What are REITs?
Similar to mutual funds, Real Estate Investment Trust (REIT) consists of a pool of assets that can aid you get good returns on investment. In other words, REIT can be considered a kind of company that lets individuals to invest or own shares of the company, in this case, buy shares of multiple real estate properties or other real estate assets. Apartments, towers, buildings, skyscrapers, hotels, resorts, manufacturing units, warehouses and loans or mortgages, sum up the investment factors for REITs. REIT does not necessarily monitor the development of a property, rather it looks at the potential for growth of a property. It is said to study the market trends and provide investors a pool of options for investment. Simply put, an investment in REIT will aid you to diversify your investment portfolio.
There are two types of REITs, namely, traded and non-traded. Traded REITs are listed in the stock exchange while non-traded REITs are the ones that cannot be traded in securities exchange and cannot be easily encashed and thus, can be illiquid over a period of time. But, what are the benefits and what are the risks of investing in REIT funds? Let us take a look at it.
Pros of Investment in REIT funds:
REITs are said to fetch more Foreign Direct Investment (FDI) in India. Pros of investment in REIT funds are:
- Get over the hassles related to real estate with REITs. The concerned authorities do that for you
- REITs are liquid capitals that ensure good return on investments (ROI) than the usual real estate investments. All you need to do is sell your shares to encash the money, in case of traded REITs
- Investment in REITs have been entitled with a special tax status, that need them to payout a minimum of 90 percent of their income as dividends. This reason itself is sufficient enough for investors to invest in REITs. The authorities have the right to increase the payout percent but don’t have the authority to reduce it. The law regarding the same mentions that the authorities cannot reduce the rate below 90 percent
- Large payouts ensure high ROI. For dividend investors, high ROI is considered to be a primary factor
- REITs can aid you to make several investments at a time and enlarge the investment portfolio. Real estate rates are independent of the stock market trends. An investment portfolio that includes both real estate and stock shares may prove to be a good backup option in case either of the market witnesses a downfall
- REITs aid you to enlarge your real estate investment portfolio. Investment pooled from a range of investors enables the trust to buy or invest in more properties as compared to individual investors. An investor may prefer to invest in a specific locality or properties of a specific builder, but REIT offers you a variety of options for investment. This way, you can secure your investments over underperforming property trends as well
Cons of Investment in REIT funds:
- Investments are subject to market risks. Cons of investing in REIT funds are:
- Reduced occupancy rates and increasing vacancies can adversely affect the revenue generation
- Share prices are subject to property rates. Decline in property rates will directly lead the share prices to drop. Also, the prices may vary according to the demand and supply of shares
- Increase in interest rates can lower the margin or potential of profit
- High dividend payouts for REITs can pressurise the authorities and the management to opt for debt to expand the real estate holdings
- Also, all REIT dividends are not eligible for 15-percent tax rates. Some dividends can be taxed as ordinary income as well