The Motley Fool

5 Reasons to Invest in REITs Over Individual Properties

Singaporeans love investing in property — and for good reason, too. Investors who bought property in Singapore have been healthily rewarded. According to data.gov.sg, the private residential property price index has risen 16-fold since 1975. It is, therefore, no surprise to see that investors have also acquired a fondness for investing in real estate investment trusts (REITs) since their debut in Singapore in 2002. 

However, what makes for a better investment: REITs or individual property? Here are five reasons I prefer investing in REITs.

No. 1: Tax benefits

REITs enjoy tax benefits over regular companies. On top of that, Singapore does not tax the dividends received through REITs.

On the other hand, rental income earned from individual properties is taxed based on your individual income bracket.

No. 2: Diversification

REITs invest in a portfolio of multiple properties. As such, investors who buy into a single REIT are already highly diversified. Because of the relatively lower cost to entry, investors can also diversify their portfolios by buying units in multiple REITs.

On the other hand, because of the high initial outlay, except for a handful of high-net-worth individuals, investors who purchase their own property would not have the means to diversify across multiple properties.

No. 3: Exposure to unique property types

REITs invest in a wide array of property types. For instance, REITs in Singapore offer exposure to data centres, shopping centres, hospitals, and office properties, to name a few. However, if you are looking to buy an individual property, it’s unlikely you’ll be able to gain exposure to the wide array of real estate sub-types.

No. 4: Professional management

REITs are professionally managed by a dedicated REIT manager, who help to manage the property, look for yield-accretive acquisitions, and manage the REIT’s capital structure. 

On the other hand, investors of individual properties need to either look for a real estate agent to manage their property or manage their property on their own.

No. 5: Low minimum capital outlay 

Lastly, REITs are much more accessible for retail investors who have not built up a huge war chest yet. REITs are sold in lots of 100 units. In theory, investors only need a few hundred dollars to start investing in REITs, but because of the minimum brokerage fee per transaction, it may be more prudent to invest at least $1,000 or more per transaction. However, this is still much lower than the minimum cost outlay to invest in property in Singapore.

In Singapore, the maximum loan-to-value ratio was recently increased to 75%. As such, investors will need to shell out at least a 25% down payment on a property in Singapore. Even for a small property in Singapore, the minimum downpayment is usually at least six digits.

The Foolish bottom line

While there are some benefits to investing in your own property, such as greater control and access to higher leverage, I believe for the retail investor, the pros of investing in REITs far outweigh the advantages of investing in your own property.

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