REIT-TIREMENT - REIT Investing and Personal Finance

A blog about REIT investment and personal finance

Friday, January 18, 2019

Why Invest in REITs

Real Estate Investment Trusts or simply REITs are listed companies that buy, rent out and manage properties. REITs lease out spaces and collect rentals from their tenants which is then pay out minimum 90% of taxable income as dividend to its shareholders, either quarterly or semi-annually.

If you have not heard about REITs before, then let me give you some examples:
Westgate, Plaza Singapura, Bugis+
Causeway Point, Northpoint City North Wing, Changi City Point
Bugis Junction Tower, Marina Bay Financial Centre, One Raffle Quay
CWT Commodity Hub, Pandan Logistics Hub, DHL Supply Chain Advanced Regional Centre
Mount Elizabert Hospital, Gleneagles Hospital
Crowne Plaza Changi Airport, Mandarin Orchard Singapore 
You could also see a lot of industrial building owned by Ascendas and Mapletree across Singapore, see whether do you recognize the following logo.
 

Now you should have a clearer picture, REITs properties are are all around us. Many REITs have oversea properties as well, which provide geographical diversification. However, this also means that  foreign currency risk is there, currency hedging could not provide protection for long term down trend.
You never thought REIT is so close to you?
While REITs business model is similar to investing in brick and mortar properties for rental, there are some pros and cons that you should consider:

SREITs
Physical Properties
Advantages of SREITs
Affordability
Could invest as low as S$100
Require high initial capital for down payment, legal fee, stamp duty, etc.
Diversification
Multiple properties, some REITs own properties in multiple sectors and countries
Own a few to most a handful of residence or commercial properties. Unlikely to own hospital, hotel, office building or retail mall
Properties Management
Managed by professional
Self-manage
Liquidity
Traded through stock exchange
Buy or sell process take months to process
Transparency
Information available online
Information not always available
Yield
5% to 9% dividend yield, not subjected to income tax
2% to 4% rental yield after minus off interest paid, maintenance fee, property tax, income tax, etc.
Monthly Commitment
No
Monthly mortgage payment
Disadvantages of SREITs
Capital Gain
Modest, as REITs distribute 90% of taxable income and leave only maximum 10% to grow
Potentially higher (do consider costs like interest, taxes, fees when calculate gain)
Properties Control
Decision control is with REITs manager
Full control
Volatility
Price subjected to market volatility 
Stable, unlikely to have big changes in short time
Income Stability
Fluctuate
Stable
Income Frequency
Quarterly or semi-annually
Monthly
Share Dilution
Private placement, preferential offer and rights issue cause share dilution
No

For rental yield of properties, you could refer below detail post by others:
Calculate Rental Yield in Singapore: A Quick and Simple Guide
Your REAL Rental Yield in Singapore is likely ZERO
Considering most purchases of physical properties are leveraged, which means monthly mortgage payments should be added into capital when calculating rental yield. Correct me if I am wrong, the rental yield is maximum at beginning due to lower capital and minimum upon fully paid up.

Some would suggested to invest in Malaysia properties for rental and capital gain. However, profit from property investment is not simply buy price minus sell price. With interest rate of 4.5%++ plus expenses like maintenance fee, taxes, legal fee, stamp duty and others, will your property gain be able to cover all costs? Below snapshot from home loan calculator, adjusted for easier viewing:
RM500k loan cost RM 108k in 5 years and RM 412K in 30 years
Now let's back to why personally I prefer REITs:
i) Low Capital Requirement 
Not all of us are born with silver spoon, nor all of us having extra high monthly income. So it would be normal to take few years to build enough capital for initial payment of one property. With REITs, I could do it with small amount.

ii) Diversification
This actually link to the above low capital requirement. Due to restriction in capital, I could only own a few properties in my life time. Let's say I own 2 investment properties, 1 vacant means 50% occupancy and rental income will drop to 50%. For REIT this would not happen as they own multiple properties and have multiple tenants.

iii) Hassle Free
I am a lazy person and I heard lots of terrible stories about bad tenants. So properties and tenants management by professional is another big plus to me. REITs dividend would also directly bank into my account, on time.

iv) Monthly Commitment
No burden on monthly mortgage payment, I could invest REITs as and when I like. Without commitment, we have the flexibility to quit job that we hate, right? Of course, this is provided we have enough emergency fund and dividend which could cover some of our monthly expenses.

Not a fan of monthly installment commitment burden
Given the advantages above and the fact that I can't really afford property investment, I will go for REITs. However, I might be missing out important points for property investment, I believe there are still many peoples who have earned a fortune from property investment. Just make sure you have done detail research and calculation before you dive into it.

20 comments:

  1. Replies
    1. Hi, read through your blog that you holding 66% REITs in your portfolio. You are very impressive to manage business and invest in the same time.

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  2. Replies
    1. Hi Justin, thanks, next post would write up on how to start investing in REITs

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  3. Good comparison between reits and private property!

    ReplyDelete
    Replies
    1. My view is biased towards REITs. Your comparison on rsp and vap is insightful too

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  4. I'm a big fan of reits myself too but one has to be wary of rights call which requires cash when it comes to reits, also need to be strategically implemented.

    ReplyDelete
    Replies
    1. Yeap, always keep warchest aside. Seen your strategy is always apply for excess.

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  5. Nice post, I m big fan for Reits as well.. Cheers 🎊🎊🎉🎉 :D

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    Replies
    1. 🎊🎉, REITs are must have in Income Investor Portfolio.

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  6. REIT supporter here as well. Another advantage of REIT is that it is liquid asset unlike physical property. However for some people, they still like tangible investment. I argued with my friends that REITs have tangible assets as well but I guess it takes time for people to change their mentality.

    Just like using margin of buy shares is no no, but taking on a loan to buy property is fine. Though both are borrowing money for investment, the former is seen as more risky and frowned upon.

    ReplyDelete
    Replies
    1. Your fren would say that you cant sleep in REIT tangible asset. Lol

      I have a friend whose property price double within 5 years. I think it is more market timing and luck but he is convinced that it is the way,and he too disagree with REIT, told me is risky.

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  7. You can shop in a REIT tangible asset! Haha.

    Anyway I seriously do not care what they invest on but they asked for my opinion thus I gave them an alternative to property purchase.

    For a property to double in price in 5 years is incredible. If he bought it during the 2008 GFC, it's highly possible. But if anyone bought into CMT then, the price would have more than doubled as well. Just saying.

    ReplyDelete
    Replies
    1. Can sleep in hospitality REIT tangible asset also.
      Yeap, my friend bought around that period, but he haven't calculate all other costs. It is common for people to consider property gain = buy price - sell price without other costs.

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  8. Great post. REITs are really passive and a good way to minimise losses from Dividends collected.

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    Replies
    1. Slow but steady, require lot of patience and discipline.

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  9. Hi Vince
    Can you comment more about buying reits in Malaysia as compared to SG ? What are the things we should look out for ? I can't find any good articles out there. Thanks

    ReplyDelete
    Replies
    1. I not so sure about Malaysia REIT, but given last year price drop, the ttm dividend yield look good now. Regarding what to look out for, I would slowly share out my view in my blog. 

      You could try search in following website:
      1) Seedly
      2) DollarsAndSense
      3) MoneySmart
      4) Investment Moat
      5) The Fifth Person
      All of them provide good articles on REITs

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