Why DIY REIT Investing Is Better Than REIT ETFs or Robo-Advisors

Daniel Lee

17 minutes ago7 min read

In the world of REIT investing, investors often face a crucial decision that can significantly impact their investment returns: should they invest directly in REITs themselves, or invest through a REIT fund?

While REIT funds such as S-REIT ETFs or Syfe REIT+ might seem attractive, especially for newer investors, there are compelling reasons why taking a DIY approach to REIT investing could be substantially more beneficial for your portfolio.

Let's dive deep into both approaches to understand why DIY might be the better choice. The article will be broken down into three sections:

Understanding the REIT Fund Approach
Understanding DIY Investing
Why DIY makes more sense

1: Understanding the REIT Fund Approach

Advantages:

Professional management of your REIT portfolio: Professional fund managers bring years of experience and dedicated research teams to the table. They spend their entire workday analyzing REITs, tracking market trends, and making investment decisions. This expertise can be particularly valuable during market volatility or complex corporate actions, such as mergers or acquisitions.
Automatic diversification across multiple sectors: REIT funds typically hold positions in numerous REITs across different sectors, providing instant diversification from the moment you invest. This broad exposure can help mitigate risks associated with individual REIT performance and sector-specific challenges. For instance, a single fund might give you exposure to office, retail, industrial, and healthcare REITs all at once.
Regular rebalancing handled by fund managers: Fund managers actively monitor and adjust portfolio allocations to maintain target weightings and risk levels. This includes selling REITs that have become overvalued and reinvesting in undervalued opportunities. They also handle all the administrative tasks related to corporate actions and distribution reinvestment programs.

Disadvantages:

Additional layer of fees: The management fees charged by REIT funds typically range from 0.5% to 1.5% annually, which might seem small but can significantly impact your returns over time. For example, on a $500,000 investment, you could be paying $2,500 to $7,500 per year just in management fees, regardless of the fund's performance.
Limited control over REIT selection: Fund managers make all investment decisions based on their mandate and strategy, which might not align perfectly with your investment goals or risk tolerance. You might disagree with certain investment choices but have no way to opt out of specific holdings while maintaining your fund investment.
Limited ability to value the REITs: With the prevalent use of financial engineering (i.e. management fees paid in units or use of perpetual securities), it is almost impossible to derive the actual intrinsic value of the REIT funds due to the inability to remove the impact of the financial engineering conducted by the individual REITs on a fund level. This leaves investors with only the reported dividend yield as a measure of valuation which is vastly an inaccurate measure of intrinsic value.
Huge overlap between different funds: If you invest in multiple REIT funds, you might unknowingly create a concentration in certain REITs or sectors, as many funds (regardless of whether it is indexed or actively managed) hold similar positions in the few top market capitalisation REITs. This can lead to inefficient diversification and increased risk exposure.

2: Understanding DIY REIT Investing

Advantages:

Complete control over your REIT selections As a DIY investor, you have the freedom to choose exactly which REITs to include in your portfolio. This means you can focus on REITs with characteristics that match your investment goals, whether that's higher yield, stronger growth potential, or specific property sectors. You can also avoid REITs that you believe face significant challenges or operate in sectors you're less confident about.
No management fees: By managing your own REIT portfolio, you eliminate the substantial ongoing fees associated with fund management. The only costs you'll face are brokerage fees when buying or selling REITs, which are typically minimal and one-off as compared to annual management fees which are recurring. This fee savings compounds significantly over time and can result in substantially higher returns.
Flexibility to adjust your portfolio DIY investing allows you to make immediate changes to your portfolio based on market conditions or your changing investment needs. You can quickly increase or decrease exposure to specific REITs or sectors without waiting for fund managers to make similar adjustments. This agility can be particularly valuable during market volatility or when specific opportunities arise.
Superior ability to value REITs: When investing directly, you can identify and adjust for various forms of financial engineering which often obscure a REIT's true financial position. This granular analysis allows you to look beyond simple dividend yields to evaluate the genuine operational performance and sustainability of distributions. It also allows you to identify the right entry and exit price to optimise the portfolio’s overall dividend yield and minimise the potential for capital losses.

Disadvantages:

Research time requirement: DIY REIT investing requires a commitment to regular research and analysis. You'll need to review quarterly reports, analyze financial metrics, and stay informed about market conditions affecting your chosen REITs. This typically requires several hours per month, depending on your portfolio size and trading frequency.
Portfolio rebalancing responsibility: You'll need to actively monitor your portfolio allocation and make adjustments when necessary. This includes deciding when to take profits from successful investments and identifying opportunities to redeploy capital into undervalued REITs.
Initial learning curve: Understanding how to analyze REITs effectively requires learning about specific metrics like price-to-NAV ratios, distribution per unit (DPU), and gearing levels. While this knowledge is valuable, it takes time to develop the expertise needed to make informed investment decisions.
Higher startup capital required: For you to be able to construct a diversified portfolio that is worth your time to do it yourself, a high start-up capital (at least $100,000) will be recommended, unlike the use of a REIT fund which you can start for as low as $1,000. This creates a natural barrier of entry for newer investors who may not have the amount of capital to DIY.

Why DIY Investing Makes More Financial Sense

Given that REITs are designed mainly for capital preservation and income generation, it is the perfect instrument for investors seeking to invest for their retirement. Having said that, DIY REIT investing will make more sense as opposed to investing through funds because:

1: Initial Capital Requirements Align with Investor Goals

For investors approaching REIT investing with retirement income in mind, the seemingly high initial capital requirement for DIY investing is a non-issue.

The reality is that generating meaningful passive income through REITs already necessitates a substantial capital base. Whether investing directly in REITs or through funds, retirement-focused investors would need to deploy significant capital to generate their desired income levels.

Therefore, the argument about higher initial capital requirements for DIY investing becomes largely irrelevant when viewed in the context of retirement planning and income generation goals.

2: Fund Management Fees Significantly Impact Income Generation

When dealing with the substantial capital required for retirement income, the ongoing fund management fees create a meaningful drag on returns that shouldn't be overlooked.

Let's consider a practical example: To generate $50,000 in annual passive income:

With DIY investing (5.5% yield): Requires $909,090 capital
With fund investing (4.5% yield after fees): Requires $1,111,111 capital
Additional capital needed due to fees: $202,021

This difference becomes even more critical given the inherent nature of REITs as income-generating instruments.

Unlike growth stocks where potential capital appreciation might offset management fees, REITs have relatively constrained returns due to their distribution requirements and the limiting nature of property investing.

In an investment vehicle where operating yields typically range from 4-6%, every basis point lost to management fees represents a significant erosion of potential income. This makes fee minimization particularly crucial for income-focused investors.

3: Limited Value Proposition of REIT Funds in Singapore

The Singapore REIT market's unique characteristics make fund investing particularly questionable, regardless of whether it is a REIT index or an actively managed REIT fund.

Despite being the fourth largest REIT market globally, Singapore has only 38 listed REITs, making it a highly manageable universe for individual investors to analyze and understand.

This limited market size creates an interesting paradox for fund investors as most REIT funds end up investing in the same handful of well-known, large-capitalization REITs that individual investors may naturally select.

In essence, investors are paying substantial management fees for a service that not only fails to provide significant additional value but also restricts their investment control and flexibility.

The transparency and accessibility of Singapore's REIT market make it particularly well-suited for DIY investing, where investors can maintain direct control over their investments while avoiding unnecessary fees that compound over time to significantly impact their income generation potential.

Conclusion

While DIY investing will indeed require more time on your end in the form of market research and portfolio management, it is more worthwhile to do it yourself rather than to fork out the expensive fees that will erode your returns and require you to fork out more capital for your retirement.

To further help you out with your investment process, you can join my telegram channel to read my analyst report on Singapore Listed REITs:

*Join the channel → click on the channel name → under files → download the report you want!

If you are looking for personalized financial advice, I offer a 1-to-1, fee-only consultation where you will receive personalized strategies to design, implement and manage a profitable REIT portfolio. You can find out more about it here: