Monday, January 31, 2011

Of Reit, Leveraged Instrument and Leveraged Investment

When you buy a Reit, you are not a fractional owner of a string of properties. You will be another anonymous shareholder in a company that happens to be dealing with properties and returning you dividends. This is much like any other companies out there who is dealing with any other form of business(e.g, selling newspaper) and returning dividends to you.

Reits are leveraged instrument. True. So are any other companies that employed leverage(debt). It is just a matter of amount of leverage employed. But it is not the same as you leveraging your CAPITAL in your investment. You will not get the full effect of the leverage. For example, if a company by virtue of its leveraged gained 20%, the value of the company might be up by 20%. The share price might reflect the revaluation and your INVESTED CAPITAL in it will go up by 20%.  Reits behaves like any other companies with leveraged out there in the stock market.


However, if you leveraged on your investment in Reits, you will pay $20 and borrow $80 to buy $100 worth of shares in the Reit. If the same Reit have a re-evaluation gain of 20% and the share price goes up 20%, you will have essentially gotten back 100% of your INVESTED CAPITAL.

In conclusion, Reits are leveraged instrument(like other listed companies with debt) ,but it is not equivalent to a leveraged investment on your capital and you do not gain fractional ownership to properties. You are just buying a company listed in the stock market that happens to employ leveraged(like most of them) and paying you dividends(like most others) with gains that are not leveraged.

By the way, I do not recommend leveraging on your capital to buy shares. Read Createwealth8888's Understanding Debt, Risk and Leverage on the danger and risk of leverage. Though, I would think if leverage on investment is needed, the only one I would do will be properties.

7 comments:

JW said...

Thanks. :)

The other leverage on investment which I guess you would probably agree is on your own business.

Wealth Journey said...

Haha.. did you just told me off by telling me to mind my own business? :p

Yes, I agreed.

JW said...

HAHA I clearly didn't meant that :)


Robert Kiyosaki was the one we chatted about in LP's cbox. His view is that there are 3 asset classes,

1) Business
2) Real Estate
3) Paper Assets

His view is that one should start from business, before moving to real estate and finally paper assets. I have only done (3), but I'm aiming to start with (1) as well.

For you, you are playing with (2) and (3) :)

infi said...

Hello,

I have been reading your blog for a while. Really love it. Please keep the great posts coming ^^

What about buying preference shares and bonds using leverages?

Wealth Journey said...

JW, Not many people can start from business. I think it takes a certain breed of individuals to be businessman. Likewise, real estate investors and equities investors are also different breeds.

I believe there will be real estate investors and equities investors who have succeeded in financial freedom who didn't use business as a springboard. Of course, if you are a businessman, you will find it easier to relate to why a company does what it does.. though you could also gleam some knowledge of it thru' a basic business degree actually.

Wealth Journey said...

Infi,

Thanks :) Do start your own blog to share. Your question seems to be the type a hnw ask.

Using leverage is double edge sword. That said, I know many hnws use leverage to buy bonds and earn the spread. I think it's safer to buy bonds with short-term(<3yrs) maturity if you are leveraging. For Preferences shares, unless it's convertible to normal shares in the short-term (<3yrs), I wouldn't do it as most of it in singapore are perpetual and leveraging this way is risky in my opinion.

infi said...

hello WJ,

I am not a HNW, though I wish to become one. My net worth cant even buy me a piece of standard bond now :(
I am quite surprise though to hear you relating this to HNW, cos I got this idea from them online.
Honestly, I know nuts about investing. I will be paiseh to start a blog.