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REITs vs. Property: Which is the Better Investment?

A common refrain you hear when it comes to buying property is that “you should buy a property if you’re going to live in it”. I don’t think many of us in Singapore would disagree with that statement but when it comes to investing and building up a passive stream of income, is bricks-and-mortar actually better than the other property alternative – real estate investment trusts (REITs)?

For a number of reasons, I would say no. A few months back I had written on why REITs and dividend investing were here to stay given lower interest rates as well as the demand for yield. Here, though, I’ll explain why I think REITs make more sense for those of us who want to invest in property as a means of creating reliable dividend income for the future.

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Tax-free income

In Singapore, dividends paid out by REITs are completely tax-free. That’s right. You pay 0% on all the income you get from REITs, so if you rake in S$10,000 in dividends per year you get to keep every cent.

But say a property you’ve purchased as an investment gives you the equivalent S$10,000 in rental income per year, you would be subject to income tax at the normal rate (minus a few certain deductions for maintenance expenses). In effect, you would be handing over a sizeable chunk of that valuable income stream to the Inland Revenue Authority of Singapore (IRAS).

Falling yields and rents

Additionally, rental yields in Singapore currently are, in my opinion, poor relative to the REIT market. You’re not looking at receiving anything higher than a 3-3.5% yield on a property investment (and remember it’s in fact even lower because of the tax you have to pay).

Adding insult to injury are the falling rents landlords are able to fetch (see below) as a glut in supply of new properties heavily outweighs demand – with completion volumes only expected to peak as far out as 2022.

Singapore rental index Q1 2019

Source: Urban Development Authority (URA) as of Q1 2019

Compare that to the yield a large, reliable Singapore REIT can generate for you, such as Mapletree Industrial Trust (SGX: ME8U) – that has over 100 properties in Singapore and the US – and which is currently yielding 5.4%.

Not only that but REITs offer you the chance to own a piece of multiple properties, that are professionally managed, without the need for a huge outlay of capital that comes with down payments on property. REIT units can be purchased in lots as small as 100 so you can invest as much or as little as you want.

Liquidity

One thing that a lot of investors overlook is the liquidity of an investment; essentially how easy it is to buy or sell what you own. A property is far from easy to purchase or sell in a timely manner. You need to draw up contracts, find a surveyor, most likely secure a housing loan and complete the transaction, all of which added together can take months.

As an investment that’s not ideal. If you own a property and want to sell it (if you need cash in a pinch), it will be far from easy. Meanwhile, by purchasing a REIT you own those units within two business days and selling it is the same – you’ll receive your cash in days and not months.

REITs for long-term income

Overall, if you’re an investor who wants to build up wealth in the long term from property then REITs are the clear answer in the current environment. The multiple advantages the asset class has over the bricks-and-mortar sort as, and I stress this, an investment means that those of us looking to create reliable income streams in the future should look no further than the REIT market.

Want to keep reading on how to lock in those sweet REIT dividends? Our Complete Guide To Buying The Best Singapore REITs dives into what we think you need to know about finding the best REITs that regularly hand you a fat dividend cheque. Click here to download your FREE guide.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Tim Phillips owns shares in Mapletree Industrial Trust. The Motley Fool Singapore has recommended shares of Mapletree Industrial Trust.