4 Key Differences Between Investing in REIT and Rental Property

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 means to ensure capital liquidity in their real estate investments.


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PTPTN: Take Advantage of these 5 Ways to Pay Off Your Student Loan!

PTPTN student loan: No more full-scholarship conversion for first class degree holders. Automatic loan deduction between 2% to 15% for fresh-graduates earning RM1000 and above.

These are the two of the most important highlights of PTPTN during the presentation of Budget 2019.

Well, it seems like there is no running away from it anymore, eh? No matter the outcome, the new government has enforced a way to ensure Malaysian students pay back their PTPTN loans.

The thing is, while we can definitely spend our time on social media to play the blame game, we might as well put our mind together to figure out a solution for those who are impacted by this, yes?

So here it is! Here are some ways that you can (or still can) repay your PTPTN loan faster and more effectively under the new changes in Budget 2019:

Now You Can...

(1) Get Your Employer to Repay the PTPTN Loan on Your Behalf

With the newly announced Budget, any company that settles their employees’ PTPTN loan will be offered a tax break.

That said, this tax break will only apply to loans that are settled by the end of 2019.

Hence, if you are working and there is still a loan balance, or if you are graduating before the end of 2019, it is best that you take advantage of the tax break window.

Take the initiative to negotiate or look for a company that would help pay off your PTPTN loan. The best bet for this strategy to succeed is none other than to offer value to the company where you are working or applying to.

(2) Get First Class and Qualify for PTPTN Loan Rebate

For students under the B40 background, you are still qualified for a loan rebate if you graduate with First Class.

While this differs significantly from a full-scholarship conversion, it is still a legit way to reduce your burden in repaying the loan once you started working:

[A RM30,000 PTPTN loan payable in 15 years at 1% fixed interest would cost you RM191.67/month. Meanwhile, a 30% discount means your total loan would be RM21,000 and it would cost significantly lesser at RM134.17/month!]

And need I not tell you that your total interest paid by the end of payment period would be RM3150 compared to RM4500?

You Still Can...

(3) Enjoy Up to 20% Discount on Loan Settlement

While there will be no more discount on loan settlement starting 2019, those who are still currently owing their PTPTN loan should repay the balance before the end of 2018 to enjoy up to 20% off the balance. (Source: The Star)

You Should...

(4) Apply for Your University’s Tuition Fees Discount/Waiver* & Start Investing! (*Source: Lite)

An extra financial support during your university times will always come handy. This means that you can now save up more (not spend more) and invest the money!

My suggestion in terms of the priority of where to invest your savings are as follow:

  • Financial education – If you have extra savings, it is always best to start investing in your financial education as the top priority. Learn how to invest before you graduate!

The knowledge of compounding return will always triumph any kind of short-term Fixed Deposit gains in the long run.

  • Invest in the Stock Market – Once you have gained the knowledge on investing, apply it and invest it in the financial market such as stocks!

Invest in a fundamentally sound company at the right timing will allow you to earn a decent return via capital appreciation and dividend income. As a start, I would recommend investing in less volatile stocks such as Real Estate Investment Trust (REIT) that pays a decent dividend between 6% to 8% annually.

6% to 8% dividend annually. You do realize that the interest rate for PTPTN loan is fixed at just 1% annually, right?

  • Fixed Deposit (FD) – My least favorite way to grow savings. But still, at an average return of 3% annually, it is better than putting your savings in any standard savings account.

(5) Develop Side Hustle(s) While You are still Studying

Another solid way to ease your burden in paying off your PTPTN loan is to develop one or multiple side hustles while you are still studying.

Start a business. Offer to teach people what you know. Monetize on your passion.

Who knows? By the end of your university life, you might already have all the fund needed to clear your PTPTN loan!

No Money Lah Verdict

Depending on your status (graduate or current student), there will be a solution that suits your situation in this article. My wish is that we stop finger-pointing. Instead, we should start to think of ways to support each other in the matter of PTPTN loan.

Do you have any personal experiences or tips on PTPTN that you would like to share? Let me know by leaving a comment at the very end of this article!

I cannot wait to hear from you!

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