Most investors are attracted by the high yield and passive income REIT offers. However, there are 3 important points to take note when investing in REIT.
(1) It is never wrong to buy a real estate at a discount (i.e. under value) in theory. However, beware of the value trap because some of the REITs are always traded below its book value due to the inherited risks. There is no free lunch in the investing world, cheap stuff may not be a good investment as the stock market is efficient and adjusted to the true value very fast. The smart money always buy up cheap and good REIT when there is an opportunity before the retail investors even have a chance to spot it.
(2) REIT uses debt and/or equity financing to raise funds to acquire properties, collect rental from the tenants and pay 90% of the net property income back to unit holders. As such, it is very common for REIT to issue additional shares (i.e. to the existing unit holders or to private investors to raise capital. Most of the time, the right issues are offered at a discount to the market price and immediately the existing shareholder will suffer capital loss if they are unable to folk out additional funds to subscribe to the rights.
(3) High return always associate with higher risk when it comes to investing. Similar to REIT investing, some of the REITs give very attractive distribution yield up to 7-9% but one must make sure they fully understand the risks in it. Most retail investors are just purely relying on the distribution yield as the selection criteria when come to REIT selection.
Investing is all about risk management, it is very important to understand all the risks before putting your hard earned money investing in REIT for your retirement. Get a professional help in building your REIT portfolio for your retirement because retirees cannot afford to make any mistakes when it comes to investing.
Kenny Loh is a Senior Consultant from Singapore Largest Independent Financial Advisor helping clients in building an investment portfolio for retirement. He specialised in Singapore REIT and has been conducting REIT investing courses for past 6 years.
He won the Top Investment Asset Under Advisory (AUA ) 2nd runner up in 2017 and currently managing million of AUA. He also won the Best Practice Consultant Award in 2017. He can be contacted through firstname.lastname@example.org if you would like his help to personalise a REIT portfolio for your retirement.