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Real Estate Investment, Really?

“Investing in real estate requires a high entry point in terms of capital so I am not ready as of now.”

“Investing in real estate has a lot of potential and I believe it will bring about a brighter prospect for the time to come, but I am not ready yet.”

“At the rate I am able to save now, I can only hope I can still have a chance to invest and ride on the next real estate wave.”

I actually disagree with the above options as I believe we can still participate in the growth story of real estate other than buying the physical properties ourselves which of course, commands a high capital requirement that often times become the absolute factor which may stop most people from investing.

There are generally three options when it comes to real estate investment:-

Direct investment – Investing directly in the ownership of the physical properties;

Indirect investment – Investing in the stocks of housing development companies such as developers, or Exchange Traded Fund (ETF) that invest into these counters;

Investing in real estate trusts (such as Real Estate Investment Trusts (REITs)), or real estate mutual funds which are two different things. One can invest in funds that invest into property related assets, or the properties as assets.

When it comes to real estate investment, there are a few characteristics to consider which investors should pay attention to:-

1. SALEABILITY

Finding a buyer can be tough during bad times. Sometimes, even when you have the willingness to sell the property off at a discounted rate, does not mean someone else will be willing to pick up the offer at the other end of the table.

Generally speaking, during bad times, even properties that are being auctioned off or to be auctioned by financial institutions will not be able to find takers. And sometimes, it may take a long time before the approval for the auction is finally given especially if it can be contested by the owners at times. This characteristic is often the result of a direct impact to those who invest in real estate via the first option of direct investment and is not so much of a factor for those who choose to invest via the second and third routes. 

2. LIQUIDITY

Liquidity refers to the ability of the investor to convert assets owned by them into cold hard cash at prevailing market values. The latter consideration of prevailing market values is an important element in the definition as surely, one can also find a buyer for a property by offering attractive discounts, but what good would this do for the investor, right?

Therefore, liquidity is not only about looking at how soon assets can be converted into cash but it also concerns the value of the asset and cash. Surely, even after the sale of one property is completed, it would still require some time before the sale proceeds come in which normally would take anywhere from a three-month to six month time frame.

If the transaction involves the consent of the State Government, it could require a longer time frame than the above stated. Hence, if you invest in real estate via route number one, the liquidity issue is quite prominent, whereby via option two or option three, liquidity is not much of an issue as the asset will be relatively more liquid as compare to direct investment.

3. TAXATION

If you are investing in real estate in Malaysia, at least as of now, you are only subjected to the RPGT (Real Property Gains Tax). However, if your holding period exceeds the stipulated time frame, you may end up not having to pay any capital gains tax at all. Therefore, when you invest, be mindful of the time frame too otherwise, your profit will be taxed. However, rental income will be taxed all the way under the Income Tax Act 1967.

Similarly, if you are investing in real estate via option two and option three, be sure that when you receive dividends, the income tax has already been levied unto the dividend at a flat 10% single-tier rate. Therefore, when you report to income tax, you do not need to include the dividend received in that particular tax assessment year. Of course, if you are trading your holdings acquired via option two or option three, you will not be subjected to any form of capital gains tax or RPGT.

4. PROFITABILITY

Making a profit is the most important concern for most investors. After all, we all invest with the expectation of receiving potential returns on investment (ROI). All forms of investments should provide at least one of these two forms of investment returns.

Real estate investments will likely provide capital gains and appreciation as well as income rental and dividends for those who directly invest in properties while holding on to assets. This is assuming one can manage to rent the unit out at a rate above the cost of maintaining the property which include instalment, maintenance fee, quit rent and assessment as well as other necessary expenses. Then, one will end up with positive returns in the form of rental income.

For those who invest via route two and three, the income return will come in the form of dividends declared by the stocks one hold or the dividends distributed by REITS or Real Estate mutual funds.

The chances of one gaining more from capital gain returns with a huge upside potential is when one invests directly in the ownership of real properties. This may probably involve leveraging on loans as well as the potential offered by increase in prices.

As opposed to option one showcasing an investment approach, option two and option three have more limited upside, while option three will have lesser appeal in terms of capital gain return but will fetch more on the income return side.

REITS will have to distribute up to 90% of its income generated by the underlying assets which can be represented by commercial properties, office towers, hotels, malls, hospitals, etc. while real estate mutual funds will depend on the objective of the fund.

Indirect investments will perhaps see a good combination of capital gain return and income return, whereby most probably the likelihood of income return will be dependent on the business cycle or lifespan of the company. This pertains to holding their stocks or where a new uprising company may be more focused on growth. Therefore, it may be more profitable to reinvest in the business rather than sharing the profit with shareholders.

In conclusion, there is more than one way to get exposure and enjoy the benefits of real estate. What investors need to be sure of is to identify one’s investment objective and personal investment time frame, holding power and whether one has done the risk management work prior to investment as this will likely affect one’s ability to reduce the impact of liquidity risk.

In all, to grow one’s money and wealth optimally, one must not be blinded by the attraction of potential investment return alone but also be wary of the risks associated with it.

Risks and returns are just like water level dictating the level ships will sail at. We desire for the ship to rise high but this must be preceded by the water level rising first.

Therefore, wise investors should be working hard to ensure that the water level does not go above the ship otherwise it will sink. Hence, ensure that you are not only single-mindedly focused on the attraction of ROI (return on investment) but will also access your personal finance holistically.

At the end of the day, the advice is to plan ahead in advance, use information well and create synergy in all areas of personal finance which include having proper asset allocation while holding on to a diversified portfolio. With this, one will then be able to optimise one’s wealth with minimal risk exposure.

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