One of the most amazing thing when it comes to real estate investment is its versatility. As such, 2 of the most common ways to invest in real estate are through investing in Rental Property and Real Estate Investment Trust (REIT) in the stock market.

If you are not familiar with REITs, just imagine yourself buying into shares of companies that own and manage real estate as their primary business activity.

Some REITs specialize in one specific asset class (eg. YTL REIT in hospitality) while some diversify into multiple asset classes (eg. Sun REIT in retail, hospitality and office space).

While both methods of investment allow investors to gain exposure in the real estate market, it is like comparing apples and oranges. Owning rental property represents direct ownership while investing in REITs is characterized by owning shares in a company whose sole purpose is to manage a portfolio of real estate assets.

In this article, let’s explore 4 key differences between both methods of real estate investment:

(1) Low Barrier of Entry (REIT) vs The Power of Leverage (Rental Property)

REIT:

With a minimum lot size of 100 units, almost anyone can afford to gain exposure in real estate by investing in REITs. As an example, at RM1.19/unit, one could start to invest in YTL REIT at just RM119 (RM1.19 x 100 units).

Rental Property:

Most often, one that intends to purchase a rental property would be eligible for 80% – 90% loan on the total value of the property. This means that one could purchase a property with just 10% to 20% of the total property value. If done right, it will enable one to leverage his/her wealth effectively.

As an example, if I were to invest in an RM200,000 rental property, I would just have to pay an upfront payment of RM20,000 and reap the gains of the entire asset appreciating over time.

Profiting in real estate via REITs and Rental Property

(2) Capital Appreciation + Dividend (REIT) vs Capital Appreciation + Rental (Rental Property)

So, how do REIT and rental property investors profit from their investment?

REIT:

Typically, REIT investors could expect to earn through the price appreciation of REIT in the market, while enjoying dividend paid by REIT companies (normally by every quarter of the year).

REIT investing in Malaysia is especially attractive to long-term investors as it consistently returns an annual dividend yield between 5% – 7%, which is more than the return of most structured financial derivatives in Malaysia (eg. Fixed Deposit).

Rental Property:

On the other hand, investors of rental property would benefit from capital appreciation as well, while enjoying rental payment from their tenants which will help service their loans.

Not only that, with the rise of platform such as Airbnb, many are also making a fortune by converting their properties to accommodate to these platforms.

(3) No Fuss in Management (REIT) vs Direct Control (Rental Property)

REIT:

Investing in REIT means you are investing in a real estate business that is managed by professionals and field experts. In other words, the management team will oversee rent collection, property maintenance and acquisition decision in the business.

If you wish to earn passive income in the real estate business without much post-purchase issues, REIT is definitely a great option to consider.

Rental Property:

For many investors, having full control and outright ownership of their investment assets are of utmost importance.

In this case, one can decide what kind of property to invest in and when to sell those properties. Besides that, one makes all the decisions from how much rent to charge, the design of the property and more.

In short, if you own a rental property, you have full control over the asset, including the effort to maintain the condition of the property and rent collection from the tenants.

REITs are businesses that own and manage real estate portfolios. As an example, Majestic Hotel KL is owned by YTL REIT.

(4) Liquid & Diversified (REIT) vs Building Tangible Asset (Rental Property)

REIT:

Owning a REIT share is just like owning any other share in the market.

This means that you can buy and sell-off your REIT shares during the weekdays at any active trading hours. Not only that, this flexibility also means that you can afford to make mistakes and still recover at minimal losses (because all you have to pay is a minimal amount of commission when you sell).

Investing in REIT also allows one to diversify to different asset classes easily due to its low barrier of entry. As an example, at the very minimum, I can invest in YTL REIT (hospitality assets) at just RM119 (RM1.19 x 100 units) and KIP REIT (retail assets) at just RM80 (RM0.80 x 100 units).

Rental Property:

While owning rental property might not provide the liquidity and flexibility in diversification, one is continuously building ownership in a tangible asset (asset that has a physical form) when investing in rental property.

Owning tangible assets such as rental property will give you the ability to refinance your property over time and use the proceeds to purchase additional assets to grow your portfolio.

No Money Lah’s Verdict:

For me, REIT and rental property investing should not be an ‘either-or’ discussion, but rather two type of real estate investments that should be practiced by everyone. As mentioned above, both methods of real estate investment offer their pros and cons and varying degrees of risk and reward.

Young adults with low initial capital should look into investing in REITs to gain some real estate exposure, while using the gains to venture into rental properties. On the other hand, experienced rental property owners should also look into REITs investing as a mean to ensure capital liquidity in their real estate investments.

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