How to Set Up Your Retirement Plan Through REITs Investing

Most of us are always finding ways to generate more income or create alternative streams of passive income to retire comfortably. In fact, investing in stocks will definitely be one of the options that you would have considered.

Investing in stocks can require substantial time and amount of work to research. It is still a great way to grow your wealth. If you are not interested in analysing the financial figures and understanding business in general, then perhaps investing in REITs can be a great alternative for you.

Real estate investment trusts (REITs) are professionally managed investment schemes, setup to manage, acquire and finance income producing properties. They are less complicated to understand since fundamentally their role is to rent out the properties in their portfolio, and in return, investors get a share of the rental income

Plan Your Retirement Through REITs Investing

One of the greatest benefits of investing in REITs is the consistent dividends they provide. Generally, REITs will distribute most of its rental income, net of expenses, to unit holders of the REITs. For instance, in Singapore, REITs are required to distribute at least 90% of their income in order to enjoy tax exemption benefit.

As such, you can work out the amount of dividend income you can receive based on the principal investment you have made. Consequently, you can work out how much you need to have in your investment account by the time you retire, in order to generate sufficient dividends that can cover all your expenses.

Work Out Your Expenses

For example, if your expense is $3,000 every month, then you will require $36,000 of dividends income every year. Based on a 5% dividend yield, this means you will require an investment portfolio worth $720,000 ($36,000 divided by 5%) by the time you retire.

Compound Your Investment Portfolio

Based on the end goal of $720,000 worth of investment portfolio, we can work backwards to calculate the investment capital you need to make. The idea is to let time compound your wealth for you.

Again, using a 5% yearly dividend return, assume that we reinvest all these returns throughout the investment horizon. Say you are 25 years old today, and plan to retire at age 65. This means that you will have a 40-year investment horizon.

By working backwards, you will need about $100,000 today for investment. Thereafter, you will reinvest all your dividend profits back to purchase more REITs units. In 40 years’ time, you will have about $700,000 worth of investment portfolio. This is represented by the blue line plotted on the chart below.

This means that at age 65, you will be able to start using the yearly dividend payout of $36,000 to pay for your expenses and not worry about your financial well-being. At the same time, your $700,000 asset will still be preserved in your portfolio of REITs.

This calculation excludes any potential capital gains from your investment portfolio.

In another scenario, let’s say you don’t have $100,000 for now, and you can only invest $10,000. And say, perhaps you can save and invest an additional of $5,000 every year to your portfolio. Again, at 5% dividend returns annually, and reinvesting all these profits back, your portfolio will reach an estimated $700,000 worth in value in 40 years’ time.

The only thing that you have to take note of in this case is that, since you started with lesser investment capital, you will need to put in more money over the course of the 40 years period. The yearly $5,000 additions will accumulate to a total of $200,000. Meaning, you would have invested a total of $210,000 instead of just $100,000 if you put in the lump sum in the beginning.

Nonetheless, the compound effect still works in favor for you over the long investment time frame. And most importantly, you will not need to rely on any pensions or social security when you retire. And you can still maintain a relatively comfortable lifestyle if you practice prudent and disciplined investment in REITs during your lifetime.

Getting Started with REITs Investing

To get you started, we will highlight three key elements you need to assess when investing in REITs.

1. Industry

Understand that REITs usually focus on holding properties in specific industries. They can generally be categorized to the sectors below:

  • Retail
  • Offices
  • Industrial
  • Residential
  • Healthcare

They can hold properties from a mix of industries to diversity risk. Understand that within each sector, we need to understand the nature of the subsegments that exist in them. For instance, in the retail sector, shopping malls in the tourist areas or luxury-brands-focused are closely related to the economic environment. Whereas shopping malls in the suburban areas will be more defensive, as they usually house businesses that sell necessities by being closer to homes of the consumers.

2. Price-To-Book Ratio

Net Asset Value (NAV) = Total Assets – Total Liabilities

Generally, REITs finance their property acquisitions through debt and equity, with the latter being the investment from the unitholders. Debt will hence form the liabilities side of the equation. Since REITs main activity is to manage properties for rental income, most of the value of their assets will be associated with the property values. Therefore, NAV tells you how much cash will remain if all assets are liquidated to pay off its liabilities. Essentially, it means how much will be left for the unitholders in total.

Net Asset Value Per Unit (NAVPU) = Net Asset Value / Total Outstanding Units (Shares)

Price-to-Book Ratio (PB Ratio) = Unit (Share) Market Price / NAVPU

Price-to-Book ratio is a key metric when investors evaluate a particular REIT. Generally, a value of less than one implies that the REIT is undervalued, since investors will be paying lesser than what the properties are worth, net of its liabilities.

However, you will observe that great assets, especially those defensive ones will usually hover at a PB ratio of above one. On the other hand, some REITS with lower quality property portfolios will consistently trade at PB ratio of less than one.

So, do track the historical PB ratio and assess how they behave in the past in order to assess for good entry points for investment.

3. Gearing Ratio

Gearing Ratio = Total Debt / Total Assets Value x 100%

This metric measures how much leverage a REIT employs when financing its properties. Typically, the higher the leverage, the riskier the investment is for investors since the REIT will have more difficulty in fulfilling its financial obligation during a crisis. Hence, a gearing of around 30 – 45% will be ideal. Investors have to be wary if a REIT’s gearing is anything more than 45%.


In summary, REITs are a relatively safe form of investment with real property assets. Compared to typical stock investment, such Trusts are simpler to understand, hence easier to evaluate for investors.

Over the long run, with prudent and disciplined investment, by reinvesting the dividends back to your portfolio, you can achieve a substantial portfolio value. And this will provide you with passive dividend income every year that can pay for all your expenses. You will no longer need to worry about your financial well-being when you get old, because you know that you can live off these passive streams of income.

Start learning more about how to invest in REITs today.


Charlie is the founder of Carepital. He is passionate about making business and investment knowledge accessible to all. He feels that living life on our own terms is what makes a fulfilling life. To progress this mission forward, he embarks on a journey to share his thoughts and research via Carepital, in hope that many can pursue their own passions and financial goals at the same time.

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