Saturday, January 23, 2010

Becoming a landlord in shopping malls?

For those who are more interested in Real Estate, there are many ways to make an investment. One can buy newly launched developments, buy completed projects and rent it out, buy commercial properties or even buy REITs, i.e. be a shareholder of companies like Frasers Centrepoint, CapitaMall Trust, CapitaMall Asia Trust, Suntec Reits, etc.

For the first three options, you need to have lump sum of money, be it cash or CPF, hence it's not for small investors like us. Hence, let's just talk about being shareholders of REITs.

You may ask, "Do we just buy any REITs?"

My answer is simply "NO".

Same as investing in companies, investment in REITs also requires research of their past years results and the distributions that they give every quarter, and of course the returns that you get for your invested capital.

When we look at the yearly distributions that every REIT gives, we can calculate their average. Other than that, we will also know how much dividend an investor can get when in good times and bad. Hence, we will be able to calculate the target price to buy, so as to get maximum returns to our investment.

Remember this, if you buy at a higher price, the percentage returns will be lower and vice versa. Therefore, we need to be clear-minded and know how much returns are we looking at.

Exapmle 1
Jason has $5,000 to invest and he intends to invest in one of the two trusts, ABC trust and XYZ trust. ABC trust's average yearly dividend is $0.25 and it's share price currently is $4.00, while XYZ trust's average yearly dividend is $0.20 and it's share price is $3.00.
By calculating their returns, ABC trust - 6.25% and XYZ trust - 6.67%.
Obviously XYZ trust is a better investment.

Example 2
Jason has $5,000 to invest in MNO trust. Their current price is at $5.00 and it's average yearly dividend is at $0.30. That's 6% return. If Jason has bought MNO trust at $4.50, then the return is 6.67%.

How much returns an investor wants will dictate what price he should buy the share.

Calculating REITs' earnings is the easiest and a stepping stone for those who are really interested in investment.

Have fun calculating and be happy landlord.

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