REIT is an acronym for Real Estate Investment Trust. REITs are established to invest and hold commercial real estate for the purposes of deriving rental income for the long-term.
They are listed securities that are traded on stock exchanges like Bursa Malaysia and the SGX.
You buy units of your preferred REITs and receive a regular payout known as income distribution, generated by netting off property-related expenses from the REIT’s rental income.
It is widely regarded as a better alternative to buying property as it is more convenient and liquid than real estate.
Are REITs a better investment than property?
Here are eight differences between them so that you can decide which is more suitable for you.
REITs require less capital and are a lot more affordable than property. Most REITs listed on Bursa Malaysia are priced at around RM1+.
Given that the minimum number of units per transaction is 100, the minimum capital needed to invest in a REIT can be as low as RM100.
A lower-priced medium-cost apartment priced at RM150,000 requires capital of around RM22,500, thus it is less affordable than a REIT.
There is little borrowing, if any, undertaken by investors in buying REITs. Investors in a REIT will leverage on the REIT’s financial strength.
They will expand their portfolio by acquiring brand new commercial properties in the future.
For property investors, borrowing is necessary as you will fund your purchase via a mortgage.
Units of REITs are acquired, owned, and disposed off individually. Property can be invested individually or jointly or under a corporate entity.
Properties can be co-owned with your spouse, family members, relatives, friends and also your business or investment partners.
As Malaysians it is easy to start investing in property in Malaysia, but REITs allow you to buy property anywhere with the click of a button.
If the REIT is listed on the SGX it is even better as SGX-listed REITs are a gateway to buy properties worldwide.
Imagine having brands like Starbucks, Uniqlo, BMW and Nestle as tenants in properties in your REIT portfolio.
You are earning regular passive income from the rent paid by these high-quality tenants. The best part is you do not have to manage the properties or their tenants.
That is not the case for property as it is dependent on how you opt to generate income.
This includes long-term rental, short-term accommodation, room rental or AirBnB. The shorter the stay, the more work is needed in managing your property.
You may potentially earn more income from AirBnB, but do you have the time and energy to run your unit successfully?
6. Income tax
Income distribution from Malaysian REITs are paid out to investors after netting off 10% withholding tax, if you are an individual investor.
You don’t need to file or declare your income from Malaysian REITs. Thus, if you are already in a high income tax bracket, you will be free from income tax.
The same cannot be applied to rental income from property as you are obliged to declare it in your income tax filing.
7. Disposal gains
If you buy a REIT for RM1.00 in January this year and sell it at RM1.20, the capital gain of RM 0.20 is tax-free.
This is not the case for real estate as capital gains from the disposal of properties are subject to RPGT (Real Property Gains Tax).
The rate of RPGT is subject to the actual property holding period before its disposal. The shorter your holding period, the higher the RPGT you will incur.
8. Debt Service Ratio (DSR)
DSR calculation is important to determine if you are still eligible to apply for a loan from the bank. A bank may disburse loans to an individual up to 60% of his monthly income, capping his DSR at 60%.
This is to ensure that you have the means to repay or service your debt.
Banks recognise rental income from renting out property as a valid source of income, enabling you to obtain a much higher loan.
However, income from REITs is less emphasized by local bankers as it will not change your DSR calculation.
Which should you invest in?
Start with a REIT if you cannot afford to buy property. Instead of parking all your savings in a fixed deposit, opt to accumulate REITs as a means to save up to buy property.
As you accumulate REITs on a progressive basis, concurrently build your cash reserves and credit profile.
Read books on real estate investing, sign up for a good property workshop and shop around for property.
Property can pay off handsomely if you buy at a huge discount as a long-term capital appreciation, but can also be negative cash flow.
Hence, REITs are a means to earn regular income to partially offset this negative cash outflow and boost the holding power of your property.
REITs and property are thus complementary when it comes to wealth building.
This article first appeared in kclau.com
Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia.