REITs – Here’s why you should invest in them

Real estate has always been a popular vehicle of investment, well known for its extremely resilient nature. However, people generally are put off by the high prices of acquiring a real estate asset. The benefits of investing in real estate are often a key factor for first-time homeowners; however, the high down payments can be a daunting task to climb. Simultaneously, the same holds true for those seeking to own a rental property as a consistent income stream. Nevertheless, there’s another way to start investing in real estate with much less money – REITs.

A REIT, also known as a Real Estate Investment Trust, is a special type of investment that has aspects of both a regular stock and a real estate investment. This unique investment class offers a wide array of opportunity to earn great returns from the real estate market with minimal commitment of money on your finances.

Start With a Low Commitment

Unlike an investment property, you can begin purchasing shares of REITs with very low financial commitments. REITs are generally publicly traded just like a regular stock, hence you can buy the shares of a REIT with your brokerage account at any major brokerage.

Take the REIT called Lippo Malls Indo Retail Trust (LMIRT) for instance which trades on the Singapore Exchange (SGX) market. Shares of LMIRT currently, at time of writing, go for around $0.210 per share. You could buy a minimum of 1 lot which includes 1000 shares for the current market rate plus any required brokerage commission, totalling around merely $210. Compare this price to directly investing in real estate which typically requires tens of thousands of dollars to get started, if not hundreds of thousands. Of course, you could put just as much into REITs as you do into physical properties, but however it is important to note that there are more benefits that REITs offer outside of the low-cost entry point.

Don’t Worry About Any Property Problems

If you invest directly in a rental property, then the onus is definitely on you to collect rent, deal with problem tenants, and solve other issues that arise. Of course, you can hire an outsourced property manager for your properties, but that is going to chalk up quite a bit of costs.

On the other hand, with a REIT, you don’t have to worry about ever dealing with a tenant. Landlords are required by the government and local laws to perform a certain level of maintenance. More importantly, some maintenance needs to happen right away to prevent further damage. Furthermore, the profit-driven nature of REITs will definitely ensure high levels of tenant occupancy rates as well as property maintenance levels. As a REIT investor, you don’t have to deal with any repairs or lease management issues. Some REITs which are excellent in this aspect including Manulife US REIT, Keppel DC REIT and Capitaland Commercial Trust.

Instant Diversification: Risk Mitigation

One of the biggest ways real estate investors fail is by underestimating property maintenance, construction, or repair costs. For example, if you were to own five properties and one had a major repair, it could ruin your investment return for the entire portfolio. A $5,000 repair is not a big deal in a large housing portfolio, but if you only own a property or two, that can wipe out your profits.

Similarly, when we talk about diversification, we are talking about diversifying risks within a portfolio. Just as how hedge funds diversify their assets within their funds ranging from stocks to bonds, REITs offer the same benefits as well. Besides owning several properties, the industry that the assets are in a REIT may differ as well (such as Soilbuild REIT where there is a mix of office and industrial properties). However, in a REIT that owns hundreds or thousands of properties, an expense here and there is no big deal and won’t wipe out profits generated by other units.

Get a Cut of Real Estate Profits Through Dividends

From what you’ve read so far, a REIT may seem just like a regular stock on the stock market. That may be accurate to some extent; however, there are some specific rules around REITs that make them more attractive than typical stocks – dividends.

The biggest strength of investing in REITs is a rule that requires REITs to distribute at least 90 percent of taxable income to shareholders as dividends. While some stocks pay no dividend at all, a profitable REIT always pays a dividend. For example, Manulife US could pay a dividend of 1.51 US cents distribution per unit (DPU), whereas IREIT Global can pay $1.55 DPU.

As Easy as Buying a Stock

Now, you know what makes an REIT unique, but how you buy in is super simple. Unlike buying a property that often requires a high amount of money and input from real estate agents, lawyers, and accountants, buying an REIT is as simple as buying a stock. Just get on SGX and start trading!

If you have cash sitting in your account, you can invest on your phone in a matter of minutes. REIT investing comes with the same risks as the stock market, but far fewer risks than direct property investing. With opportunities to earn a big return with none of the work of direct investing, buying a REIT is the best and most convenient way to make your first real estate investment!

Clive Chng

Clive Chng

Clive graduated on the Dean’s list from Nanyang Technological University with an Engineering degree. Prior to joining Redbrick, he not only served as a Project Manager for Keppel Shipyard where he oversaw multi-million dollar marine projects, but was also the Vice President for Keppel Young Leaders, focused on the development of future leaders. Being a fan of low-cost Index Funds, his passion in Investing and strong interest in understanding how financial markets shape economies ultimately fuelled his move from the field of engineering into the financial industry where his personality trait as a servant leader further allows him to service his clients effectively.
Clive Chng