I believe most of us know the difference between REITs and property. While both are directly related to investing in real estate, there are a few key differences between the two. Here’s a quick summary of these two investment vehicles
Although Both Are Essentially Real Estate, they Can Be Different As Chalk And Cheese. Photo by Jason Leung on Unsplash
REITs Vs Property (Key Differences)
Low Capital Outlay
You don’t need to have a lot of funds to get started in REITS. You can just buy a single lot and get yourself started from only a few thousand dollars. The same cannot be said for real estate. With a down payment of 25% and the stamp duty of 4%, you are looking at almost 30% of the property price to get started. For a property price of $1mil, this works out to be around $290k
Liquidity
REITs are stocks, so they are extremely liquid. The probability of finding a buyer for your shares are so much easier than selling a piece of real estate. In most scenarios, you can sell your stock the same day you want to. As for real estate, it is far more complicated. To sell your property, you would need to do a comparative market analysis, home staging, videography, advertise, conducting an open house before you even receive an offer. Depending on your property, it can take days or sometimes even months to sell.
Management
If you are a landlord, you would know that you are essentially managing the property yourself. That means dealing with all manner of troubleshooting that can go wrong with a house. For REITS, the management of the portfolio of the properties is done by a professional team. All you need to do is to wait for the share prices to go up and collect dividends.
Taxes
Whenever you rent out a property in Singapore, you are subjected to both income and property taxes. Dividends, on the other hand, are tax-free since 1st January 2008.
REITs Vs Property (Monetary Returns)
Now that we understand the key differences between REITs and property, which one is better? Some people prefer REITs due to the liquidity while others insist on the leveraging real estate brings. There is no right or wrong answer. It all boils down to which instrument can fulfil your objectives. I did however come across an article on Seedly that seems to suggest that REITS offer better returns than real estate in terms of both yields and capital gains. When I saw the numbers, I nearly fell off the chair. If you are a property investor, you would know what I mean.
Difference Between REIT and Property (Source: Seedly)
| Example | CapitalMall Trust (CMT) | Trevista Condo |
|---|---|---|
| Initial Capital Outlay | Low ($1690) | High ($200k) |
| Leverage | No | Yes (Bank Loan) |
| Taxes | No (Tax Included) | Yes (ABSD, Property Tax, Rental Income Tax) |
| Capital Gain (Since 2010) | 44.4% | 42.9% |
| Yield | 4.5% p.a (Dividend) | 2.9% p.a (Rental) |
| Effort | Low | High |
At first glance, it would appear that investing in CapitalMall Trust(CMT) is a no brainer. There is little effort, and the gains and yields seem to be much higher than purchasing a Trevista Condo 10 years ago. However, the presentation of data is highly misleading, and the article didn’t highlight one crucial fact. That fact happens to be the return on actual investment (ROI). To give you a clearer perspective, I will be extracting this specific number which is not indicated in the table. Because the most important thing at the end of the day is how much money you put in and how much you get back.
Calculating The Return On Investment For CMT
Let’s assume you were able to travel back in time back to 2010. You have $226,100 in your pocket and is looking at either buying 134 lots of CapitalMall REIT or purchasing a Trevista condo. So which instrument will give you better returns at the end of the day? Let’s take a look.
Return On Investment On The CMT REIT
| CapitaMall Trust (CMT) | |
|---|---|
| Intitial Downpayment | $226,100 |
| Share Price 2010 | $1.69 |
| Share Price 2019 | $2.44 |
| Profit After Sale | $105,000 |
| Total Yield (4.5% on initial amount) | $101,745 |
| Total Gains | $206,745 |
| Return On Investment | 91.43% |
| Return On Investment Per Year | 9.1% |
So, buying the REIT will net you a profit of $206,745. That’s an impressive 91.43% or an average of 9.1% per year. Not many instruments can give you such a high performance. The returns are even better than what we get from our CPF Special Accounts. How about the Trevista Condo? Well, in addition to property and income taxes, I have also included in bank interest charges. The bank interest costs are the most significant expense for an investment property. I’m a little surprised that the author did not add the interest costs in the yield calculation. Nonetheless, I have added it here.
Calculating The Return On Investment On The Trevista Condo
Return On Investment On The Trevista Condo
| Trevista Condo | |
|---|---|
| Price Of Condo in 2010 | $1,050,000 |
| Intitial Downpayment | $200,000 |
| Stamp Duty | $26,100 |
| Selling Price in 2019 | $1,500,000 |
| Capital Gain | $450,000 |
| Profit After Marketing Fees | $420,000 |
| Rental Income (Yearly) | $38,400 |
| Maintenance Fees (Yearly) | $4000 |
| Property Tax (Yearly) | $3000 |
| Income Tax | $800 |
| Bank Interest Costs (Yearly. Averaged over 10 years) | $12,192 |
| Agent Fees (Yearly) | $1600 |
| Yield Per Year | $16,808 |
| Yield For 10 Years | $168,080 |
| Total Gains | $588,080 |
| Return On Investment | 260% |
| Return On Investment Per Year | 26% |
If you have bought the Trevista condo instead, your $226,100 will net you a total of $588,080. That’s a whopping 260% on your initial investment. Or an average of 26% a year.
However, I do have to point out that for the Trevista condo, your cash flow position is negative. Because the rental cannot cover the mortgage payments, maintenance fees, agent fees and property and income taxes. With the assumption that the loan amount is $840k, loan tenure of 30 years and an interest rate of 2%, you are looking at a mortgage payment of $3104 per month. Which also means that every year, you will need to come up with $8248 which goes into the principal of the property.
If you decide to sell your Trevista condo today, not only will you get your returns but also the principal you have put in the last ten years. After the sale, you will get back
-Your original $200k. ($22,610 is gone to IRAS)
-Profit of $588k
-Principal Payment of $251k
The total is slightly over a million dollars. The same cannot be said if you have invested in the CapitalMall REIT. Even if your Trevista doesn’t appreciate, here are the expected returns. The returns are of course lesser to what you get by investing directly in the REIT.
Return On Investment On The Trevista Condo With Zero Capital Appreciation And Zero Rental Increment
| Trevista Condo | |
|---|---|
| Price Of Condo in 2010 | $1,050,000 |
| Intitial Downpayment | $200,000 |
| Stamp Duty | $26,100 |
| Selling Price in 2019 | $1,050,000 |
| Capital Gain | $0 |
| Profit After Marketing Fees | ($21,000) |
| Rental Income (Yearly) | $38,400 |
| Maintenance Fees (Yearly) | $4000 |
| Property Tax (Yearly) | $3000 |
| Income Tax | $800 |
| Bank Interest Costs (Yearly. Averaged over 10 years) | $12,192 |
| Agent Fees (Yearly) | $1600 |
| Yield Per Year | $16,808 |
| Yield For 10 Years | $168,080 |
| Total Gains | $147,080 |
| Return On Investment | 65% |
| Return On Investment Per Year | 6.5% |
Capital Appreciation. The Most Important Factor When It Boils Down To Return On Investment On Real Estate
CMT Prices Today. Screenshot From Google Search
However, if you were to look at the CapitalMall REIT prices today, it is about $1.85 per share. That’s almost the same price ten years ago! If you did not sell last year, your capital appreciation is only a shocking 9%! Which also means that if you have invested in a condo and the price remained the same, you will get more in terms of your ROI than your investment in CMT. In my earlier article, I have written on how profitability is the most critical factor that affects stock prices. This also means that the capital appreciation of REITs is directly proportional on rental returns. This form of “capital appreciation” is not the same as the increase in land value we see at from the Trevista condo.
So REITs or Property?
Again, I must tell you that there is no right or wrong answer. Which is better is dependent on which instrument can fulfil your needs. Also, the above calculation shows you that capital appreciation for Trevista is the main reason why the returns on investment are so high. I do know of some people who are very focused on the rental yields that sometimes they forget to see the bigger picture. I hope that this simple example would show you that rental yields are not as important as capital appreciation. To understand how housing prices go up, why not book a videocall appointment us today? Learn from historical examples, and you may very well see yourself accumulate 1million dollars. Like what some of the owners at Trevista did ten years ago.
Article contributed by Jerry Wong.
Jerry Wong is a realtor at Propnex Realty, bringing a rich background in interior and lighting design to his work. He loves exploring diverse spaces and observing the transformative power of real estate. Beyond his professional role, Jerry finds his greatest fulfillment in connecting people with the right properties, gaining immense satisfaction from helping clients achieve their dreams.
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Great article Jerry, thank you for sharing.