Today, many people seek to invest their money in real estate because it is always a safe investment and it represents a great investment opportunity to double the profits. If you prefer to go safe investing, then REIT can be the right bet. REIT’s are a way to diversify in the real estate market and can be an attractive investment that generates income with low-interest rates.
What is REIT?
REIT (Real estate investment trust) allows investors to merge their money through investing in real estate. Some REIT’s buy properties and rent them to tenants while others develop properties from the ground up. REIT is like a mutual fund in real estate as many investors buy shares to make money. Real Estate Investment Trust is investment companies in the real estate sector that are publicly traded. These companies hold a large number of real estate assets, both properties and mortgages from which they obtain income that they reach the shareholders in the form of dividends.
A REIT is basically a company specialized in the acquisition and operation of all types of real estates, such as residential or commercial properties. They are similar to investment funds but almost exclusively dedicated to investing in properties. These properties, in turn, are rented and the profits obtained are delivered to investors in the form of dividends. But that is not investing in property it is investing in the stock market. By acquiring a share of one of these companies, you are literally investing in the portfolio of real estate assets that it owns, neither more nor less.
They are easy to buy and sell as assets with high liquidity. You do not need to find a buyer when you want to sell. You can obtain immediate diversification as a single REIT company can own and operate hundreds or even thousands of properties around the world. You will not deal with tenants as the company takes care of, and you simply collect dividends and maintaining the properties. One can invest in REIT's with less amounts. All the work of administration of these properties will be carried out by REIT, which has exceptional experience and knowledge necessary to carry the business forward much better. It is like having an expert administrator hired to do all the work for you to get excellent income.
But also like other types of investments, REITs have some advantages and disadvantages. Let us know in detail from below points.
Pros and Cons of Real Estate Investment Trust
- REIT is a very transparent and liquid way to access the real estate sector, and you can enter and exit from it at any time.
- The capital investment is much lower compared to direct investment.
- It allows diversification since you can invest in a wide range of properties at once, like apartments, shops, hospitals, forests, hotels, shopping centres, and many more.
- Tax advantages differ from one country to another.
- They allow you to invest easily in various countries.
- If the REIT has a dividend reinvestment policy, compound interest will increase.
- It is a less risky investment and requires shorter time than direct real estate investments.
Disadvantages of REIT
- Returns are lower than obtained through direct investment.
- The frequency in the payment of dividends is usually lower, especially when there is a dividend reinvestment policy.
- Due to the size of the REITs, if you are small investors, your vote in the assemblies will have no impact on decision making.
- The investor owns financial instruments and not physical properties.
- The occasions on which the leverage effect can be used to invest are much more limited.
- As these are financial products, the correlation with financial markets is superior.
REIT Investing Benefits for Buyers and Realtors
The recently proposed budget has made cheers to home buyers and the real estate industry. Do you have a limited amount and want to invest in real estate. Now you have the opportunity to buy units of Real Estate Investment Trusts. In the recent announcement of Budget 2019, the finance minister has cleared the uncertain taxation of REITs. REITs are like mutual funds and invest in properties which help to produce profits. The REIT units are listed on exchanges and traded like stocks. The price per unit in REIT would be Rs 1 lakhs, and minimum subscription cost is Rs 2 lakhs. The costs of units are expected to go down as there is more importance and popularity is given to REITs in the market
The Budget proposes that the income earned by REIT will be taxed in the hands of investors and no tax is paid by funds. The new proposal will bring positive impact and boost the real estate industry. It is providing less funds to developers, and people can invest with lower amounts in Indian real estate. The new REIT gives an easy way to capital markets for generating income in real estate, creating a new financial asset and also given an option to exit for REIT investors. The introduction of REIT will benefit the developers with ease liquidity and retail investors with regular incomes and appreciation on price.
Boosting Affordable Houses
The Budget has granted Rs 4,000 crores through the National Housing Bank for affordable housing for urban people. This will help to remove the gap in affordable housing scheme and eased foreign direct investment (FDI) rules. The minimum built-up area of a house in Hyderabad has been reduced to 20,000 sq.mts. As previously it was 50,000 sq.mts. The capitalization requirement for FDI in real estate projects reduced from $10 million to $5 million. This will attract a lot of foreign investments and results in the growth of real estate sector. Also, a total of Rs 7,060 crores has been provided for constructing 100 smart cities.
It will have a positive impact on various segments of the real estate industry, like residential, commercial, retail, and hospitality. With Smart cities construction, there will be demand for technology-based services, and there will be a positive impact on IT Hubs in India. The Budget has been allocated Rs 14,389 crores to National Highway Authority of India under the Pradhan Mantri Gram Sadak Yojana for the development of roads.
The increase in home loan interest deductions under Section 24 will give relief to the real estate investor, and the tax sops may boost real estate demand in smaller cities. The new budget 2019 proposal has made big allocations for improving the country's infrastructure, which helps in the development of the economy.
REIT platform encouraged many people to invest in the real estate industry. They are an excellent alternative for investors who want to gain more income. They have been the vehicle chosen so that the small retail investor has access to invest in this sector in a simple and liquid way for small amounts traded in the market.
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By: Shailaja K