Invest 101 - Reits vs Property Investment

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How Property Investment works (Malaysia)?
  • Buy the property. Then either hold for rental income or sell for capital gain.
  • Type of property investment can be anything but most popular are Shop-lot or Resident Type Property.
  • Major income source of Property investment, Buy low Sell High, or Rental Income (positive cashflow)
  • Rental incomes are subject to Income Tax. Capital Gain from Selling properties will be impose with Real Property Gains Tax (RPGT).

How REITS works (Malaysia)?
  • Real Estate Investment Trust is company that own, manage and operate income-generating real estate.
  • Type of reits are various, can be Office, Factory, Shopping Mall, Hotel, or even Hospital.
  • Major income source of REITS will be the $ received from operate the real estate. Example : Rental income, or Car park fees.
  • Listed in Stock Exchange (e.g. KLSE) and can trade like normal Stock Counter.
  • REITS company are exempted from annual tax assessment if they distribute 90% of the year income to unitholder.
  • Dividend received by unit holder will be deducted 10% for Withholding Tax.

Comparison
  1. Starting Cost:
    2. Property : High Starting Cost, to buy 400k house, you need around 50k (deposit + lawyer Fees)
    REITS : Low starting cost, to buy 100 unit IGBReit (let say RM 2), is only RM 200+
  2. Cashflow Effect :
    3. Property : Hard to achieve positive cashflow now due to high property price.
    REITS : Dividend as Positive cashflow.
  3. Interest :
    4. Property : Need paid Bank Loan Interest unless you buy with cash.
    REITS : Reit give you dividend.
  4. Recurring Cost :
    5. Property : Required Maintenance Cost to repair your property.
    REITS : REITS manager will get fees from REITS Income.
  5. Liquidity :
    6. Property : Not Liquid, hard to sell. Required legal procedure to release.
    REITS : More liquid than property, just like normal share. If any long-term fundamental issues happen to reit, I can cut loss easier than property.
  6. Effort to maintain :
    7. Property : You need time to entertain your tenant or maintain your property.
    REITS : Reit is maintain by a group of manager. Of course, they entitle for management fees (Reit Manager Fees sometime is a concern for us to select good reit.)
  7. Opportunity to get undervalue :
    8. Property : Lesser opportunity. Good properties are expansive and price seldom drop.
    REITS : Good REITs are expansive, but undervalue may happen when Panic Sell occur.

Scenario Compare : 
Property Investment:

Let say I buy a 400k house, I paid 50k deposit, and every month paid 1.5k instalment(only 300 is principal, 1.2 k serving the bank loan interest). If condominium unit, I need paid maintenance fees around RM 200 and my rental income only RM1200.

Positive Cashflow = rental income – Bank interest server – Maintenance fees 
 = 1200 – 1200 – 200 = - 200.
Overall, every month I still lost RM 200.

Property Investment:

With 50k cash, I can buy 33k unit IGB Reit (let say rm 1.5 per unit) At year 2018, IGB Resit declare 9 cent dividend per share.
33,000 unit * 9cent = RM 2970.
RM 2970 / RM 50000 = 5.9% dividend get.
Overall, IGB Reit give me 2970/12 = RM 247.5 positive cash flow per month.

Blind Spot of Property Investment vs REITS Investment :

Let say 2020, the property i bought in previous scenario raise to RM 550k, then after sold my capital gain will be RM 100k (deduct fees & tax).
My Cost are only 50k Deposit, but return are 100% (RM 100k). Is that mean better than Reits?
Answer is No.
Scenario like this is actually a Blind Spot when we compare Property vs REITS Investment.
Please don't forget that you paid RM 50k Deposit then Borrow RM 350k from Bank. (This is a 7x Levarage)
For Reits, Reits also can have Capital Gain as Share Price Rise.
We can also Leverage by using Margin Finance to increase the Dividend received. Personally, I don't encourage that.
Because Reit is a Long term Investment that rely on Holding Power. If you hit Margin call, you will easily join the panic sell party.

Summary :

There is not right or wrong in choosing Property or Reits investment. For me, i did owned a property for investment as well.(To utilize my LOAN portion)
Both required a lot of Research and Study in order to success. Just like buy a property, we need to look on multiple criteria, Location, Price, high density and etc.
REITS also the same, just the criteria slightly different.


Disclaimer : This post is for record and research Purpose. Not Buy and Sell Advice. Please do own study before making any purchase decision.

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