Play the real estate market with little capital

Dear Sven,

I’m interested in investing in property, however, I do not have a large amount of cash on hand and do not want to take out a mortgage loan. Since buying property can be quite expensive, is there any way I can access the property market without having to put up the majority of my cash and pay interest on a mortgage loan?

Instead of buying “physical”  property, you can access property through securities, i.e. paper assets. Modern finance allows you to purchase almost any asset through a security, and the most common vehicle for accessing property is a Real Estate Investment Trust (REIT).

A REIT is a type of security that invests in real estate through physical property or mortgages. It is basically a mutual fund that holds only property investments, and is mandated by law to pay out 90 percent of its profits as dividends to investors in order to receive tax benefits.

A REIT has a number of benefits for investors. The most obvious benefit arises from the fact that it allows investors to participate in the real estate market by pooling funds from many investors together to purchase real estate, which allows investors to access real estate through a small contribution from their personal capital. For example, you are looking to buy property in Hanoi and London. You find out that a two-bedroom apartment in Hanoi costs almost USD200,000, and a two-bedroom apartment in London would set you back USD500,000. You really believe that the property market in both countries is going to perform really well over the next few years, but you only have USD20,000 USD in life savings. You don’t want to take out a mortgage loan and pay the related interest costs. You can find a REIT that invests in London property, and another that invests in Vietnamese property. You can then purchase shares in both REITs, as the cost of a share in a REIT is quite low, often less than USD100 per share, and have access to the markets you desire.

The second biggest pro that comes with investing in REITs is liquidity, i.e. the ability to turn your investments into cash and realize your profits in a short period of time. Many REITs trade publicly on stock exchanges, which means you can buy and sell your REIT shares on a daily basis. Many private real estate mutual funds will be available for redemption daily, weekly or monthly. This is in contrast to owning physical property, where is can often take months to find a buyer for your home, and you will have to rely heavily on the sales and marketing prowess of your real estate agent. You might find a situation where you are not able to sell your property and realize the profit you desire because of the time it takes to find a buyer. A REIT solves this problem.

A REIT is also far more convenient from a management perspective than owning physical property. There is no need to find tenants or manage the property in general. The REIT manager takes care of these responsibilities, and will usually charge an annual fee like most mutual funds.

REITs obviously come with a few cons. Most notable is the fact that your faith rests on the REIT manager, whose job it is to manage the funds within the REIT to the best of their ability, to ensure that funds are allocated to the best property assets at the best possible prices, and to ensure that liquidity is managed effectively allowing investors to have their cash and profits returned when required. Although the majority of REITs are sound, some are headed by poor managers and inexperienced investors, who run these vehicles because they think that property is an easy concept to sell to their clients compared to stocks and bonds. What happens is that liquidity is managed poorly, funds go into administration when many investors withdraw their money in a short period of time and the fund is unable to sell the underlying properties fast enough to satisfy investors’ need for cash. The result is a drawn-out liquidation process, taking years to pay investors’ money back, often cents on the dollar. Another obvious pitfall is the fact that you cannot experience any lifestyle utility by owning shares in a REIT. If you want to buy a property on the coast to holiday in once a year, obviously you have to buy the physical asset. Anyway, you shouldn’t be investing in a lifestyle option, as you would be forgoing all rental income or “yield.”

You can access REITs from your brokerage account, IRA, pension, savings account or trust, and there are REITs listed for almost every property market. In Vietnam, Techcom Capital runs a REIT that invests in office buildings, retail shopping malls, hotels and resorts. It’s listed on the Hanoi stock exchange, providing liquidity and it costs around VND1 million to subscribe to shares. In the US you can access a REIT called PS Business Parks, which acquires, develops, owns and operates office and industrial properties, and is listed on the New York Stock Exchange. As an expat, it’s quite easy to access a REIT listed anywhere in the world, from almost anywhere in the world.

BIOSven Roering is a Managing Partner at Tenzing Pacific Investment Management. He holds an Economics Degree from Rhodes University in South Africa, and is a candidate in the Chartered Financial Analyst (CFA) program, having successfully completed level 1 and is currently working towards the level 2 exam.