REITs or Physical Properties – Which One Makes a Better Investment?

November 14, 2017

REITs or Physical Properties – Which One Makes a Better Investment?

By Mr. Propwise

Are physical properties or REITs better investments? I have over a decade of experience investing in the stock market, and also have experience buying and selling multiple properties (in addition to writing a property blog), so in this post I will share my opinion with you.

The Key Difference between Buying Physical Properties and REITs

First, let’s look at the differences between buying physical properties and REITs.

When you buy a property, you lock in your purchase price when you sign on the dotted line. And due to the size of the typical property purchase, most of us will only be able to buy just one at a time, i.e. we only have one “bullet”.

For REITs, you can spread your purchase over a period of time using Dollar Cost Averaging. I liken this to the difference between using a shotgun and a machine gun. With a shotgun you only have one shot, but you can do more damage with that shot. You can spray lots of bullets with a machine gun, but you might not achieve the same effect as the shotgun. Which one is better? Well, depends on whether you hit the target!

Is Diversification a Good Thing?

Some financial advisors tout the benefits of diversification when investing in REITs, which you can’t do when investing in properties (unless you invest via property sharing agreements with other investors). Via a single REIT, you can invest in multiple properties in a single sector (e.g. 100+ industrial properties through Ascendas REIT), or in properties across many sectors through diversified REITs. You can also invest in a portfolio of REITs or in a REIT index to get even greater diversification across sectors and geographies.

Is diversification a good thing? Ask Warren Buffett, who said: “Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing.” I particularly like how he described his US$26 billion investment in Burlington Northern (a railroad company) as an “all in bet” on the U.S. economy. If it wasn’t Warren Buffett saying that, you would think you were in the Marina Bay Sands casino!

Is diversification a good thing? Depends on whether you know what you’re doing.

The Biggest Advantage of Investing in Physical Properties

The biggest advantage of property is that you can get a LOT of leverage for a LARGE absolute sum of money at an incredibly LOW interest rate (versus any other loan you can take). If the property price goes up, your return on capital is multiplied.

Leverage, like a knife, cuts both ways. But as long as you do not overstretch yourself and have holding power, buying a property will usually not be a fatal mistake. And when you get it right, you can make a LOT of money.

How much? How about several YEARS worth of your employment income with a holding period from 3 months to 3 years? I have seen this happen to people I know quite often with property, but rarely with REITs or stocks.

Properties Do Have Some Glaring Disadvantages versus REITs

One disadvantage is that it is troublesome to take care of. It takes a lot of legwork to find a good property, the buying process can be complicated, then you have to maintain the property, look for tenants etc.

Buying stocks just involves clicking some buttons or calling your broker. BUT to really understand a company takes a lot of work – it takes years of experience to be able to properly analyze a company’s financial statements and develop good judgment, and research all the different properties the REIT owns, but if you know what you’re doing, then yes it’s a lot easier to deploy your capital into REITs.

Also, properties are illiquid. If you don’t mind hitting the bid, you can take a loss and sell your shares. Selling a property in a down market could take months. Sometimes the illiquidity is not a bad thing, as it forces you to have a longer time horizon when investing. For REITs it’s too easy to sell early to “take profit” and then miss out on a lot of the upside.

REITs or Physical Properties – Which Are Better For Building Wealth?

I think the question that matters is whether properties or REITs are better at building wealth for the vast majority of people. Sure, Warren Buffett became the richest man in the world by investing in stocks, but how many Warren Buffetts are there? And are you as good and as dedicated as Warren Buffett? I highly recommend reading his biography, The Snowball. If you read it you will realize that he is not an ordinary guy. He has an obsessive personality that helped him become enormously successful in asset allocation and investing, but at a great cost to his personal life.

Closer to home, if you look at the Forbes 40 richest people in Singapore, you can compare the number of people who got rich via real estate versus stock investing. For the latter category, I can think only of Peter Lim, who made a bet on Wilmar that made most of his fortune. You will see many more real estate investors and developers on that list. Or just look around you – I would  bet that for the average Singaporeans, the appreciation of their HDB flat has added more to their net worth than investing in stocks.

The title of this article is a bit of a trick question, because you don’t have to choose to invest exclusively in one or the other. You can invest in BOTH physical properties and REITs. Both types of investments have their place. In fact, I do both. It all depends on your judgment of the property and stock markets.

For sheer wealth creation for the average person, however, my vote will be for property. If you’re looking for capital preservation and a hassle-free way to generate income from a diversified portfolio of properties, then REITs would be the preferred vehicle.

One’s not always better than the other – it just depends on what your objectives are.

Happy Investing!

This article is a sample chapter from the newly published REITS to RICHES – Everything You Need to Know About Investing Profitably in REITs by Tam Ging Wien.

by Propwise.sg on November 14, 2017 · 0 comments

Posted in Singapore Property Market

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