Real Estate Investment: REITs and/or Physical Property
Different characteristics between investing in REITs and Direct Physical Property
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) are corporations that act like mutual funds. REITs invest in income-producing real estate and distribute it at regular interval to the REIT shareholders. REITs are professionally managed by REIT managers and property managers who charge a fee in exchange for their services. When you invest in REIT, your money is pooled together collectively with other investors in a collective investment scheme that invests in a portfolio of income generating real estate assets such as residential, shopping malls, offices, industrial properties, hotels and serviced apartments. Beside using investors’ money, REITs also borrow from banks to leverage on low-interest mortgage rate. There are a variety of REITs listed on the Singapore Stock Exchange, and you can buy them in the same way as you would buy a stock. REITs shareholders do not have to manage the property on their own, deal with tenancy matters such as negotiating rental with tenant, manage monthly rental income, or chase your tenant for rental payment. Some of the biggest REITs in Singapore include CapitaLand Mall Trust (CMT), Ascendas REIT, Mapletree Commercial Trust.
You must already be familiar with investing directly in physical property such as condominium, office, retail, shophouse, or industrial properties. You need huge capital outlay, and commitment to manage your investment. You can engage a real estate agent to manage it on your behalf at a fee, however you may still physically shop for the right property, engage contractor to touch up and prepare it for leasing out, read and sign paperwork for the sale and purchase, and leasing, ensure maintenance fee and property tax are paid on time, and income tax generated from the rental filed properly.
The attractiveness of investing directly in physical property is the ability to leverage on the low-interest mortgage that multiplies your returns in capital gain and rental yields. Having said that, if you only have that certain amount of money to invest directly in a physical property, you are technically putting all of your eggs in one basket. Not all real estate is created equal, and in challenging times diversification is the savior. Certain types of real estate will perform better than the other, and if you are holding on to the former that’d be great. Otherwise, you may have to leave your property vacant for some time and forced to accept lower rental. This will be frustrating considering you will still have your monthly installment, maintenance fee, and property tax to pay. As physical property is a very illiquid asset, in time when you need urgent cash, you may not be able to liquidate fast, and have to sell lower than market value to pay for your urgency.
I have summarized the difference characteristics between investing in REITs and Direct Physical Property
Small Capital Outlay
No Leverage for Investors
Very High Liquidity
Property managers manage the properties
Huge Capital Outlay
Huge Leverage up to 75%
REITs are ideal for small investors who wish to invest in real estate but do not high capital to buy real property or would like to diversify their real estate investment portfolio from direct physical property investment. REITs investors do enjoy high liquidity as the ownership in the form of shares are traded in the stock market. If you have the capital, effort and commitment, you should also invest in physical property to leverage your capital gain and rental yield from the low-interest mortgage. You can also do combination of both, and if you, I would suggest a 50-50 allocation between the two. As in all types of investment, I believe in value investing and so should you. You shall identify price and value discrepancy; buy at price that is below the value. As there are many methods to identify value, I leave this task to you, the future real estate investor.
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