Saturday, 1 April 2017

Why I prefer investing in REITs compared to investing directly in property

[It's 3am in the morning and here I am typing away. Thinking about it, I'm really starting to enjoy blogging now, to be able to consolidate my thoughts and to present it in a logical fashion does provide a decent amount of satisfaction 😆] Alright, I'll not carry on and on about this, so here's what I actually want to talk about, REITs:

(i drew this XD)⁠

1. Liquidity

This is probably the main reason why I'm leaning towards REITs. This is also the beauty of the share market in general. If you wake up in the morning feeling like you need some funds for other purposes, you can always simply sell with the click of a button! (Or a few buttons). There are always buyers on the market daily. Of course you may want to find a "better day to sell" as any stock on the stock market does fluctuate a wee bit on a daily basis even though the fundamentals of the company in question may not have changed one bit.

You can't do this when it comes to properties, more often than not, a significant waiting time is involved, whether or not you are buying or selling a property. Listing it on a property-for-sale webpage; recruiting a property agent's help; showing the property to potential buyers who may not even be truly interested is all part of the package as well.

2. The ability to buy and sell off a portion of what you have

You can also sell a portion of your holdings (of course this is limited by the rule that the minimum trading amount is one lot.) which is still fair in my opinion, especially since a hundred shares now constitutes a single lot whereas in the past, one thousand shares constitutes a single lot.

(What's still unreasonable is the minimum commission amount, which I will not be going into in this post, as it's not the point here.)

On the other hand you can't do this with a property, how are you going to divide up a house overnight and put it up for sale? Well unless if you're telling me you own thousands of properties, then this may not apply to you 😁. Furthermore, investors with tight finances, such as students (including myself) are not able to afford buying an entire property directly, and taking a loan to do so is out of the question as well (this point slightly overlaps with my economies of scale points).

3. Economies of scale

Let's be honest, if we, the common folk are interested in say industrial properties or healthcare properties, what are the chances that we can afford it? Do we have the funds to buy a hospital like how Billionaire Mr. Lim bought Thomson Medical? We probably do not.

But by pooling funds together, which is essentially what a REIT does, managers of the REIT are able to buy such properties! This also brings me to my point that aside from having greater bargaining power and economies of scale, us as investors, are also able to select from various types of property trusts that suits your palate! To name a few, we have; Healthcare, Industrials, Retail etc.

This essentially allows us to diversify the little amount of money we have as well. By buying various REIT shares, we are arguably “less at risk” of price fluctuations than if we were to own a single property.

4. Convenience

Owning a property can be a hassle. Or rather collecting rent is. What if the tenant is being uncooperative? Sure, there are legal means of settling the issue, but I’m trying to point out that it is going to be a huge headache and a waste of time. Furthermore, if the tenant for some reason is only able to make cash payment, you’ve got to make a trip down to collect your rent! You also have the issue of them haggling for rent (at before a contract commences that is). 

With REITs all these issues are avoided, or rather managed by someone else, or a team that’s actually professional. All you’ve got to do is sit back and wait for the dividend payouts, which goes directly to your bank account.

Not a free ride

I would like to add in this point in time, that Investing in REITs isn’t a bed of roses though, and there are some downsides: management fees (though generally you can be assured that 90% of the REITs income is distributed as it grants the REIT tax incentives), lack of control and lack of rights (unless you hold a substantial proportion of shares), volatility (just like other stocks on the market, although the prices of REITs are generally less volatile). Just like other stocks, monitoring prices from time to time, reading their financial reports, looking out for any updates/announcements would do good as well.

Although I do already own shares (albeit small parcels) in some listed REITs, there are some which I plan to increase my holdings in, and also a couple of others which I will be talking about in a separate post. (I will be talking about these in a separate post, so stay tuned!)

Till next time!

Best Regards, 

A 😁

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