REIT Investing: The Hassle-Free Way to Invest in Commercial Real Estate in India

REIT investing involves the REIT buying and developing properties to operate them as part of its very own portfolio for investment.

REIT Investing: The Hassle-Free Way to Invest in Commercial Real Estate in India
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It was long ago when the government made it possible for investors to invest in large-scale commercial real estate projects. However, it was only recently that individual investors embraced the concept of REIT investing. Real estate investment trusts allow individuals to invest in income-producing and large-scale real estate. 

REIT investing is done via REIT which owns and typically operates related assets or income-producing real estate. This includes loans or mortgages, warehouses, self-storage facilities, resorts, hotels, apartments, shopping malls and office buildings. Unlike the other real-estate companies’ investments, REIT investing does not develop real estate properties for the purpose of reselling. In a contrast to this, REIT investing involves the REIT buying and developing properties to operate them as part of its very own portfolio for investment. 

Assessment of REIT

  • REITs provide a way for individual investors to earn an income share by way of ownership of commercial real estate, without the need to go out and purchase commercial real estate. 
  • REIT investing is true-total return investing. This type of investment provides high-dividend yields accompanied by decent long-term capital appreciation. Unlike conventional real estate, REIT investing today involves REIT trades on stock exchanges. 
  • Depreciation leads to overstating a decline in the property value of an investment. Thus, instead of utilizing the payout ratio for the assessment of REIT, it is essential to look at funds from operations, further making it one of the best investment options

Types of REITs

REITs as one of the best investment options own and manage income-producing real estate, whether it is the property itself or the mortgage on the property. REIT investing allows you to invest in companies on an individual basis via an exchange-traded fund or along with a mutual fund. There are many types of REITs available such as: 

  • Retail REITs

About 24 per cent of the REIT investments are in freestanding retail and shopping complexes. However, it is important to keep in mind that while considering an investment in real estate, it is important to examine the retail industry itself. 

  • Residential REITs 

These types of REITs own and operate multi-family rental apartments as well as manufactured housing. This type of REIT investing involves considering several factors before starting. For example, the best apartment markets tend to be where the affordability is low as compared to the rest of the country. 

  • Mortgage REITs

About 10 per cent of the REIT investments are in mortgages as opposed to real estate. 

  • Office REITs

This type of REIT invests in office buildings. This type of investment receives rental income from tenants who have generally long-term leases. 

Several REITs are registered with SEC and can be publicly traded on stock exchanges. This type of REIT is referred to as publicly traded REIT. The other types may be registered with SEC but are not publicly traded. These are referred to as non-exchange REITs or non-traded REITS. This is one of the most significant distinctions among the different types of REITs. 

If you are looking forward to REIT investing, you must understand whether it is publicly traded and the ways in which it can impact you. Publicly traded REITs can be purchased with a broker as an intermediate. In general, you can purchase preferred stock, common stock and debt security of a publicly traded REIT and the brokerage fees will be applicable. The non-traded REITs are sold by a financial advisor or broker. Non-traded REITs also have a high up-front fee. 

Special REIT Tax Considerations

Most REITs pay out at least 100 per cent of the taxable income to the shareholders. The REIT shareholders are responsible for paying tax on capital gains and dividends, received in connection with REIT investments. Dividends paid by the REITs are treated as ordinary income and are not entitled to reduced tax rates on other types of corporate dividends. 

On a Parting Note

One of the most significant benefits of REIT is the high-yield dividends. REIT must pay out 90 per cent of the taxable income to shareholders. Another benefit of REIT investment is the diversification of the portfolio. Not a lot of people can simply go out and purchase a commercial real estate property to generate an income passively. However, REITs offer the public to do the very same. Moreover, purchasing and selling real estate often takes some time, tying the flow of cash and yet REITs are highly liquid and can be bought or sold with a simple click of a button. 

Conclusively, Investing in REITs is a good way to diversify a portfolio outside conventional bonds and stocks and can also prove to be attractive for long-term capital gain appreciation and strong dividends. 

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