Real Estate Investment, Really?
Yes, really. Believe it or not, we can participate in the growth of real estate other than just buying properties with a higher capital requirement which often times can become the factor in stopping people from investing in properties.
There are generally three options when it comes to real estate investment:-
Direct Investment where you invest directly in the ownership of the properties;
Indirect Investment where you invest in the stocks of the housing developments from the developers or the Exchange Traded Fund (ETF);
You invest in real estate trusts (such as the Real Estate Investment Trusts, REITs) or real estate mutual funds where you invest in the investment funds for property related assets.
When it comes to real estate investment, there are a few characteristics to consider which investors should pay attention to:-
Finding a buyer can be tougher than you think, even with a discounted rate. It doesn’t mean someone is going to immediately pick up the offer.
Even auctioned properties are having trouble with excess supply during bad times. And it may take a longer time before the property is finally auctioned off especially if it is being contested by the owners. This could be the result of a direct impact to property investors who are direct investors.
The concern here isn’t about converting the assets into cash but the value of the assets into cash. What good would it be for the investors if the property is sold off at a lower than the prevailing market value. But this would only concern the direct investment of properties. Liquidity is not prominent for Route 2 and 3 as the assets will be relatively more liquid as compared to direct investment.
Even after a sale of one property is completed, it would still require some time before the sale proceeds floods in which normally be a 3 to 6 months time frame, longer if the transaction involves the consent of the State Government.
Property investments in Malaysia are subjected to the Real Property Gains Tax, RPGT. However, you may not be taxed if your holding period exceeds the stipulated time frame. But this will not be subjected to your rental income as it will be taxed under the Income Tax.
Similarly, if you were to choose route 2 and 3, be sure that the income tax has already been levied into your dividend at a flat 10% single-tier rate so you would not need to include the dividend received in your tax assessment year. You will also not be subjected to any form of capital gains tax such as the RPGT.
Ultimately, profits are the most important concern for all sorts of investors. Property investments will likely provide capital gains and appreciation as well as rental income and dividends for those directly investing in properties assuming they are renting out above the cost of maintaining the property.
For those investing in route 2 and 3, the investment returns will be in the form of dividends declared by the stocks one hold or the dividends distributed by REITs or real estate mutual funds.
But do know that direct property investment has a higher chances of gaining more from capital gain returns with a huge upside potential as you are probably leveraging on loans and the appreciation in property value. Route 2 and 3 has a more limited upside as opposed to route 1 with route 3 having a lesser appeal in terms of capital gain return but will fetch more on income returns.
REITs distributes up to 90% of its income generated by the underlying assets which are represented by commercial properties such as office towers, hotels, malls, and etc while real estate mutual funds depend on the objective of the funds.
Indirect investments sees a good combination of capital gain and income returns (which depends on the business cycle or company lifespan for income return). This pertains to holding their stocks or where an up and coming company may be focused on more growth. It may be profitable to reinvest in the business rather than sharing the profits with shareholders.
Investors has to be sure to identify one’s investment objective and personal investment time frame, holding power, and their risk management homework prior to the investment as it will likely affect the ability to reduce the impact of the liquidity risk.
Risks and returns are like water level dictating the level ships sail at. Wise investors should ensure that the water level does not go above the ship otherwise the ship will sink, like their investment. At the end of the day, plan ahead in advance, use information well, and create synergy in all areas of personal finance from having a proper asset allocation to holding on a diversified portfolio. Only with this, one will be able to optimise one’s wealth with minimal risk exposure.
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