What is a Real estate investment trust? And how to make an effective investment in real estate through REITs?
A REIT unit, at its most basic level, reflects part ownership of the Trust’s Real Estate Assets and entitles the unit holder to a portion of the REIT’s income. A REIT is typically obligated to pay out at least 90% of its Net Taxable Income in dividends and interest to its unitholders. The blog will introduce you to what are REITs and how to make an effective investment into real estate with the help of REITs!
Commercial property, such as stores and office space, is a less typically used kind of Real Estate investment. When you factor in the difficulties of obtaining the necessary permissions, obtaining long-term leases from viable tenants, and assuring prompt rent payment, it’s no surprise that few people pick this investment choice.
What are REITs? (Real estate investment trust)
There is, of course, another method to get into real estate investing: buying shares in publicly traded real estate corporations. However, these investments are subject to market risk, and despite the fact that real estate is the underlying asset, they are more correctly classified as mid or small-cap equity investments with a high degree of volatility.
President Eisenhower signed the REIT Act title into law as part of the Cigar Excise Tax Extension of 1960, which gave birth to the REIT idea. The REIT was founded by the US Congress to allow US investors to invest in and profit from diverse, large-scale, professionally managed real estate portfolios in the United States.
REITs are similar to Mutual Funds in that they allow several investors to pool their funds and the assets are professionally managed by a designated Manager in both situations. However, while Mutual Funds’ underlying assets are often Equity, Debt, Gold, or a mix of these, REITs’ underlying assets are predominantly Real Estate Holdings or loans secured by Real Estate.
When a real estate company agrees to establish a Real Estate Investment Trust, it becomes the REIT’s Sponsor and names a Trustee. The Trustee retains the Trust’s Real Estate Assets in its Trusteeship, and the Sponsor no longer has direct authority over these assets. A REIT can directly or indirectly control its Real Estate Holdings by using a Special Purpose Vehicle (SPV). In the case of REITs, the SPV is a domestic corporation that owns the REIT’s Real Estate Assets on its behalf, and according to laws, the Trust must own at least 50% of the SPV. Now that you know the major features, as well as how to invest in them, let’s tackle the big question: “Should you invest in REITs?”
Making an effective investment in Real Estate
Because REITs, like Exchange Traded Funds (ETFs), are listed and traded on stock exchanges, buying units on the stock market is the best method to invest. As a result, if you want to invest in REITs in India, you’ll need a Demat Account. The price of REIT units on stock exchanges fluctuates based on demand for units as well as the REIT’s performance, just like that of Exchange Traded Funds. Embassy Office Parks REIT, Mindspace Business Park REIT, and Brookfield India Real Estate Trust are the three alternatives available right now.
You may invest in REITs through mutual funds in addition to stock market transactions. Currently, the Kotak International REIT Fund of Fund is India’s only international mutual fund that invests solely in international real estate investment trusts. In recent years, a few domestic mutual funds have begun to participate in REITs; nevertheless, their real exposure to this Real Estate Investment is fairly restricted. As a result, the only option to get substantial exposure to real estate right now is to buy REIT Units on the stock market.
The major reason to invest in REITs is to diversify your investment portfolio by gaining exposure to commercial real estate without having to deal with the headaches of owning and managing a single or multiple immovable property. Professional asset management and a relatively small investment ticket size are two more advantages of investing in REITs.
While these are undeniably beneficial aspects, critical drawbacks such as the limited investment possibilities and liquidity of REITs might limit your capacity to monetize the investment, even in an emergency. As a result, REITs should only make up a small percentage of your investment portfolio (ideally no more than 10 percent ).
If you want to make an effective investment in real estate then our real estate agents are here to help you, all you have to do is give us a call right away.