% off of what she was currently paying. Since we’d never raised the rent before, it wound up being about 29% off of market value.

Fortunately, there were other properties available at the price she could afford. They would represent a change for the woman and her family from the size of house they were used to, but they would not go homeless, and she could still remain at home and take care of the kids.

This was a case where having a property manager as an intermediary really helped. She’s seen all types of situations before and could use her judgment on what was fair and not fair, and she was very comfortable that we’d been more accommodating than the average landlord.

But, saying that we could not lower the rent was not an easy decision.

The second situation was a little easier to deal with. We purchased a foreclosure from a large national bank. The bank did not have keys, so once we received the deed, the property manager went to drill the lock. I’d been by the house a few times and had seen a car in the driveway one time, but, otherwise, had seen no signs of life. I figured (wrongly), that perhaps the neighbors were using the driveway for overflow parking since the house looked vacant otherwise.

Oops.

A woman came running out, screaming and demanding a writ of possession.

Apparently there were also a couple of kids in the house.

So, we eventually had to go to court to get an eviction notice and then a writ of possession to take possession of the property.

My wife didn’t like the idea, emotionally, of kicking anyone out of a house, much less a family with kids.

Fortunately – in a sense of psychopathic numbing – the family had been living in the house for four years without paying a mortgage, so they should have had plenty of time to save up to move somewhere else.

We offered cash for keys both to smooth the transition and to ensure that our property wasn’t trashed as the squatters left. I do not feel sorry for the parents in the least. They knew that they were occupying a property they had no right to.

I do feel sorry for the kids, though.

Even in situations where, as a real estate investor, you may feel sorry for someone, you have to do what is right for you and your family.

That doesn’t make it easy.

Again, using a property manager helps. She took the phone call from the people illegally occupying the property. She went to court. She enforced the writ of possession. Using a property manager has allowed us to have willful blindness and treat the property as the investment that it is.

It sounds harsh to be unemotional about the plight of others. However, real estate investments are not charitable causes unless you specifically choose for them to be such. You don’t go into your job every day and offer to work for free, despite the fact that such a donation of free time would either enable higher profits or lower prices. The same applies with your real estate investments. They are meant to produce money for you so that you and your family can live and not become a burden to the rest of society. They also provide housing for people who want and need such housing and can afford to pay for it.

Have you been faced with human tragedies as a real estate investor? How have you dealt with it? Let’s talk about it in the comments below.