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Everyone loves to have property but, …
For many of us, real estate is always a point of attraction while discussing investment. Because it has a great long term track record which provides steady and consistent income. People make money either by selling property at a higher rate or through renting it out.
If one does not get a good price to sell still she can keep it for the rental income or use it after construction.
After all prices rise or drop by the demand. So one always tries to invest in those properties which have a higher possibility to rise in demand. There are other benefits which are listed out below.
Benefits of investing in Property Investment
- Get good appreciation value over the time
- Can choose property on our own
- We can rent / sell at our desired price
- We can use property for ourselves
Unfortunately there are some disadvantages too which are associated while buying or maintaining it. Those disadvantages are as below.
Problems we may face
We can’t buy the desired property with our budget. Best properties attract more rich buyers and hence the common person mostly can’t afford to invest in such properties.
Risk of Fraud
If we do not have the proper knowledge then a fraudster can cheat us by selling property which is not owned by him or not having authority to sell.
If the seller is hiding any information at the time of selling then we may face legal issues related to that property later.
Issue of Local Thugs
If our property is at a main location so any local thugs (or punks) may harass or threaten us to sell him at a very cheap rate. We may have to agree to sell that property just out of fear or if we do not have good support from judicial authorities.
Takes time to sell at desired price
Real Estate properties take time to sell actually. Because buyers can’t bring much capital instantly. If we are in a hurry to sell, then the property might get sold at a very cheap rate.
High brokerage cost
We do not have time to go door to door for asking buyers or sellers to sell or buy property at desired price. So we approach the broker to avoid hassle. But the real estate brokers charge a minimum of 2% of the value.
Value varies location to location
Properties at the main location are always attractive. Because it pays us high income flow over the period. And also value appreciation at good speed. But those properties are very much costly that only rich people can afford. With no option we move towards other locations.
Risk of government policies
If you bought a property and suddenly the government decided to widen the roads or acquire your land then you will get paid a very much lesser amount than you have bought.
High cost of transaction
When we go to buy or sell the property we may have to pay various taxes, charges and duties, which are high in amount and we can’t avoid or reduce it.
Hard to maintain and protect
If you are having the property for yourself it will be your responsibility to watch it vigilantly and monitor it from time to time.
This article give you the Best Solution for all these problems we may face while investing in Real Estate
REIT – Best Property investment fits everyone’s budget
No doubt having the physical property is good for living or doing the business. But just for the purpose of investing in Real Estate, choosing physical property carries all those risks given above.
If you want to invest your money in real estate then REIT is the best way to do so. We will learn all the information of REIT, its benefits over buying actual property.
Let’s see how it differs from the Property.
Introduction of REIT
REIT is the abbreviation of Real Estate Investment Trust. It is a trust founded for pooling all the investments of individual people and investing it into Real Estate properties to generate good income and pay back to the investors.
How REIT works
REIT collects money from people like you and me and invests it into physical Properties and after completing the construction they rent it out for commercial or residential purpose and generate income. Sometimes they sell that property and make profit.
REIT companies can also earn interest income by giving loans to construction companies.
All the income is then distributed in a proportionate amount to the investors as a dividend income.
History of REIT
REIT started in 1960 when US’ 34th President Dwight D. Eisenhower signed the legislation that created the new approach to income-producing real estate investment. A manner in which investments can be done in Real Estates just like in Mutual Funds in which stock-based investments are combined.
REITs were first introduced in India by Securities and Exchange Board of India (SEBI) in 2007 almost 50 years after they were first incorporated as an investment vehicle.
Earning potential of REIT
Earning potential is similar to having the income from property itself. Here REIT develops the properties faster than our physical property, so we can beat the inflation too.
Main thing in REITs is that we get regular income flow.
Risk involved and control on REIT
When we discuss the investment no matter how safe it is, it still carries risk. Either systematic or unsystematic risk is involved in every investment.
REIT is not an exception to that. When a project fails to develop for a number of reasons or sudden crash comes in the economy all the sectors including REIT gets affected and can’t generate expected income.
In India REITs are regulated by SEBI (Securities and Exchange Board of India) but still there might be some loopholes. By exploiting that someone tries to cheat investors or the company. That risk is systematic, meaning we can not avoid that risk.
But still in my opinion this is better than having multiple properties invested at different locations.
On 26th September 2014 SEBI’s regulations on REIT came into picture by Securities and Exchange Board of India (Real Estate Investment Trust) Regulations, 2014 to control and monitor REIT Activities by SEBI. So that innocent people should not be cheated by some people.
Types of REIT
REIT are categorized into three types.
Equity REIT is the popular and well-known type of REIT, if it focuses on buying, managing & developing investment properties. Since regulations by REIT are required to develop and hold the properties for the longer period of time, so their main source of revenue is from rent of their holdings. REITs invest in specific types of properties, which generally fall into the following:
- Office and Industrial Complexes
- Retail Shops
- Residential Flats
- Hotels and Resorts
- Health Care (i.e. Hospitals)
- Self-Storage (i.e. Warehouse)
- Raw Land
This type of REIT is not so popular as equity REITs, because this REIT lends loans to other Real Estate construction or investors or invests in existing mortgage loans on properties (instead of investing directly in the properties by their own). Hence, their main source of revenue is interest from the loans they lend.
Hybrid REIT is a combination of both types of REITs that is equity and mortgage REIT, it diversifies between owning properties and making loans to real estate investors. Their revenue comes from both rental and interest income.
Who can invest in REIT
Any individual, Group Entity, or any entity which has a legal status can invest in REITs.
As per the update on April 2019 minimum limit of investing in REIT is ₹ 50,000 for Public Offers by the company and also from Open Market for trading.
Means you just need Rs. 50,000 to invest in Property. Interesting right?
How to Buy REIT units
To invest in REITs you must have a Demat account.
You can open any of the free demat accounts given below.
Then you have to add money to the account and ask the broker to buy. Or otherwise you can directly buy on your own.
REITs are in the form of units just like a Mutual Fund. So we can invest our desired amount in multiple of its lot size.
Advantages of REIT
Let us understand all the advantages of REIT
High Yield Dividends
REITs yield about 90% of the profit returns to the investors in the form of dividends. That means. If you have invested Rs. 50,000 and in the first year the company earned returns of 4% of asset value and declared 90% then you will receive Rs. 1800. Remaining 10% will be accumulated in the company and reinvested in other projects. This doesn’t mean that you will never get 10% back.
When your money is getting reinvested in any asset then its value goes up so you can get higher returns to compensate for previous dividends you sacrifice. When you decide to sell, practically you will get all your money for which you are entitled.
Hedge against Inflation
Inflation is not good or bad but it is a fact. It always exists in every economy. In inflation prices of the product always goes up. This means that if you have the same income for the 2 years then you are not growing as you pay more over the time for the same products you purchase.
If you invest in REIT. It gives you higher returns year-on-year. So that you can easily beat the inflation.
When you invest in REIT, managers of the trust do not invest in a single asset. Your investment is actually distributed in all the assets they hold. It gives you the highest safety on your investments.
Fits for everyone’s pocket
The lot of size of REIT investment is decided by the SEBI and that which is already suitable for every individual. So that everyone can participate in REIT and enjoy the benefits and satisfaction of investing in Real Estate.
Lesser fluctuation in prices
Unlike stocks, REIT do not fluctuate much. They do not change quickly in the short run. It takes time to actually show results.
Risk is managed by experts
Experts try hard to make us more profitable by investing in safer assets. They have studied well about Risk Management techniques and hence try to maintain optimum level of risk which benefits everyone.
If we invest in physical Property then it is hard to sell out or buy quickly. But REIT does not have liquidity issues. We can release or invest our money when we want, no waiting time. No questions asked.
No need to monitor properties
When all the physical properties are managed by REIT, there is no need to have personal attention any more. We just sit relax by investing in REITs.
Earn dividends without hassle
We are entitled to earn dividends automatically in our bank account. No need to ask anyone about the dividend money.
All the process is regulated, governed by authorities.
Disadvantages of REIT
As of now we have understood all facts about REIT. As every coin has another side, so the same goes with REIT. Though there are advantages of REIT, so there are some disadvantages which must be understood before going further.
Fewer returns from over diversification
If the REIT manager is overly focusing on safety and investing money in too many projects then possibly it is not creating good income as it is overly diversified.
Low growth because of high dividend yield
Equity Shares do not distribute total income as a dividend among the investors. Equity Shares plow back some money and reinvest in the company for the company’s growth in the long term.
But REITs distribute most of the income among investors in the form of dividends. It’s dividend yielding rate is approximately 90%. So with only 10% of profit, REIT companies can not have higher growth.
Not tax friendly
REITs are not tax friendly because dividend income from REITs are taxable unlike Equity Shares.
Investor can not define property
We are just entitled to earn a dividend. We are not the owner of any property “REIT” owns. So, investors can not define the property in which his money got invested.
Risk could be significant
If some projects fail then REITs can not generate income. That is the significant risk we may face while investing in REIT.
We may have to pay high cost for management fees & transaction charges
This is quite impractical as compared to the physical property. Because with physical property the acquisition (transaction) charges are much higher than REIT.
But still transaction charges and management fees vary between different companies.
Quick summary of Advantages and Disadvantages
Advantages of REIT
- High-Yield Dividends
- Hedge against Inflation
- Good diversification
- Fits investment for everyone’s budget
- Lesser fluctuations in prices
- Risk is managed by experts
- More liquid investment compared to physical asset
- No need to monitor properties
- Earn dividends without any hassle
Disadvantages of REIT
- Fewer returns from over diversification
- Low growth because of high dividend yield
- Not tax friendly compared to Equity Shares Investment
- Investor can not define property where his money got invested
- Risk could be significant
- High cost on management fees & transaction charges
REIT / InvIT Shares List
Now let us know what are the listed REIT and InvIT shares list in the Indian Stock Market (i.e. National Stock Exchange NSE).
As of now very few securities are listed in NSE. You can see the list by clicking following buttons.
After reading all these points we can come to the conclusion that REIT investments are the best over physical property if we are just solely thinking of investing in the property.
The emotional value of investing in your own residential area or the commercial area which we are going to use for living or running your own business could be more significant than the REITs.
If you have any suggestions then feel free to suggest in the comment box below. Or send us email on [email protected]
Thank You for reading this article with great concentration.