REITs, or Real Estate Investment Trusts, are businesses that own and operate real estate holdings in order to generate income. A REIT, unlike other real estate businesses, does not construct properties with the intention of reselling them. On the other hand, REITs purchases and develops properties largely for the purpose of operating them as part of its investment portfolio. They are businesses that handle real estate and mortgage portfolios of great value. Individuals can participate in large-scale, income-producing real estate through REITs. Why should you diversify your investment portfolio with REITs?
Difference between Direct Real Estate Investment and REITs
- In REITs, investors are investing in a diversified portfolio of commercial real estate assets. With the direct investment route for commercial office spaces, investors invest in a single office property.
- Individual investors can profit from real estate through REITs without having to own or manage actual assets.
- Direct real estate offers higher tax benefits than REITs and gives investors more decision-making power.
- REITs are easier to buy and sell than traditional real estate because many are publicly traded on exchanges.
The difference in returns for real estate investment and REITs
There is a significant difference between the returns for the both investments:
- One can expect a realistic ROI from REITs in the range of 7-8% annually, post adjustment of the management fund management fee.
- With REITs, the ROI will be highly structured, realistic, and risk-averse. REITs are ideal for investors who want a steady income with minimum risks.
- REITs are required to distribute at least 90% of taxable income to shareholders, and dividend yields of 5% or more are very common..
- During periods of inflation, the value of real estate tends to rise as property prices and rent rise, providing a stronger return to REIT investors.
How do REIT investors earn returns?
REITs, like any other business, require capital. REITs create money by renting, leasing, or selling the assets they purchase. The shareholders elect a board of directors, which is in charge of selecting investments and recruiting a team to oversee them on a daily basis. FFO, which stands for funds from operations, is the most common way REIT earnings are calculated.
REITs Investors can earn two types of income:
- Capital gains post the sale of REIT units
- Dividend income
REITs will be a great choice for investors who want to diversify their portfolios beyond gold and equities markets. It's a good place to put your money if you're a first-time real estate investor looking to diversify your portfolio without taking on too much risk.
If you desire cash flow, tax incentives to offset that income, and a high potential for gain, direct real estate investing may be a preferable alternative. It's also an excellent option if you want more control over your money and prefers a hands-on approach.
REITs are a good option for investors who may not want to manage or operate real estate, as well as those who don't have the funds or can't secure financing to do so. REITs are also a wonderful method for new real estate investors to get their feet wet in the business.
Individual investors can invest in the revenue generated by commercial real estate ownership with REITs, without having to purchase commercial real estate themselves.
Is it still too early to invest in REITs?
REITs have already been introduced in India, and investors have seen excellent returns. The success of the REIT offering in India has piqued interest in this new investment vehicle, and we expect other REIT listings to follow soon.
Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust are the only three REITs, currently, eligible for investing in India.
Note - Read all the documents, terms and conditions before moving forward with investment decision in REITs. Do research before invesment.