How to Invest in Real Estate Investment Trust

Real Estate Investment Trust (REIT)

Investing in Real Estate Investment Trust in India

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Real Estate Investment Trusts are corporations that operate on real estate properties to generate profits. REIT corporations maintain high-value portfolios through real estate properties and mortgages. Their major operation is leasing properties and dividing the collected rent among the shareholders. The investors benefit as their capital boosts gradually without actually buying or maintaining the property.

What are REITs?

REIT stands for Real Estate Investment Trust. It is an investment institution that operates and manages real-estate projects to generate profits. The base module of REIT real estate is mutual funds as they collect the capital of various investors. The investors do not have to buy, finance or manage the properties and still get to earn the dividends on investments from REIT investing.

How Does a Company Qualify as a REIT?

Real Estate Investment Trust Companies have a simple and basic working model. The company earns rent on the properties that it has leased to people and then the profit is divided among the shareholders. In case the REIT is a mortgage REIT, it does not own the property but finances it instead. The major source of income for these REITs is the interest in investments.

There are a few provisions that an institution has to comply with to qualify as a REIT Real Estate Investment Trust Company. Some of the major requirements are -

  • The firm should be structured as a corporation or as a business trust.

  • The shares of the firm should be completely transferable.

  • Around 75% of the investment should be in real estate industry

  • 75% of the total gross income should be generated from rents, real estate mortgage interest, or sales of property.

  • 90% of taxable earnings should be paid in the form of a shareholder's dividend annually.

  • The corporation should be a taxable entity.

  • The corporation should be operated by a council of directors and trustees.

  • The firm should have a minimum of 100 shareholders after the completion of its first operating year.

  • Less than 5 individuals should not hold more than 50% of the total shares.

  • 95% of REITs income should be invested.

Types of Real Estate Investment Trust (REIT)

There are different types of REITs -

  • Equity REITs - It is the most common type of REIT. It operates and manages real estate properties that are profit-generating. The main source of income for Equity REITs is rent generation from real estate and not property reselling.

  • Mortgage REITs - Mortgage REITs are the one that provides finances to property owners and manages them directly or indirectly through mortgage-backed securities. The main source of income for mortgage REITs is the difference between the interest they pay to investors and the rent they earn. This type of REIT real estate is highly sensitive to interest rate changes.

  • Hybrid REITs - The REIT corporation which uses the business strategies of both Equity and Mortgage REITs.

The types of REITs are also divided based on how the shares are distributed -

  • Publicly Traded REITs - These REITs have their shares listed under the national securities exchange and are traded by individual financiers. The trade of these shares is operated and managed by the SEBI.

  • Public Non-Traded REITs - The Public Non-Traded REITs also fall under SEBI but their trade is not covered under national securities exchanges. Therefore these shares are less liquid and are more stable. This is because these shares are not affected by share market fluctuations.

  • Private REITs -Private REITs are the ones that are neither registered under SEC nor do they trade on national securities exchanges. These are generally sold to institutional investors only.

Advantages of REITs

There are various advantages and benefits of REIT investing -

  • Steady Income - REIT real estate investments generate substantial dividend earnings which lead to a steady rate of capital appreciation in the long run.

  • Diversification - The investors get the option to diversify their real estate properties as major Real Estate Investment Trust Companies that are traded fall under stock exchanges.

  • Transparent Dealing - All the files of financial reports are audited by experts and therefore it gives the investors the chance to gather information on all important categories like ownership, zoning, and taxation.

  • Liquidity - Major parts of the REITs are traded on the stock exchange which makes them highly liquid. This makes them easy to buy and sell.

  • Risk-Adjusted Returns - REIT investments provide investors with risk-adjusted returns and stable cash flow. They provide investors with a reliable source of income even with high inflation.

Limitations of REITs

Every coin has two sides, similarly, everything has its advantages and disadvantages. A few disadvantages of REITs are -

  • Zero Tax Benefits - The dividend income from REITs are concerned with taxation and therefore REITs cannot be considered tax beneficial in any form.

  • Market Risks - Market fluctuations can be considered one of the major risks concerned with REITs. Therefore, it is very important to research well before investing especially for investors with low-risk capacity.

  • Rate of Capital Growth - The rate of capital appreciation is very low in REIT real estate. This is because 90% of their earnings are divided among the shareholders and they get only 10% to reinvest.

Who Should Invest in REITs?

Real Estate Trust property investments are high valued and therefore are expensive. Consequently, if you want to invest in real estate property, you must have large substantial capital funds at your disposal. The major investors in REITs are generally big institutional financers like insurance corporations, bank trust councils, endowments, pensions funds, etc.

How to Invest in Real Estate Investment Trusts?

The trade of REITs is very similar to that of popular public stocks, buyers can choose the REIT from the list of stock exchange markets. There are three ways in which investors can make Real Estate Investment Trust investments -

  • Stocks - A very basic and direct way of investment in REITs for investors is buying and selling stocks.

  • Mutual Funds - Mutual Funds are a very easy and significant way of portfolio diversification for investors. Mutual Funds fall under the category of indirect investment and therefore an investor has to invest through a mutual fund corporation.

  • Exchange-Traded Funds - Under the exchange-traded funds, financers avail the ownership of the property indirectly.

Real Estate Investment Trusts can be called Mutual Funds where bonds and shares are replaced by properties. Another added feature REITs get is assistance from professional financial advisors that help investors to make better choices and decisions in terms of investing in the correct REIT.

Tips to Assess Real Estate Investment Trusts

As an investor, you can follow the below-mentioned tips to avail maximum benefit from a REIT investment.

  • Before choosing a REIT real estate investment, make sure you research well about the institutions that have a positive history in concern of providing good dividend yields. You should also compare various REITs on the role and participation of the company in capital appreciation, especially in the long run.

  • You can work on your portfolio diversification by choosing the stock exchange as a trading method. In this, you can earn maximum profits without any long-term investments.

  • For investments, always choose the REITs that have a wide variety of properties and tenants.

  • You can also go for mutual funds and ETFs that provide finance to REITs. In this manner, the funds come along with professional financial assistance and therefore management of funds would be more efficient for the investors.

  • Always choose corporations and companies that have been active in the market for a long time and have an experienced team of professionals. This would be more beneficial and high-profit yielding.

  • Last but not the least, you should find out about the working of the REITs and also how they compensate for their investments. You can analyse their performance history by tools like funds from operations or financial management rates. This would also facilitate the EPS growth of REITs and present dividend earnings to maximise returns before investment.

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