Differences Between Investing in REITs and Actual Properties

Decades ago, investors who wanted to invest in real estate had only one option – to buy and manage their own property. However, with the introduction of real estate investment trusts (REITs) in 2002, investors in Singapore now have a new option available.

Both investing options have their own set of pros and cons. Here are some of the key differences.

Owning your own property

Singaporeans typically prefer investing in real estate to any other asset class. This is especially so for those born in the 60s and 70s. But in recent years, property prices have risen to astronomical levels making them more inaccessible to new investors. Furthermore, the government has put in place property cooling measures that have led to even greater barriers for investors looking to property as an investment.

Furthermore, the government has put in place property cooling measures that have led to even greater barriers for investors looking to property as an investment.

Having said that, there are still upsides to owning your own property.

  • Leverage: This is probably the biggest advantage over other types of investments. Property owners only need to fork out just 20% of the property value, while they get another 80% mortgage to pay off the rest. This means that for $200,000, an investor can buy a $1,000,000 property.
  • Control: A major reason for many investors turning to property as an investment is the flexibility to use the property for personal use if the need arises. They can also choose to modernise or renovate the property as they please.
  • Easier to find bargains: Investors and analysts alike usually scrutinise REITs’ valuations, bringing them closer to market value. Individual property valuations are, however, sometimes inefficient in the market. Savvy investors can, therefore, sometimes find under-priced real estate.

Buying REITs

REITs are investment trusts that own a portfolio of properties. Investors can buy a unit of a REIT as an investment and indirectly own a part of these properties managed by the REIT.

Each REIT is actively managed. Managers look for ways to expand their portfolio and keep occupancy rates high. The profits generated are then distributed to shareholders of the REITs. It is a requirement for REITs to distribute at least 90% of income generated from their property to unit holders.

Here are some of the advantages of owning REITs:

  • Low entry cost: Even with leverage as an option, investing in property usually requires a significant amount of capital. The minimum typical starting amount is well over $100,000 to own a small property in Singapore. However, investors only need a much smaller amount of capital to start investing in REITs.
  • Diversification: REITs typically own a large portfolio of properties making them more diversified than owning a single property. There are also REIT exchange traded funds (ETFs), which track the performance of a variety of REITs.
  • Liquidity: As REITs are traded on the exchange, units can be easily bought and sold.
  • Professionally managed: Investors of REITs need not worry about maintenance, or finding tenants for their investment as this is taken care of by the REIT management team.
  • Transparency: The financial results of a REIT need to be reported each quarter. This gives investors a good idea of how the REIT is performing.

The Foolish bottom line

Both these investments have their pros and cons. As investors, we should invest in the asset that we are most comfortable with and is better suited to help us achieve our investment goals.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.