Monday, 9 June 2014

Benefits and Risk of Investing in REITs

Today, I decided to compile a simple table to illustrate the benefits and risk of investing in REITs compared to direct property investment.

No.
Direct Property Investment
REITs Investment
1
Large capital required
Low capital required
2
High transaction cost
Low transaction cost
3
Self managed
Professionally managed
4
2% to 4% rental yield
4% to 8% rental yield
5
Illiquid (difficult to sell)
Liquid (easy to sell)
Table 1: Benefits of REITs

No.
Direct Property Investment
REITs Investment
1
Prices are less volatile
Prices are more volatile
2
Income frequency higher
(typically monthly)
Income frequency higher
(typically quarterly/half yearly)
3
Direct control and influence
No direct management control or influence
Table 2: Risk of REITs

Direct property investment is capital intensive. Large amount of cash is required for the down payment and transaction cost (eg stamp duties, legal fees, property tax…etc). Purchasing of property for most would also require a bank loan of easily 70% to 90% of the property prices.

On the other hand, investing in the right REITs can be quite affordable. Yields are also much higher yield, enabling investors to grow their capital in a shorter period of time.

On my journey towards financial freedom, I will need to invest in both! REITs will help me grow my savings sufficiently to afford the down payment of a new property!

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