Yahoo Finance 7 Reasons Why You Should Own REITs
It is no secret that the REIT sector has taken it on the chin last year.
The sharp surge in interest rates, along with the presence of high inflation, act as strong headwinds for the asset class.
However, this phase should be viewed as a temporary event that should eventually pass.
Although sentiment for REITs is weak right now, you should keep these seven reasons in mind as to why they still constitute a great income-generating instrument.
1. Exposure to different classes of properties
REITs allow you to gain exposure to many different types of property.
If you purchase physical property, you will normally only have access to either commercial properties such as shophouses or residential properties such as HDB flats and condominiums.
Investing in REITs opens you up to a wide range of property types such as industrial, healthcare, and hotels.
For example, investing in a healthcare REIT such as Parkway Life REIT (SGX: C2PU) allows you to own hospitals and nursing homes.
Allocating money to an industrial REIT such as Mapletree Industrial Trust (SGX: ME8U) gives you exposure to a range of industrial properties such as data centres and light industrial properties.
Parking some money in CapitaLand Ascott Trust (SGX: HMN) gives you ownership of a range of hotels and service residences across 15 countries.
The above are just several examples of how an investor can gain exposure to different property sub-types by owning different REITs.
2. Regular, predictable distributions
A REIT can be viewed as an income-generating machine.
It is mandated by law to pay out at least 90% of its net profits as distributions, thereby making it a reliable source of distributions.
These payments are made either quarterly or half-yearly.
Income-seeking investors can rely on REITs to generate a passive source of cash inflows that can either supplement their earned income or act as a substitute for earned income during their retirement years.
3. Easy to transact
Another advantage of REITs is that they are very easy to transact.
In essence, REITs are bundles of properties that are wrapped together in a portfolio.
Units of the REIT are then issued and traded on a stock exchange, making them easy to buy and sell without much fuss.
In contrast, buying a physical property can be a painstaking process where you have to deal with lawyers and property agents.
The whole process of purchasing a property is a hassle that may take weeks or months for the required paperwork.
Buying units of REITs is as simple as clicking a button to purchase on your laptop or mobile phone.
4. Professionally-managed
It can be frustrating and time-consuming to maintain your investment property.
Not only do you need to ensure that the property is well-kept and in good condition, but you also need to ensure the tenant pays the rental on time and in full.
REITs have the advantage of being professionally managed as a REIT manager will be appointed to oversee the operations of the REIT.
A team of staff will ensure that the properties within the REIT are properly maintained and that rental income is collected on time so that distribution can be paid without delay.
5. Tax exemption
Remember that rental income from investment properties is taxable in the hands of the recipient.
This means that you need to add the rental income to your earned income when filling out your tax form for the Inland Revenue Authority of Singapore.
In contrast, REIT distributions are exempted from tax because of the requirement to pay out 90% of their earnings as distributions.
Hence, you can receive a steady, tax-free source of passive income by owning a bunch of REITs.
6. Affordable lot size
Buying a property is a major decision as the capital outlay can be substantial.
With property prices having risen substantially in the past decade, even a small condominium unit can cost more than a million dollars.
Buying a REIT, though, requires a much smaller monetary commitment.
Lot sizes on the Singapore Exchange consist of 100 units.
Therefore, buying one lot of Mapletree Logistics Trust (SGX: M44U) costs just S$163 but gives you exposure to 189 properties in eight countries.
7. Compounding through dividend reinvestments
The last and probably more compelling reason to buy REITs is that you can compound your wealth through the reinvestment of dividends.
If you buy a physical property and receive rental income, it is impossible to reinvest this rental income back into the property.
But for REITs, you can easily reinvest the distributions you receive by purchasing more units of either the same REIT or other REITs.
By doing so, you will slowly compound your wealth and increase your flow of passive income.
Ready to ride the REIT wave in 2024? Discover the secrets to navigating the current market landscape as we delve into the exciting world of Singapore REITs in our upcoming webinar. Registration is free, and we’ll not be holding any insights back. Secure your spot today by clicking here!
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Disclosure: Royston Yang owns shares of Mapletree Industrial Trust.
The post 7 Reasons Why You Should Own REITs appeared first on The Smart Investor.
