REITs: What are Real Estate Investment Trusts and should you invest in them?
If you are looking forward to investing in real estate, then a real estate investment trust is your best bet. These investment options offer great liquidity, are completely safe, offer diversification opportunities, and affordability. In this guide, you can learn about real estate investment trusts and why you should consider investing in them.
What are REITs?
A real estate investment trust (REIT) is a company that owns and operates income-producing real estate assets to generate revenue. These are the companies that end up managing portfolios of high-value real estate properties besides mortgages. For example, they lease properties and collect rent. The rent which is collected is later distributed among all the shareholders as income or dividends.
Real estate investment trust offers investors a fantastic opportunity to possess excellent value real estate and allows them to earn dividend income to improve the capital which time. This investment is for both small and big investors as they can park their excess funds and reap benefits.
How does a company qualify as a REIT?
To qualify as a REIT, the company needs to meet the following requirements:
- The company should be structured as a business corporation or even a trust.
- A team of trustees or a board of directors should manage it.
- The minimum number of shareholders should be around 100.
- Required to pay around 90% of the taxable income as dividends.
- Accrue at least 75% of the gross income from the rent or the mortgage interest.
- A maximum of at least 20% of the corporation asset comprises this stock under the taxable subsidiaries.
- The company must have a minimum of 75% of the investment asset in the real estate sector.
Types of Real Estate Investment Trusts (REITs)
Regarding REIT investing, you need to understand the diverse types of real estate investment trusts, some of which are mentioned here:
This type of real estate investment trust is among the most prominent ones. It is concerned with operating and managing income-generating commercial property. Rent is one of the most common sources of income here.
It is also known as MREITs, and it is involved with lending money to proprietors or even extending the mortgage facility. These trusts acquire mortgage-backed securities.
The option allows the investors to diversify the portfolio by parking the excess capital in mortgage and equity real estate investment trusts. So, the income sources here would be rent and interest.
Retail real estate investment trust:
These trusts invest in the retail segment, including shopping malls, hypermarkets supermarkets. But you need to know that the real estate investment trust does not run retail outlets. They focus on renting out the space to different retail tenants, and returns, in this case, will depend on the performance of that sector.
Residential real estate investment trust:
Residential real estate investment trusts will buy and operate the apartment building or the gated community, besides other housing establishments. Residential real estate reflects positive growth whenever the residential property demand grows.
Advantages of REITs
Some of the advantages of investing in REIT stocks are mentioned here:
The best part about investing in a real estate investment trust is that you can earn steady dividend income and allows capital appreciation over time.
As most real estate investment trusts are traded frequently on stock exchanges, it allows investors to diversify their real estate.
The real estate investment trust is completely transparent because the market regulator SEBI regulates it. It allows the investors to avail all the information on different elements like taxation and ownership.
Most real estate investment trusts offer individuals risk-adjusted returns, and health generates steady cash flow. It allows people to have a steady income source even when the inflation rate is completely High.
Limitations of REITs
There are also some limitations to investing in REIT, which are mentioned here:
Regarding tax saving, there is no tax benefit related to a real estate investment trust. It is because the companies are also subjected to taxation here.
One of the major risks associated with this type of investment is that there is always a market-linked risk, and the market is susceptible to fluctuations. It is the only reason why investors with weak risk appetites need to check the pros and cons before they invest in this stock.
The prospect of capital appreciation is only satisfying for some investors.
Who should invest in REITs?
You would wonder whether you should invest in a real estate investment trust, and then you must know that it depends on your risk-taking appetite. Investors looking forward to parking their funds in real estate investment trusts should have a huge capital at their disposal.
For instance, big institutional investors like bank trust departments and insurance companies' pension funds can suitably invest in the financial tool. This investment can also work like a retirement portfolio for you as it helps you get a mix of properties. You can diversify your asset classes to a great extent by including real estate, and you do not even have to manage it personally.
You can earn a huge amount of return provided the value of the real estate investment trust appreciates. Additionally, these companies end up distributing at least 90% of the taxable earnings to the shareholders, which serves as a great avenue to generate income steadily.
How can you invest in Real Estate Investment Trusts?
Once you understand what REITs are, you also need to understand how to invest in real estate investment trusts. Investors can buy shares in a separate real estate investment trust just like any other popular public stock. It is because real estate investment trusts are also enlisted in most of the stock exchanges.
Stocks: People who are looking for a direct way to invest in real estate investment trusts should consider buying stocks.
Mutual funds: By choosing this option, you can diversify your investment portfolio to a great extent. You would be required to invest in a fund through a mutual fund company because it is an indirect investment method.
Exchange-traded funds: You can avail of indirect ownership of properties and would also further benefit from diversification with this specific investment option.
You need to know that a real estate investment trust is an investment option that resembles mutual funds, and the only difference here is that you will be holding properties instead of bonds or stocks. You can be entitled to avail the help of financial advisors to make better-investing decisions.
Tips to assess Real Estate Investment Trusts
You can easily assess the benefit of real estate investment trust if you factor in the following tips:
You need to look for corporations with a great track record in offering optimum dividend yields before investing in a specific real estate investment trust. You must analyze the company's role, facilitating long-term appreciation.
You can diversify your investment portfolio by buying shares through stock exchanges, and there is no need for you to stay invested for the long term.
You can also park your funds in real estate investment trusts with different properties and tenants.
You can go for companies that have been active in the field for the past few years and have experienced teams.
It would be best if you opted for mutual funds when investing in real estate investment trusts. As these funds come with professional help, you can also manage them more professionally.
Lastly, you must understand how the investment is compensated. For example, you must do a scrutiny check of the management of the real estate investment trust and the performance record with the help of prices, including funds from operations or the fiscal management rate. At the same time, it would be beneficial to factor in the real estate investment trust growth in the EPS and current dividend income before investing to make the most of the returns.
Q. How does a company qualify for a real estate investment trust?
The company must comply with different eligibility criteria that require the real estate investment trust to own income-generating real estate for the long term.
Q. How can you invest in a real estate investment trust?
Real estate investment trusts are listed and traded on stock exchanges, and you can purchase the units through your Demat account. You can also explore the IPOs to make the most of the real estate investment trust launches.
Q. Can real estate investment trust make you rich?
Yes, a real estate investment trust can make you rich, but you need to know that just like any other investment, it also comes with some benefits and risks. You must understand the available real estate investment trust options before making any investment decision.
InvITs or infrastructure investment trusts, allow individuals or institutional investors to invest in infrastructure to earn returns.