In 1960, Congress created REIT to make it possible for private investors to own large-scale, income-producing real estate.
Individual investors can participate in the revenue generated by commercial real estate ownership through real estate investment trusts without purchasing any actual commercial real estate. Now, the question might arise ‘How does a REIT work?’ Let’s explore the answers with this article.
What is a REIT?
A real estate investment trust, or REIT, is a type of real estate investment trust that owns and operates income-generating properties.
Real estate is a good investment option because it allows you to diversify your portfolio beyond bonds and stocks. Additionally, REIT shares are attractive due to their two characteristics:
- Strong dividend
- Long-term capital appreciation
This investment option allows both big and small investors to invest their money in REITs and earn profits accordingly. Small investors might combine their funds with those of other investors to invest more in significant commercial real estate projects.
Properties included in a real estate investment trust (REIT) are:
- Data centers
- Healthcare facilities
- Housing complexes and other properties
Now that we understand what are REITSs, let’s see why they make a great investment opportunity, as well.
Why Invest in a Real Estate Investment Trust (REIT)?
REITs offer a mechanism for private investors to share in the revenue generated by commercial real estate without actually going out and purchasing the commercial real estate.
REITs provide investors with a consistent income stream by investing in properties that generate consistent rental income. This makes them less risky in comparison with other financial instruments.
The best part about REIT investing is that they provide the benefit of diversification without worrying about the ownership and maintenance of immovable properties.
So, let’s just dive in!
Types of REITs
The following are the types of real estate investments.
Equity is one of the most popular types of REITs. Mostly, it focuses on running and overseeing commercial buildings that produce income. Moreover, rent is a typical source of income in this area.
Mortgage REITs, commonly known as “mREITs,” are associated with lending money to proprietors and extending mortgage facilities. These REITs make money by charging interest on the money they lend to business owners.
Hybrid REITs allow investors to diversify their portfolios by investing in both equity and mortgage REITs. Here, both rent and interest are the primary sources of income for investors.
Private REITs are real estate funds or companies that are not traded on National Securities Exchange and are also not registered with the SEBI. Only institutional investors can purchase or invest in these REITs.
Publicly traded REITs
Real estate investment trust shares are traded on the National Securities Exchange and registered with the SEBI (Securities & Exchange Board of India). These shares can be purchased by individual investors through the NSE.
Public non-traded REITs
Non-traded REITs that are publicly traded are not traded on the National Stock Exchange but are registered with SEBI. These REITs are more stable because they don’t get affected by market fluctuations.
How to Invest in REIT Stocks in India?
Let us now explore how to invest in real estate investment trusts. Real estate investment trusts are frequently traded and listed on stock exchanges. These listed REITs make attractive investments. Hence, you need a DEMAT account to invest in real estate investment trusts.
In India, you can do REIT investing in three ways:
1) Equity: REIT stocks provide investors with a way to invest in the real estate market without purchasing individual properties. Additionally, REIT stocks are often considered more liquid and diversified than direct real estate investments.
2) Mutual Funds: REIT mutual funds are a type of mutual fund that invests in real estate investment trusts (REITs) and other real estate securities. These REIT funds are managed by professional portfolio managers who use their expertise to select and manage a diversified portfolio of REITs and other real estate-related securities.
3) ETFs or Exchange Traded Funds: REIT ETFs are a type of investment fund that invests in a diversified portfolio of real estate investment trusts and other real estate-related securities.
Note: Each type of REIT operates differently and may have different risk profiles, potential returns, and share prices. Hence, before investing in a REIT, it’s important to carefully consider your investment objectives, risk tolerance, and the specific characteristics of the REIT.
However, if you’re confused about which stocks to pick, you can explore smallcases:
- smallcases are readymade portfolio of stocks/ETFs, that are based on a theme idea or strategy.
- They’re created and managed by SEBI-registered experts,
- smallcase.com offers over 200+ stock portfolios, created by 180+ managers.
- Some of the popular smallcases among new investors are as follows:
Disclosures for aforementioned smallcases
Factors to Consider Before Investing in REIT Stocks
1) No Tax Benefit: The REIT dividends earned through the trust is subject to tax.
2) Highly volatile: The majority of REITs get affected by market fluctuations. Therefore, risk-averse investors should analyze the investment’s return-generating capacity before investing.
3) Low capital appreciation: In the case of real estate investment trust, the likelihood of capital appreciation is quite low. This is because they only reinvest 10% of their earnings and return about 90% to investors.
Advantages of investing in REIT Stocks
Real Estate investing can be advantageous. Let’s see how.
1) Diversification: Most of the REITs are traded on the National Stock Exchange and provide investors with the opportunity to diversify their portfolios.
2) Liquidity: Since most REITs are traded on stock exchanges, they provide the advantage of instant liquidity to investors.
3) Steady Cash-flow: Real estate investment trust offer risk-adjusted returns to investors and allow them to maintain a steady cash flow,
4) Transparency: REITs are registered with the Securities and Exchange Board of India (SEBI). Hence, they are regulated, safe, and transparent.
5) Attractive Income: Another major benefit of investing in REITs is that they provide substantial REIT dividend income to investors.
Now, you can also reap benefits of investing in REITs.
Who Should Invest in REITs?
REITs own and manage high-value real estate properties and are considered as one of the most expensive investments. Hence, investors who have huge funds to invest should think about investing in REITs.
For instance, pension funds, bank trust departments, endowments, etc., can invest in real estate investment trusts.
To Wrap It Up…
A real estate investment trust offers a steady flow of funds to investors and provides them with the benefits of diversification. Apart from this, you don’t need a huge amount of funds to begin REIT investing. Hence, if you want to diversify your portfolio, you can start investing in REITs.
Moreover, conduct extensive research before making any investment to protect yourself against scammers, and make sure that this investment is only a small portion of your overall portfolio.
The best ranked real estate investment trust companies of 2023 are:
1. Tanger Outlets
2. Service Properties Trust
3. Service Properties Trust
Starting is easy – open a brokerage account, typically a quick process taking just a few minutes. Thus, there’s no need to worry about how to buy REITs. Referring to the REIT index is also advisable. Afterward, you can buy and sell publicly traded REITs like any other stock. Buying a REIT has never been easier!
REIT investment research firm Nareit states in its mid-year report that, despite macro-economic headwinds, REITs are well-prepared to navigate the ongoing high-interest rate environment due to their strong balance sheets.
As REITs own and manage high-value real estate properties, they represent one of the costlier investment avenues. Therefore, investors who choose to invest in REITs typically possess substantial capital.
As REITs must distribute 90% of their annual income as shareholder dividends, they consistently provide some of the stock market’s highest dividend yields. This feature makes them a preferred choice for investors seeking a reliable income stream. However, one must also remember REIT dividend taxes that would still be applicable.
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