Friday, January 18, 2019

Why Invest in REITs

Real Estate Investment Trusts or simply REITs are listed companies that buy, rent out and manage properties. REITs lease out spaces and collect rentals from their tenants which is then pay out minimum 90% of taxable income as dividend to its shareholders, either quarterly or semi-annually.

If you have not heard about REITs before, then let me give you some examples:
Westgate, Plaza Singapura, Bugis+
Causeway Point, Northpoint City North Wing, Changi City Point
Bugis Junction Tower, Marina Bay Financial Centre, One Raffle Quay
CWT Commodity Hub, Pandan Logistics Hub, DHL Supply Chain Advanced Regional Centre
Mount Elizabert Hospital, Gleneagles Hospital
Crowne Plaza Changi Airport, Mandarin Orchard Singapore 
You could also see a lot of industrial building owned by Ascendas and Mapletree across Singapore, see whether do you recognize the following logo.

Now you should have a clearer picture, REITs properties are are all around us. Many REITs have oversea properties as well, which provide geographical diversification. However, this also means that  foreign currency risk is there, currency hedging could not provide protection for long term down trend.
You never thought REIT is so close to you?
While REITs business model is similar to investing in brick and mortar properties for rental, there are some pros and cons that you should consider:

Physical Properties
Advantages of SREITs
Could invest as low as S$100
Require high initial capital for down payment, legal fee, stamp duty, etc.
Multiple properties, some REITs own properties in multiple sectors and countries
Own a few to most a handful of residence or commercial properties. Unlikely to own hospital, hotel, office building or retail mall
Properties Management
Managed by professional
Traded through stock exchange
Buy or sell process take months to process
Information available online
Information not always available
5% to 9% dividend yield, not subjected to income tax
2% to 4% rental yield after minus off interest paid, maintenance fee, property tax, income tax, etc.
Monthly Commitment
Monthly mortgage payment
Disadvantages of SREITs
Capital Gain
Modest, as REITs distribute 90% of taxable income and leave only maximum 10% to grow
Potentially higher (do consider costs like interest, taxes, fees when calculate gain)
Properties Control
Decision control is with REITs manager
Full control
Price subjected to market volatility 
Stable, unlikely to have big changes in short time
Income Stability
Income Frequency
Quarterly or semi-annually
Share Dilution
Private placement, preferential offer and rights issue cause share dilution

For rental yield of properties, you could refer below detail post by others:
Calculate Rental Yield in Singapore: A Quick and Simple Guide
Your REAL Rental Yield in Singapore is likely ZERO
Considering most purchases of physical properties are leveraged, which means monthly mortgage payments should be added into capital when calculating rental yield. Correct me if I am wrong, the rental yield is maximum at beginning due to lower capital and minimum upon fully paid up.

Some would suggested to invest in Malaysia properties for rental and capital gain. However, profit from property investment is not simply buy price minus sell price. With interest rate of 4.5%++ plus expenses like maintenance fee, taxes, legal fee, stamp duty and others, will your property gain be able to cover all costs? Below snapshot from home loan calculator, adjusted for easier viewing:
RM500k loan cost RM 108k in 5 years and RM 412K in 30 years
Now let's back to why personally I prefer REITs:
i) Low Capital Requirement 
Not all of us are born with silver spoon, nor all of us having extra high monthly income. So it would be normal to take few years to build enough capital for initial payment of one property. With REITs, I could do it with small amount.

ii) Diversification
This actually link to the above low capital requirement. Due to restriction in capital, I could only own a few properties in my life time. Let's say I own 2 investment properties, 1 vacant means 50% occupancy and rental income will drop to 50%. For REIT this would not happen as they own multiple properties and have multiple tenants.

iii) Hassle Free
I am a lazy person and I heard lots of terrible stories about bad tenants. So properties and tenants management by professional is another big plus to me. REITs dividend would also directly bank into my account, on time.

iv) Monthly Commitment
No burden on monthly mortgage payment, I could invest REITs as and when I like. Without commitment, we have the flexibility to quit job that we hate, right? Of course, this is provided we have enough emergency fund and dividend which could cover some of our monthly expenses.

Not a fan of monthly installment commitment burden
Given the advantages above and the fact that I can't really afford property investment, I will go for REITs. However, I might be missing out important points for property investment, I believe there are still many peoples who have earned a fortune from property investment. Just make sure you have done detail research and calculation before you dive into it.

Saturday, January 12, 2019

How to Come Out a Simple Dividend Investment Plan

As mentioned in previous post, one should first access their financial situation and plan before one start your investment journey. The fund for investment should be money that you do not require within short to medium term, like 3 to 5 years.

I recommend to plan using Google Sheets because it allows you to access it anyway anytime with internet connection. This plan would allow you to have a clear picture which will reflect the S.M.A.R.T. goal that you've set.

I would recommend to plan investment in period of quarter instead of year for better progress tracking. Investment time frame should be long as compounding effect require time to work. Rule of 72 is commonly used to estimate investment doubling time. Take a 6% dividend example, let's say we re-invest all dividend, then our investment sum will become double in (72/6) = 12 years. Continue to do it for another 12 years, the investment sum would become 4 times of initial capital. So it is important to start investing as early as you could, not only when you have a lot of capital.

Now, for a start, let's set quarter target of $3000 capital and 1.5% dividend throughout 30 years. Below is a basic template to start with, green column are target that we set:

From above example, you can see quarter dividend exceed capital injection at 2035 Q4, which at this point, you get more than you invest. However, if we want to enjoy the fruit of compound interest, we should re-invest all those dividends.

Next, let's adjust for dividend re-investment. This time, the target capital would be increased yearly to account for dividend received amount (on top of existing $3000 capital) and target dividend growth set to 0.25%.

This time round, you can see the effect of compound interest. The dividend you would receive is around 3 times from previous example. Let's look at 2048 Q4, total dividend receive is 667k vs capital of 982k. Isn't it great that 2/3 of your invested sum is financed by your dividend ?

If u delay your investment journey by 1 year, then what you lost is the final year of fruit. From the above, the final year dividend is 62k, which is close to 5 years of initial capital. This shows that the time horizon is important in investing, capital is secondary.

Now we have done the planning step, we then would need to add few columns to track our actual progress. Below is the template that added actual value in blue column.

You could copy this template through this link. Once open, click file then make a copy.
File -> Make a Copy
All 3 examples are in there, feel free to modify to suit your need. Try tweaking around those figures to create an investment plan that can cover your expenses with dividend. If your goal is too far away, you may need to consider to increase investment capital amount and lower your expenses. Most importantly, start now.

Lastly, in every quarter end, update your actual result and check against your target. Review your target regularly, circumstances change from time to time, you need to revise your target regularly.
Do contact me if you need any clarification or help. If you find this useful, share with your friends and families.

Friday, January 4, 2019

What to Consider before Start Investing

One would not go for skydiving without training and parachute. Similarly in wealth building process, one should not jump straight into "investment" without reviewing their current financial situation and plan beforehand.
Opps, there are peoples skydiving without parachute ? OK, bad analogy, but you get my point.
Before you start your investment journey, it is important to understand and prepare for the following:

1) Cash Flow
You would have to track your monthly income & expenses and record it down. With this, you are able to know where your money is going to. A positive net cash flow is the key for wealth building. If your net cash flow is in negative, then you would need to cut down on your expenses. There are lots of free apps for this purpose, or you could DIY yourself with spreadsheet.
Sample created by Excel
2) Net Worth
Similar to the above, only this time round is to check on your assets & liabilities. If your net worth is in positive, congratulation. If it is in negative, you would have to find ways to reduce your liabilities. How to reduce liabilities ? Save and reduces expenses to pay off debts.

Sample created by Excel
3) Emergency Fund
Save up emergency fund for min. 3 months worth of your expense. Some would advise to save up 6 - 12 months expenses, it is all depends on individual preferences and circumstances. Do not invest all your money, as market can be volatile and you may be required to cash out at lost during emergency.
My children's doggy kitty piggy banks
4) Insurance
Purchase insurance plan to protect assets and your loved one, especially when you have dependent. There are various types of insurance: health, accident, term life, whole life , critical illness, mortgage, home and others.

Health insurance is a must as cost of medical is expensive and it could easily wipe up nest egg that you built for years. If you have dependent, then it is important for you to have term life or whole life insurance which pay out upon your death or permanent disabilities. The same goes for mortgage insurance if you have dependent and outstanding housing loan to service.

It would be good to have a list of insurance policies that you and your family having and keep all in one place. Some insurance agents would do insurance summary free for you, all you have to do is ask them. If you are paying premium yearly through GIRO, then it is even more important to have the list with payment date. You do not want to miss out any payment and lost your coverage, do you ?
Sample of what my insurance agent done
5) Debt
After saving enough emergency fund and have sufficient insurances for protection, the next step would be clearing off high interest debt. Some high interest debt examples are credit card debt, personal loan, renovation loan, with credit card interest rate ranked the highest.

Logically speaking, you should start paying down highest interest debt to maximise the reduction in interest expenses. However, this may not always the case; for example, car loan interest is computed based on  initial loan amount, paying down car loan won't help to reduce any interest expenses. Do not solely look at advertised interest rate, ask for effective interest rate (EIR) before getting any loan.
6) Goal
Set a S.M.A.R.T. goal and plan for how you want achieve your it.
Your goal should be concise on what you want and could accomplish with your available resources in a certain time frame. It should be measurable so that you could track your progress. Be honest to yourself, do not set an easy goal for the sake of goal setting. I will cover the basic of dividend investment planning in next post.

Investment is not a grow rich quick scheme and every investment come with risk, that is why it is very important to set your financial foundation solid before you start investing. I hope the above information are useful to you, feel free to leave comment or contact me.

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