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Real Estate Investment Trust (REIT) – A Complete Guide

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Have you ever heard about property owners taking in handsome monthly rentals and found yourself daydreaming about having your piece of real estate? If that thought has crossed your mind, you’re not alone! Many people wish to invest in real estate for this, and various compelling reasons. However, let’s face it – owning a valuable property can be quite a hassle!

From searching for the right location and dealing with the expenses to dealing with negotiations, property maintenance, finding the right tenant, and dealing with market fluctuations, the whole process can be overwhelming. And when the time comes to sell the property, finding a suitable buyer can prove to be a daunting task! 

That’s where Real Estate Investment Trusts (REITs) come into play! By investing in REIT, one can enjoy the benefits of being a real estate owner without dealing with any of these hassles. It allows you to own a share of a property without investing a lot of money! 

REITs have become increasingly popular investment vehicles in India. REITs were introduced in India in 2014 by the Securities and Exchange Board of India (SEBI) to provide an avenue for investors to participate in the real estate market and benefit from its potential returns!

In this article, we will explore the ins and outs of reit India, including their types, performance, benefits, limitations, and how to invest in them!

what are reits?

Let’s take a deeper dive and learn about REIT investing and its meaning!

 The REIT full form – Real Estate Investment Trusts is enough to give us an idea about what it must be. These are trusts that acquire, manage, and finance income-generating real estate properties! REITs originated in the United States during the 1960s and have since become very popular globally. In India, they were introduced in 2014 to attract investment in the real estate sector. 

Think of REITs as mutual funds, but instead of investing in stocks and bonds, they invest in real estate assets. They offer an excellent opportunity for retail investors to invest in real estate affordably. With REITs, investors can own a share of prime properties located in posh areas that would be expensive to buy individually! These properties can range from office buildings and shopping malls to hotels and warehouses.

When investing in REITs, a small portion of the rental income goes towards compensating the broker or fund manager, while the rest (at least 90%) is distributed among the investors! And since it is regulated by SEBI, it is a safe investment option.

REITs are also a highly liquid asset as they are traded on stock exchanges which eliminates the hassle of selling an entire property!

different types of reits

Just like real estate, there are many different types of REITs!

  • Equity REITs: They own and operate income-generating properties like offices, malls, and apartments, earning revenue through rent and property sales.     
  • Mortgage REITs: They invest in real estate mortgages and debt instruments, earning income from interest payments.  
  • Industrial REITs: They focus on warehouses and industrial facilities, earning revenue from leasing to companies.  
  • Resort REITs: They specialise in hotels and resorts, and earn revenue from room rentals and hospitality services.  
  • Residential REITs: They own residential properties (apartments, houses) and earn income from tenant rents.  
  • Healthcare REITs: They invest in hospitals, nursing homes, and medical facilities, generating rental income.  
  • Diversified REITs: Hold a mix of property types, spreading risk across various real estate sectors.

limitations of reits

Everything has its advantages and disadvantages. Here are a few REIT limitations –

Taxation: While REITs have tax benefits as an entity, investors’ income from REITs is taxable at the income tax rate, offering no specific tax advantages.

Market Risks: REITs are subject to market risks in the real estate segment. Bad market conditions and economic factors can impact the performance of underlying real estate assets, affecting the returns.

Slower Capital Appreciation: The rate of capital appreciation for REITs is slower due to the mandated requirement of retaining just 10% cash flows This affects the potential growth compared to traditional real estate companies. 

Lack of Control: Investing in REITs means giving up direct control over properties, as the major decisions regarding property management are made by the REIT’s management team.

Also Read: How Mutual Fund Provides More Returns Than Real Estate Investment?

how to invest in reits?

Now you must be wondering how to invest in REIT. If you’re looking for clear guidance on investment planning, here is a step-by-step guide on how to invest in REIT in India.

Firstly, we need to open a Demat Account. As REITs are listed on the stock exchange, the demat account holds shares electronically. 

Then we need to choose an Investment method out of the three: 

a. Stocks: We can invest directly in a specific REIT by buying shares listed on major stock exchanges. 

b. Mutual Funds: We can opt for diversification by investing indirectly through REIT mutual funds offered by mutual fund companies. 

c. Exchange-Traded Funds (ETFs): We can gain indirect ownership of multiple properties and benefit from diversification through REIT ETFs. 

Lastly, we need to monitor the performance of our REITs and stay updated on market and economic conditions that may affect our investment

tips to analyse which reits are good

When assessing reit in india for investment, consider the following tips:

  • Property Portfolio

We should look at the REIT’s property collection. A diverse portfolio with well-located properties indicates a strong investment!  

  • Occupancy Rate

We should check how many properties are occupied. Higher occupancy means more stable income! 

  • Management Team

Research the REIT’s management track record. A skilled team makes better investment choices. 

  • Dividend History

Examine the REIT’s past dividend payments. Consistent and growing dividends suggest a well-performing REIT!

By using these tips, we can make informed decisions when choosing the right REITs for us.

conclusion

REITs provide a fantastic opportunity for both experienced and new investors. They help us explore the real estate sector and enjoy regular income and long-term growth potential! As the real estate market continues to evolve, REITs prove to be an attractive choice for diversifying portfolios. 

As the real estate market in India continues to grow, we can expect a wider range of REIT options available for us to invest in the near future!

Also Read: A Guide to Fractional Real Estate Investing