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REITs: Are They The Only Thing You Need?

“Properties are the best investments in Singapore” – Almost any other person

It is true… To a certain extent. Since Singapore is land scarce, property prices generally goes in an upward trend. Rental fees are always on the rise, just look at all the poor hawkers that had to move due to high rental rates.

“Ya lah, so properties are the way to go. Good and secure, good money from rental. Invest in it won’t be wrong. So why am I reading this sia?” – Probably you right now

Yes, IF you invest in a property that has a decent location, generally you can make money off it. That’s why many people look to REITs to fund their retirement.

Real Estate Investment Trust (REITs), it grants you the ability to own a basket of properties and be eligible to earn rental income. IF you buy into the right sector, you can get a decent percentage yield as a passive income.

BUT

Is it the only investment you need? Not necessarily…

There are a hundred and one articles out there to tell you how to get started on REITs and what to look out for (like these).

This article is not about those, we will be trying to understand the importance of having an diverse investments. Not just REITs alone.

Advantages of REITs

  1. Rental income is almost guaranteed
  2. Invest with less
  3. Liquidity

Rental income

Singapore government dictates that 90% of the property profits is to be given out as dividends to the unit holders. Hence, as long as the properties in the portfolio are making money, you more or less will be guaranteed returns for your investments.

Invest with less

Buying property is expensive as a lone investor, not a lot of us have that much cash on hand to put into buying a property. So REITs gives us the opportunity to own a basket of properties and be a property owner.

Liquidity

REITs are definitely more liquid than if you were to own a property yourself. It is like a share where you can choose to buy sell or hold. Hence it is a popular choice for many who want to go into property investing.

Disadvantages of REITs

  1. Rental income
  2. Slow growth
  3. Last payouts

Rental Income

Yes, the thing that is an advantage is also a disadvantage. The government has ordered that 90% of profits, to be given out to unit holders. What if the REITs declare losses over the period? There goes your dividends~

Slow growth

Also, because of the dividend rule, there is little leftover for the REIT to use to grow. Hence, this results in a slower growth for the REITs. If the properties under REITs are being funded by debts, it may affect the distributions to the unit holders, i.e. yourself.

Last payouts

During an unfortunate case where the REIT winds up, unit holders will be the last group to receive payouts… If any. Therefore, during a market downturn and if the REIT has to close down, you have tobe prepared to receive no repayments. Even if there is, it will be minimal since most of it are paid to creditors not you.

“The yield still very attractive leh, I think it outweighs the disadvantages”

No doubt, with the attractive percentage yield, it looks stable and looks to be a good investment. But think about it, during an economic downturn, the inability to keep more than 90% of profits will result in the managers having to issue more bonds or securities. Thus, increasing the debt. As a unit holder, you will be subjected to decreased yield. The decreased yield causes investors to lose confidence and start to sell their units, further decreasing the unit price of the REIT. The reduced equity from investors will cause the REIT to seek more debt options…

You get the picture.

This is not to say that REITs are bad investments. No. REITs are still a good investment and is recommended to be part of your investment portfolio. But, to put ALL your available investment funds into it is a BAD IDEA.

Other plans such as annuity, endowments and unit trusts are able to safeguard your money better in times of economic downturn. It is like a soccer team, you will need defenders, mid-fielders and strikers to reach your financial goal.

Don’t you want to build a winning team? Of course you do!

Not one portfolio will suit everyone though. You will have to analyse your own risk appetite, your current financial capabilities and study each financial product in-depth to understand how it will benefit you.

You have time for that meh?

Do you really want to spend your precious time after work to research on the different financial product? You really want to read through pages of terms and conditions to find out if the plan has any hidden clauses? Do you have the finance knowledge to evaluate the yield, the P/E, ROE etc.?

If you do have the time then I sincerely congratulate you. But most of us would rather spend time with friends and family, relax and just have our “me time”.

So how? I want to build a good “team” but I also want to have time for myself.

Well, if you have any financial advisor friends, it’s time to call them up! They are not there to push products to you (if they do then you run!). No, they are there to help you plan your finances, hence the name. They are well versed with the terms and conditions, they know the product inside and out.

Your financial advisor friend will be proficient in assessing your current financial capabilities and help you build your “team”.

So what are you waiting for? Contact your financial advisor friend now!

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