Thursday, January 28, 2010

Investing in properties for rental

You have to be careful before you buy any residential, commercial or industrial property for rental. The developer or the marketing agent will usually release the available units in batches and they will try to push up the price by created a perceived scarcity of supply. They will pressure the buyer to commit to the purchase through a combination of the following techniques:

- pretend to get a special price from the developer
- ask the buyer to submit a cheque to book the unit
- tell the buyer that someone else is waiting to submit a cheque to book the same unit
- tell the buyer about the current market rental and that the property represents an attractive yield.

The market rental indicated by the property agent or consultant is likely to be exaggerated. It could be the highest market rental for a recent transaction, but the average rental from several transactions could be much lower.

The buyer may also overlook to consider other cost of purchasing or renting the property, such as stamp duty, legal fees, GST, agent's commmission (to secure a tenant) and other costs. After deducting these expenses and taking the actual market rental (and not the exaggerated figure), the rental yield is likely to be more modest.

It is better to invest in a REIT (real estate investment trust) to earn the yield on properties, rather than bear the hassle of being a landlord and having to deal with property agents. I found that REITS are able to provide an attractive dividend yield of 6%to 8% at current market prices.

Tan Kin Lian


Anonymous said...

Mr Tan, some reits can drop 80% from its IPO price. Like the Allco Reits, it was once $1.38 but $0.15 only. It is risky also. The managment can just cheat away your money also.

Anonymous said...

Buy STI ETF as it tracks the STI index. It is better than REITs.

Or blue chips.

Wait for the next low. May not be too long.

Anonymous said...

Reits are in fact more risky. Why do you want to leave your money with other people and buy something that is already overpriced when they sell it to you? It would be better if you place your money in some place you can see. How many rich people made their money through reits?

Anonymous said...

For people with money to invest (i.e. after paying debts with high interest rate e.g. credit card loans) Reits is one good option to growth your savings and is much better than puting money in the banks, investment-linked insurance and some risky penny stocks.

It is true that some Reits made many people lost money. So, before one makes an investment, it is important that you study the Reit carefully. Look at the track record of the Reits manager i.e. whether they (besides looking after their own intest by maximising their income) also take care of the interest of Reits unit holders. Some Reits managers just acquire many properties so that they can earn higher fees (one time fee and recurring fees) and ended up with very high debts which they may have problem refinancing. This happened to some Reits in 2009 and the Reits prices collapsed.

Another important factor is the quality of the properties under the Reits. Good quality properties are those provide stable income and have growth propects e.g. shopping malls in good locations.

Investors can't expect Reits prices to go up very quickly but can expect stable income from the distributions that come quarterly or half-yearly. And unlike investing in real property, the money required to buy Reits units is small (start with few thousands dollars) and the liquitity is high (i.e. can sell it easily if you need the money for other usage.)


Anonymous said...

Greed. That is what these agents capitalise on. If there is no greed, then whatever agents, whether land banking, timeshare, minibonds, properties etc will not succeed. Look within yourself and ask whether you are greedy. If you are not, nothing can cheat you.

Lucky Tan said...

Mr. Tan,

3 years ago an accountant wrote to the forum to point out the lack of transparency of REITS. These include a number of issues such as the lease hold of commercial property which may be limited to 20-30 years so while yield may look high the income stream is limited.

The other thing I notice is the REITs can have quite high short term loans which they have to rolled over from time to time. The assumption is that the rental yield is higher than the loan amount and the difference can be pocketed as returns. However, if we enter a high interest rate environment coupled with a weak rental market, this strategy will backfire.

Investors shoud do a second level check on the debt level esp short term debt and the lease period of the properties in the REITs.

Tan Kin Lian said...

Direct property investments, if purchased with a loan, is also risky. If the borrowing is high and the investor is not able to get a good rental, or to find a tenant, the owner will not be able to service the loan. When the bank sells the property to recover the loan, the owner will suffer a capital loss.

There is a similar risk, but on a smaller scale, if one invest in a REIT that has a high debt component.

If the REIT does have have any borrowing, it is almost the same as investing in a direct property (without any borrowings). The advantage of investing in the REIT is that it is professionally managed and there is spreading of risks over many property units, rather than being exposed to only one unit.

There is a cost in paying the fees to managed the properties in the REIT, but this is deducted from the rental to get a net yield. There is also a similar cost of renting a property.

Anonymous said...

Buy a second property only after paying off the one that you use for living.
Otherwise you risk being in perpetual debt... your home is NEVER an investment.. but your second property is.
Buy a second property only if you can afford to pay it off within 10 years or less and DO NOT DEPEND on rental income to finance the loan.

Listen to success stories with a LARGE pinch of salt. people like to boast.. many inflate their net assets..

Anonymous said...

I share the concern with regard to the lack of transparency with regard to REITS.

Investment history has shown again and again that the following mix is a sure receipe for disaster:

1) Lack of transparency;
2) Complex instrument which investors do not really understand;
3)Gold rush mentality inspired by early abnormal gains;
4) Lax regulation; and
5) Unscrupulous financial instituitions out of exploit the situation

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