Investment 101: Getting to know real estate

Welcome back to another instalment of the Investment 101 series where we learn about different investment options, what they are, and how they can help us in our journey to financial security.

So far, we’ve discussed unit trust/mutual funds, bonds, shares, and robo-advisors. Today, we’ll be diving into the interesting world of real estate.

When we think of real estate, we often picture houses, condos, or huge office buildings. We may also wonder, is it possible for small investors to get a piece of that action? The answer is, YES! Continue reading to find out how.

What is it?

Real estate is a popular type of investment. It involves the purchase and rental of residential and/or commercial buildings. For e.g. investors with large capital or access to credit may buy apartment units and rent them out to tenants. Although this can provide consistent passive income for investors, buying property may not be an option for small investors with little capital. Additionally, there is also some element of luck involved here. Sometimes, you may end up with difficult tenants who don’t pay you regularly and/or refuse to move out.


Another alternative to directly investing in real estate is REIT (real estate investment trust). REIT is a type of security that is somewhat similar to unit trust/mutual fund. Funds pool money from many small investors and fund managers use this money to invest in a wide range of assets such as stocks and bonds. Similarly, REIT pools money from many small investors and invests in real estate such as shopping malls, hotels, hospital, etc. As small investors, we may not be able to invest in such real estate projects on our own, but by investing in REIT, we can get a share of a large real estate portfolio.


What is the minimum investment?

REITs are usually traded on the stock market and hence, minimum investment will depend on the current share price. In Malaysia, the minimum number of shares you can purchase is 1 lot or 100 shares, so depending on your REIT of choice, the minimum investment will be current share price x 100.


What are the fees or charges involved?

Since REITs are traded on the stock market, the charges involved are similar to buying shares. You will incur brokerage charges which vary depending on the trading account used and transaction amount. In Malaysia, you also incur stamp duty and clearing fee.

For fellow Malaysians who are interested to invest in stocks, but you’re not sure how to get started, do check out Rakuten Trade. It’s a share trading platform and you can sign up for an account online.


How do you earn return?

As mentioned before, REIT pools money from many small investors and invests in real estate. These properties are then rented out and the rental income received is distributed to investors in the form of dividends. Due to tax incentives, many REITs distribute at least 90% of their taxable income to investors.


What are the main risks involved?

REIT’s underlying asset is real estate. Hence, factors such as recession that make it difficult for tenants to pay their rental regularly could adversely affect returns for investors.

How actively do I need to be involved?

With REIT, you don’t face the hassle of managing and maintaining multiple properties – it’s handled for you. However, do monitor the REIT’s major business decisions (properties sold and purchased), performance (share price, dividend yield) and general market conditions to decide whether to hold on to the REIT or switch to another. For example, hotel REITs may not be great performers for a while due to the pandemic. You’ll need to decide whether to ride out this challenging time or switch to another REIT that focuses on a different property type.

Pros

Investing in real estate can provide good returns in the form of capital appreciation and rental income. With REIT, small investors can also add real estate to their investment portfolio and enjoy its benefits.

Cons

Many individual REITs focus on a specific property type and aren’t very diversified. This leaves them rather vulnerable to changing market conditions. For example, hotel REITs and mall REITs may not be great performers during times of recession.

Who is it suitable for?

Buying properties would be suitable for those with large capital. However, if you want a piece of the real estate action without the hefty price tag, maintenance costs, and possible tenancy issues, REIT is a good option for you.

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For Malaysians interested in learning more about the REITs available to you, click here. There are a variety of REITs to choose from. Some are more specialised (for e.g. Al-Aqar Healthcare REIT that manages hospitals and medical centres) while others are a little more diversified (for e.g. Sunway REIT that manages hotels, malls, office buildings, a college and medical centre).

Have a look at the REITs available to you and check out their portfolios and performance over the years before taking your pick.

If you ever find yourself saying, “Real estate investment is for the big guns, not for me,” then think again! REIT offers an affordable way for small investors like us to invest in real estate and diversify our investment portfolios.


I hope you found this article helpful. Next month, I’ll be discussing gold as an investment option, so stay tuned!

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