Real estate has long been an asset class of choice for portfolio diversification due to its low correlation with the stock market. And coupled with Singapore’s seemingly unruly property prices, it’s no wonder property investment remains a popular choice among investors.
Real estate investments involve ownership of real estate and center around participation in Singapore Real Estate Investment Trusts (S-REITS).
This article describes both of these methods.
Related: Everything you need to know about safe and efficient investing in REITs
Source: Unsplash
Real estate investment by ownership (becoming a landlord)
The first, more traditional way is simply to become a landlord. This means buying or renting a property unit and then renting or subleasing it to generate rental income.
The idea is simple, but the execution may be a little less straightforward. That’s because being a landlord is not the passive income play that many people think.
Depending on the terms of your rental agreement, you should be prepared to deal with all sorts of issues and challenges, from tenant troubles to property wear and tear, maintenance and replacement, and even housekeeping.
And while landlords are now pushing occupancy in light of record-high rents, that won’t always be the case. When the rental market recovers, the break-even point may be marginal, or even in the red.
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How to Calculate Rental Yield for Property Ownership
This gives us perhaps the most important metric to know as a landlord: rental yield. A simple formula for calculating this is:
- (net annual income / total cash expenditure) x 100
moreover,
- Net Annual Income = Annual Income – Annual Expenses – First Year Mortgage Interest Rate
- Annual fees may include property taxes, management fees, brokerage fees, etc.
- Total cash outlay = down payment + stamp duty + refurbishment and fittings + taxes + other legal fees, etc.
Note that net annual income should be used to get a more accurate picture of rental yield.
When buying an investment property, you are probably told the gross rental yield. This figure uses gross rental income, which does not include maintenance and other running costs, which makes it higher and more attractive.
So it’s important to run your own numbers instead of just relying on what the brochure says.
Source: Pexels
A step-by-step guide to choosing an investment property
- First, decide what type of property you want to invest in. If you choose residential property, you may have to pay additional Buyer Stamp Duty (ABSD), which increases your investment expenditure. On the other hand, commercial properties such as shophouses and industrial buildings are not covered by his ABSD.
- Then find a realistic annual rental income you can expect from the property. In addition to the costs discussed in the Rental Yield Calculation section above, additional factors such as commercial unit zoning requirements, proximity to MRT stations, etc. may also need to be considered.
- Contact your real estate agent or seller to request a viewing. The condition of the unit should be reviewed, including possible problems and remedial work that may be required. You should also observe the environment and its characteristics, such as noisy neighbors, obstruction issues, etc., which may affect the likelihood of obtaining and retaining tenants.
- Once satisfied, negotiate a suitable price with the agent or seller. Arrange appropriate financing, including looking for a mortgage with favorable interest rates.
- We sign the paperwork, pay the down payment and any other fees, and begin the necessary renovations. Once complete, you can begin showing your unit to potential tenants. I hope you can get a part-time job soon.
Related: 8 ways to optimize your rental property
Source: Unsplash
Real estate investment by REIT
A real estate investment trust (REIT) is a separate investment fund focused purely on real estate. Investors buy shares in her REITs that deal in the types of real estate they want to invest in.
As a shareholder, you are entitled to receive dividends paid by the REIT. This arises primarily from rental income collected from real estate held by the trust.
REITs may provide long-term returns on capital, but typically at moderate rates. Rather, what REITs are designed to do is provide a passive income stream through dividends.
How to calculate a REIT’s return on investment
Calculating a REIT’s ROI is much easier than calculating a rental yield. All you need to do is look at the dividends paid per share or the dividend yield (most of which are offered by default).
Also keep an eye on management fees when choosing a REIT. Higher-than-average management fees can squeeze earnings, so it may be worth switching to a REIT with moderate yields and low management fees.
A step-by-step guide to choosing a REIT
- Explore the listings of REITs offered by your online broker to understand what types and characteristics they focus on. You can also see your top holdings, historical dividend yields, management fees, and other important information.
- For more information, obtain a copy of the REIT’s prospectus. If you have any further questions, including future plans, you can also reach out directly to our management team.
- When you are ready to proceed, purchase units or shares of your desired REIT through an online broker. When you do this, you become a shareholder and have all the usual rights, including the right to receive dividends.
- Hold the stock and wait for the next dividend to be paid.
Related: 5 Best Performing REIT ETFs
Source: Pexels
| landlord | Investor |
|---|---|
| high starting capital | low starting capital |
| long term financial commitment | No commitment, you can sell your shares at any time |
| Due to low liquidity, you may have to wait until a suitable buyer is found | High liquidity, shares can be traded on exchanges |
| Need to deal with problems that may arise | Fee for money management |
| You can only invest in a few properties at once | Depending on the REIT you choose, you can invest in different types of real estate and different segments |
| potentially high cash flow | stable passive cash flow |
The table above summarizes the main differences between investing in real estate through ownership and investing in REITs.
In general, being a landlord allows you to collect rental income directly from your tenants, which can lead to high cash flow.
Instead, you’ll have to deal with any issues that may arise, from routine maintenance to ill-mannered tenants who are looting the place or ignoring the rules.
And don’t forget the biggest obstacle. It requires a large capital expenditure and, if you have a mortgage, a long-term financial burden.
Also, real estate could appreciate significantly, but removing tenants and selling units for a quick profit may be easier said than done. This reality makes property ownership less liquid and you should consider whether this fits your needs as an investor.
On the other hand, investing in real estate through REITs is much less hassle and has much lower barriers to entry. Instead of investing hundreds of thousands of dollars, you can start investing with a much smaller amount of capital.
It also makes it quicker and easier to sell your REIT if you want, and you can sell it through your brokerage account on the stock exchange during trading hours. This makes REITs a much more liquid investment by comparison.
Want to start investing in REITs? Please read the list of Top Online Brokerage in Singapore.Use our services if you are determined to become a landlord best mortgage Helps calculate starting capital.
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This article originally appeared on ValueChampion.
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https://theindependent.sg/a-step-by-step-guide-to-property-investing-in-singapore/ A step-by-step guide to property investment in Singapore