We all want to own a property. It is one of the best assets you can have, with its return on investment significantly better than most other investment tools. However, the biggest problem with this investment tool is that properties don’t come cheap. Depending on where the estate is located and how big the area is, it can cost lakhs or crores — the type of money the common man can’t afford, at least not all the time.
So, what shall small scale investors with hopes of investing in the real estate sector do? Invest in a Real Estate Investment Trust (REIT), of course! Let’s look at what it is and how it is beneficial for small as well as large investors.
What is a REIT?
A REIT is a company that invests in real estate. They’re different from real estate developers, though, as they don’t build the estate themselves. They, instead, buy the property outright and use it to earn money. The money to buy the property comes from various small and large investors, who earn returns based on how much they’ve invested.
They typically manage high-value properties and mortgages, and use the rent to distribute it among shareholders as income and dividends. So, in a way, a REIT is like a mutual fund, the only difference being that it invests in real estate instead of stocks, bonds, and similar securities.
Types of REITs
REITs are classified based on the business they invest in and the method used to transact their shares. Broadly, they can be classified as:
- Equity REITs
REITs that fall under this category typically own and manage commercial properties. The money earned by renting such properties is their main source of revenue.
- Mortgage REITs
This type of REITs lend money to developers instead of buying property themselves. The interest earned through such mortgages is their primary source of revenue.
- Hybrid REITs
Companies falling under this category lend money to developers and own commercial properties as well. So, they’re a mixture of both equity and mortgage, and hence earn through rent as well as interest on their mortgage.
- Private REITs
These are private limited companies meant for a select list of investors. They’re not registered with SEBI and neither do they trade on the stock exchange.
- Publicly traded REITs
As the name suggests, the shares of these REITs are available on the stock exchange.
- Public non-traded REITs
While this group of REITs are registered with SEBI, they are not traded on the stocking exchange.
Does investing in REITs make sense?
The only way to answer this question is to look at the advantages of this investment tool. If they resonate with you, there is no reason to not invest in one.
Since most REITs are listed on the stock exchange, you can sell your shares any time and boost your liquidity.
- Steady stream of income
REITs pay out regular dividends, which ensures a steady flow of income. Not every investment tool has this feature.
- Exposure to real estate
If not for REITs, investing in real estate would be impossible as the property prices continue to rise steadily.
Real Estate Investment Trusts (REITs) can be perfect additions to your portfolio, as they can deliver both stable incomes as well as growth, which can convert into some fairly impressive long-term overall returns. And please ensure to get a clear understanding of how these firms work—as well as risks associated with it before you get started.