‘Why and how I got into REIT investing’

The decision to invest in properties seems like a no brainer for most people. For one thing, most urban properties prices have been on an upward spiral for the past few years. Many a Tom, Dick and Harry has made handsome money from flipping property, riding on this trend.

And those who have not made any money usually cannot sit still, with many jumping onto the bandwagon. The optimistic layman investor finds it hard to resist new property launches. After all, they can bank on DIBS during construction period and on the greater fool theory once construction is completed (that even though, you might be a fool to buy something, you will always find a greater fool to buy it at a higher price). For many, the only due diligence conducted is based on what the staff of these property companies tell them.

And like some people say, if you can’t beat them, join them!

Back in 2011, I was very tempted to join the crowd because I had a lump sum of money, sufficient for the down payment of a commercial property I was eyeing. I did a mental calculation and computed that the rental yield was below the minimum 6%. I also realised that it would be too much of a hassle to find and maintain tenants as I was still having a full-time job.

By chance, I stumbled upon REITs. I found it to be like an investment into a commercial property but hands-off, without the hassle of tenant management. The rest is history.

I am neither a fund manager nor an analyst, so I will keep REIT jargon to the minimum in my articles. REITs are really no rocket science–you just need to understand enough from a REIT annual report to conclude whether it is a good buy or not.

Of course, I am only seeing it from a retail investor’s perspective – which is pretty straightforward. Just ask these questions: “Is this profitable?” and “Is this fundamentally sound?”

I have talked to REIT industry experts, the likes of Dato’ Stewart Labrooy, his Axis REIT management team, and YP Lim of AmFIRST REIT to pick their brains what goes behind the scenes. This is what I intend to share with StarProperty’s readers.

Along the way, I’d like you to ask this important question: Have you explored how REITs can achieve your investment goal with much less headaches?

Many newbie investors stretch their monthly commitments to grab a piece of the action at new launches, with minimum or no money down. Some of these newly launched properties in Penang are tagged at a whopping three quarters of a million ringgit or above.

Not qualified for the loan? No problem, property gurus may teach you to share the loan with a few friends or even strangers. And yes, the price may still appreciate; say to 1 million ringgit after three years.

However, when you want to dispose of it, have you thought of how small the market would be for a one million ringgit property? When there is no willing buyer, you can either sell at a loss if you don’t have the holding power or bleed every month paying the installments.

Even sensational property investors like Faizul Ridzuan (author of WTF? 23 properties by 30) advocate managing risk by targeting mass market properties which are affordable to many.

I am neither an aggressive nor a passionate property investor. Instead, I have always had an affinity towards  income-generating assets which provide more downside protection regardless of the economic condition. REIT fits the bill well.

If there is an easier way to get a net 6% yield or more from a property-related investment vehicle, I can’t think of it. Let the REIT manager take most of the risk and headache in property and tenancy management.

Compared to actually buying a property, if your tenant’s business scales down or if the relationship with your tenants goes awry, you need not to do the dirty work of looking for new tenants.

I am a couch potato investor – wanting to grow my money with minimum risk and effort while focusing on my other interests. As Bill Gates once remarked: “I will always choose a lazy person to do a hard job, because he will find an easy way to do it.” I say, why don’t we let the professional REIT and property manager do the job for you?

I also like the fact that I can switch out easily to buy other sweet little things when my current holding is not so attractive anymore. Real property is not so liquid. It can take months to close a transaction and most importantly, find a willing buyer.

I love surprises only if it doesn’t surprise me much. Paradoxical? You bet. When it comes to the unpredictable Mr Market, we will only be delighted at pleasant surprises. But don’t you agree that if you are looking forward to many pleasant surprises, you must have a strong stomach to see through all the unpleasant surprises as well?

This is the exciting part about investing – we can never be certain, but can only do due diligence to sufficiently cushion the impact when prices fall.

REIT managers are required to distribute 90% of more of their rental revenues in order to receive the government’s waiver of corporate tax which is provided as an incentive. Therefore, most of the time, the returns from REITs, especially given good management, are assured.

And if you talk about capital gain in properties, these exist for REITs too. Investors can reap more profits via capital gain in the medium to long term. I’ve learnt to treat such capital gains as icing on the cake rather than the cake itself. So you can say I am a very contented REIT investor.

Of course if you have the time to have a full-time job as a property investor, you can potentially reap higher profits with higher leverage by directly investing in properties. Also, some people enjoy the other aspects of investing directly in property. A veteran property investor in Penang who’s also my client admits that she isn’t really excited by the surge in property prices. What she loves doing is adding her personal touch in taking care of her tenants’ needs and in finding good deals.

I have also met a property investor who pays real estate agents lots of money to resolve his tenancy issues and to keep his tenants from bothering him, however. Like him, I am also not such a tenant-oriented landlord.

So this is how I got into REITs two years ago. As you can see, the crucial thing is to understand ourselves when it comes to investing. For REITs, well, if you are already invested in stocks anyway, why don’t you look at what the 16 REIT counters in KLSE have to offer?

Over the course of the next few months, I will do that with you. We will look at the various REITs on offer, and attempt to guide you on this underdog asset class which I believe deserves a place in your portfolio.

Lieu Ching Foo is the founder of Malaysian personal finance blog http://HowToFinanceMoney.com, the co-founder of REITMethod.com and an advisor with financial advisory firm Fin Freedom.