Thursday, November 5, 2009

Buy a Property or Invest in REITs?



I have always wondered whether it is better for a person without much money or capital to invest in a property or to invest in real estate investment trusts. (Please read here if you have no idea what a real estate investment trust is)

Let's assume that a person has $100,000 in spare cash and is earning a decent salary.

With $100,000 he could pay a 20% downpayment on a $500,000 condo. He could easily rent out this condo for $2500 to $3000 per month. Excluding the estimated $1500 mortgage loan he will have to pay every month, he can potentially receive up to $1500 in rental income if he chooses to buy a property.

He will be getting a decent 18% rental yield based on his intial $100,000 investment. In addition, the rental income is paid monthly compared to a REIT's quarterly or semi-annual distributions. However, to invest in a property, a large amount of capital is needed for the downpayment. You also need to worry about obtaining a bank loan especially if the property is your 2nd property.

With a REIT, he will only be able to manage around 6% to 10% yield. He however needs a much smaller capital. With the REIT, he does not need to worry about tenants, collecting rents and stuff.

He can also diversify his money across various REIT sectors like serviced apartments, retail, industrial, malls and office space. Thus, his returns should be much more stable. He will have less to worry about in a certain sense.

I still believe that investing in property is much more profitable than investing in a REIT. However, REITs provide diversification oppurtunities, are more liquid, and much less cumbersome to manage.

Just my 2 cents

Read Related Articles:
1. Investing in REITs
2. Investing in Rental Property

4 comments:

  1. Hey dude,

    i dont really agree that property is a better investment.

    Let's put aside the question on leverage.Ceteris Paribus.

    Property is highly regulated by singapore government as it is a social good. Government will step in to cool the market. Not for stock market.

    So given this backdrop. i would prefer stock market.

    Cheers...keep up the interesting articles dude..have u found a job?


    SGDividends

    ReplyDelete
  2. i think this is a very good topic.

    probably need to decide which is relatively more undervalued + your earning capabilities(how secured it is) especially if you want to get a loan.


    though given the leverage, if you can afford the loan, it'll be the better option.

    ReplyDelete
  3. seriously,.. really wonder which area can rent for 3000-3500, except central area, and for that matters.. properties in the central area cost at least $1M and above

    ReplyDelete
  4. Heh..Maybe I am wrong. Property investment is not better compared to REITs.

    I guess both have their pros and cons and we should weigh them carefully while considering our own specific situation

    ReplyDelete

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