In a previous relationship, the one thing I dreaded the most was going shopping. We would go from shop to shop, and she would keep trying on clothes that she never intended to buy. It was frustrating, it was tiring, and most of all, I felt really bad for the shop’s staff. They were probably not paid very well, with the bulk of their earnings depending on sales commissions. How different that experience is compared to being a landlord!
Landlords earn money consistently from rental fees, and their earnings don’t depend on how well a shop does. But being a landlord requires a lot of money in initial capital. After all, you have to buy the commercial space and even with commercial loans, not everyone can afford to go down that route. So what happens if you want to be a landlord but can’t afford to be? Introducing Real Estate Investment Trusts, better known as REITs:
Why invest in REITs?
REITs are required to redistribute at least 90% of their taxable income each year. As a result, many REITs provide some form of recurring income to investors via high-yield dividends.
Dividends are typically issued on a quarterly or semi-annually basis. REIT yields are typically between 5% to 7%.
To illustrate better what this means, let’s take the case of CapitaMall Trust, which oversees 16 properties including Plaza Singapura, Raffles City and Bugis Junction. A share currently costs $2.130 and their quarterly dividends over the past year have been between $0.027 and $0.030 per share, for a total of $0.113 over the past year, for a yield slightly above 5%.
Ideally, that means that investing in a REIT will ensure you have a steady recurring income throughout the year. What’s more, because of how affordable REITs are, they are definitely ideal for the beginner investor who may not have that much cash on hand to invest. That said, because of the high commission rates charged by brokerage companies, one should at least be able to commit $10,000 before considering investing in REITs.
What are the risks involved in REITs?
REITs are typically low risk investments, but a lot depends on market forces. As with shares, there’s no guarantee that you will be able to sell your units at a higher price than what you bought them for.
Also, because of the nature of the various property markets, some REITs might be more resilient to changes in the economy and some might be less so. The current industrial property market, for example, might see a drop in rental prices in order to retain as many tenants as they can in a slower economy. This will probably lead to a drop in income, and dividends may not be paid out if the REIT reports an operating loss.
Is now a good time to invest in REITs?
The good news is that there’s never a bad time to invest in REITs. Even with the slower Singapore economy, the key is finding one that is well-managed and is able to ensure a consistent stream of income. Don’t just go for those with higher reported yields, but take the time to read the REIT’s prospectus and see if it fits with your risk appetite and how long you intend to remain invested.
Want to know more about investing? Start your journey at our Learning Centre.
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