“I have surplus money and I want to invest in commercial real estate” – one of my clients told me.
After a discussion of initial fifteen minutes, we realized we were counting the risk points only and did not touch upon returns at all!
Don’t we all know how tremendous the task is to find the right property, at a right price, and at the right location?
Now, consider that a magic wand came and Boom! You spot the perfect property….BUT:
- Charges, stamp duty,
- Paper work,
- Lawyer fee to ensure right title, and
- Endless miscellaneous expenditure.
Hey, even that step is done – Time taken 6 months to an year.
But, wait a minute!
After this step, you are the legitimate owner but struggle never ends.
Or, does it end here?
You need to find a right tenant, who pays the rent on time and maintains it, and you don’t have the risk of losing possession!
“Oh God! Only if I could do all this on click of a mouse, like Gold bonds and mutual funds. Help me here please.” sighed my client.
That’s where I introduced him to REIT or Real Estate Investment Trust and oh Boy! Trust me, he jumped!
So, let’s dive in and learn more about what is REIT, how it works and why you should invest in it.
What is REIT?
Many people consider real estate as important asset in their investment portfolio. Once of the important reasons why real estate is good because it has great long-term track record and can provide you with a steady income. What more satisfying than to own a property of your own versus staring at other stocks.
However, there are several challenges associated with owning a property like money for down payment and ability to get a substantial loan. If that is not enough then you also need enough cash in your pocket for maintenance and repair of property.
Fortunately, there is a way where you can invest in real estate without owning individual properties. It’s called Real Estate Investment Trust (REIT)
REIT is an entity that owns income-producing real estate. Their structure is similar to that of mutual funds where underlying asset is real estate and the same is held by investors in form of units. REITs are professionally managed by REIT managers and property managers who charge a fee in exchange for their services.
How does REIT works?
REITs invest in real estate properties and distribute profits generated from these assets (primarily rental income) at regular intervals to REIT holders. REITs are required to distribute at least 90% of their taxable income as a dividend. Of course, when property appreciates, your unit value goes up! So accumulation of wealth continues!
Why Invest in REIT?
REITs offers a variety of advantages to different individuals including the fund sponsor, investor and the real estate developer. Here are some of the key advantages of investing in REITs:
1. Cost-effective and time saving
REITs help save time, effort and money. Of course, you should invest in REIT to reduce all the worries that are involved in buying a physical property. Some of the risks involved when you buy a property are finding right property, at right price, in right time, paper work! (Enormous task), charges – Stamp duty and lawyer fee, maintenance of property, and finding tenant. The time and effort taken in selling the property is again similar to the hassles faced during purchase.There is no transparent mechanism of finding the right price and it varies as per the situation of both seller and buyer.
You can easily sell the units of publically listed REITs with just a click of a button in any major stock exchanges as compared to physically owning a property.
3. Quality of Property
REITs provide an opportunity to buy units in prime real estate assets in the country which otherwise is beyond reach of most of individuals. It offers an opportunity for individuals to buy Real Estate as large institutions do. For example, you can’t buy a floor area in prime properties similar to Embassy Golf Links in Bangalore as your budget is low. However, REITs allow you to buy the units for that property that will give you a percentage share.
4. Portfolio Diversification
REITs also offer you access to the real estate market typically with low-correlation with other stocks and bonds
There has been a tremendous growth that the market has witnessed in many sectors even during the times of recession. With Equity markets and Gold prices nearing all time highs and fixed income yields at all time low, REITs provide an interesting investment option. This seems to be the best way to diversify in the real estate market and it can offer you an appealing income producing investment.