REITS stands for Real Estate Investment Trust. They are listed securities traded on stock exchanges like Bursa Malaysia and the Singapore Stock Exchange (SGX), allowing investors allow individuals to invest in large-scale, income-producing real estate.
Rents collected from tenants are distributed on a regular basis to provide stable yields to Investors or Unitholders.
REITs are generally low-risk but offer stable dividend yields, making them perfect for beginners in trading. Average dividend yield for REITs is 6% so far.
Compared to physical property, REITS are regarded as a better alternative to buying physical properties as it is a lot more convenient and liquid compared to having exposure in real estate.
Let’s delve further into 8 differences of REITS and physical properties, so that you can make better judgement and decisions on which one is more suitable investment vehicle for you.
1) Upfront Capital
Average cost per unit of REITS listed on Bursa Malaysia is about RM1+ per share. As the minimum units per transaction is 100, your startup capital for REITs investment could be as low as RM100.
For purchase of a medium cost apartment priced at RM150,000, you would need about RN22,500 capital upfront for the first purchase.
You can fund your physical properties purchases using mortgages (Other people’s money). Normally investors do not borrow to invest in REITs. Sophisticated investors may use margin facility for REITS investment, however the case is quite rare.
Investors can be ‘creative’ when it comes to physical properties, as they can invest individually, jointly or corporately. As for REITs, you own shares of a public company. REITs consists of thousands of shareholders who jointly co-own the portfolio of properties.
As an individual investor, you can invest in physical property that is close to you for convenient management.
Whereas, you can invest in REITS locally and/or globally. REITs listed on the SGX allows you to earn income from properties worldwide, such as Asia-Pacific, North America, and Europe.
Imagine having brands like Starbucks, Uniqlo, BMW, Nestle, etc, as tenants of properties in your REIT portfolio. Essentially you are earning passive income regularly from rents and leases paid by high-quality tenants to REITS. Best part is, you don’t have to manage the property and tenants.
For property investment, you own the whole property and you will need to find ways to generate income from it by renting it out. Management work will be involved to increase your investment ROI.
6) Income Tax
Income distribution from Malaysia REITS is paid out to investors after netting off 10% withholding tax if you are an individual investor.
You do not need to file and declare the income derived from Malaysian REITs.
However, for rental income derived from properties you rented out, you are obliged to declare them in your income tax filing, and your tax payable is calculated based on your income tax bracket.
Of course, there are a number of tax benefits for real estate investors to help reduce the total income tax payment, depending on the ownership structure of the property, be it individual, joint-ownership, or under a corporation.
7) Disposal Gains
Capital gains you get from selling off REITS is tax free. In contrast, capital gains from the disposal of properties would be subjected to Real Property Gains Tax (RPGT).
The shorter your holding period for the property, the higher the RPGT you will incur for your profits for selling your property.
8) Debt Service Ratio
Income derived from property investment is recognized by bankers as a valid source of income. This will allow you to be eligible for higher loan amount.
Income distribution from REITs will not change your debt service ratio figure from banker’s point of view. It is more likely to be proof of funds for to support the loan application for property investment.
Which of the two should I invest?
Physical properties can be handsomely profitable if you are buying it at a huge discount today and have long-term capital appreciation in the future.
However, buying a property may result in negative cash flow.
You can take advantage of REITs regular income distributions to partially offset the negative cash outflow, so as to boost your holding power for physical properties.
Thus, both REITs and physical properties are complementary when it comes to wealth building.
Be smart by allocating your investment fund to reap maximum ROI from property investment.