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REITs vs Property

reit vs propertyIn Singapore, it is often reckoned that you can’t go wrong investing in property given our scarcity of land and prosperous economy.

Moreover, many of us, I am sure, have heard numerous stories about ballooning property values that further fuels a belief that investing in real estate is the way to go.

Investors who wish to get some real estate exposure in their portfolios can buy into a real estate investment trust (REIT) or a tangible property. Both options have their pros and cons. Here are some of them.

Advantages of REITs compared to Real Estate

  • Diversification: Most people are not going to be able to branch out much further than a single family home and a small multi-family home. However, you can easily invest in a diverse pool of properties through different types of REITs. For example, SoilBuild Business Space REIT (SGX: SV3U) operates a combination of business parks and industrial buildings while Fraser Centrepoint Trust (SGX: J69U) owns shopping malls.
  • Low Starting Cost: It doesn’t take much money to get started in REIT investing as compared to spending years scraping together a down payment for a property.  If you have some small savings lying around, you can easily invest in a shopping mall you visit often such as SuntecREIT (SGX: T82U).
  • Liquidity: REITs are listed on the stock exchange which means that you can buy and sell them throughout the trading day. It is easier to buy and sell a REIT than it is to buy and sell a property.
  • Professional Management: Other than occasionally checking on your investment, no substantial maintenance or effort is required to hold a REIT. REITs allow investors the opportunity to have their properties managed by a professional real estate team.
  • Transparency and Flexibility: You may not know the true market price of your property as it is subjected to many factors – location, surrounding amenities etc. In contrast, information of the REITs is easily accessible due to their public listed status. Moreover, REITs in Singapore are required to distribute at least 90% of taxable income each year to enjoy tax exempt status by IRAS (subject to certain conditions) – making them good income investment vehicles.

Advantages of Property Investing compared to REITs

  • Ownership Control: Owning a property is like having a business under your name – you get to call the shots. Want to spruce up your property as an excuse to raise the rent? No problem.  You get the idea.
  • Tax advantages: There are a myriad of tax advantages to direct property ownership that are not available to REIT investors, such as being able to write off depreciation and costs related to property management.
  • Leverage: The biggest advantage of investment property over REITs is probably the leverage on the capital invested. With $100,000 to invest and an 80 percent mortgage, an investor can buy a property worth $500,000; significantly increasing your net worth as your equity in the property builds up over the long run.

Foolish Bottom-Line

In my opinion, REITs are a good way to get started if you have just started working and wish to avoid all the hassle in owning a property. On the other hand, investing in properties can be a part of a long term retirement plan as they are inflation-proof (rental rates increase in tandem with inflation).

Nevertheless, while REIT and property prices have some contrasting benefits, they are both underpinned by the same asset class – Real Estate. It is imperative to consider your own circumstances and risks involved as you arrive at the decision on which investment alternative is more suitable.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.   Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.