A BEGINNER’S GUIDE TO INVESTING IN REITsBy
Telukunta Sai kinnera, 18-May-2020
What if someone told you could pool up your resources with many other investors and invest in large-scale commercial real estate as a group?
Well, REITs allow individuals to exactly do that.
What are REITs?
REIT - 'Real Estate Investment Trust' is basically an investment corporation that owns and manages real estate properties and mortgages. REITs invest in a wide range of properties including offices, warehouses, apartment buildings, medical facilities, data centers, cell towers, infrastructure, and hotels, etc.
Cash Flow of REITs:
Individuals invest in REITs. REITs further invest the collectively obtained amount into various properties. They now make money by either giving these properties on rents or by leasing or selling them and this earned money will be distributed among shareholders as 'DIVIDENDS'.
Different types of REAL ESTATE INVESTMENT TRUSTS:
Public non-listed REITs:
These are the ones that own large real estate properties like shopping malls, office spaces, massive residential townships, healthcare, etc. Equity REITs make money by giving these properties on rents or long term lease. The earned income is then distributed among the REITs investors as dividends.
These REITs do not own properties. They only provide finances for real estate projects. Means, they earn the EMI’s or the interests on those projects which is further distributed as dividends to its shareholders.
These are the ones that are registered with SEC but are not traded on national stock exchanges.
These have an exemption from SEC registration and their stocks aren’t traded on a national stock exchange as well.
How to get started with REITs investment?
You can invest in REIT of interest by buying shares in any listed major stock exchanges as like any other public stock. You can also purchase shares in a REIT mutual fund or REIT fund. If not much acquainted with this field, you can always consider taking the help of an investment advisor or financial planner.
Here are a few pros and cons you should consider before you start investing in REITs :
- Capital required for investment is low.
- REITs provide a good opportunity to invest in large and high-quality properties.
- REITs generate good income as well as capital appreciation.
- As they have less correlation with other stocks or bonds, REITs come under lower-risk investment options.
- REITs are useful for Portfolio Diversification and save one from falling trap to any of the risks that the micro-market may show up i.e provide protection from market inflation risks.
- Maximum i.e 90% of REITs income is supposed to be distributed among its shareholders ( as dividends) as directed by SEBI. So, it is a good option for any individual to earn handsome returns.
- Professional management of REIT lowers the risk of any mismanagement of a lump-sum amount as it has certain methodologies and proper ways of working which otherwise if handled personally, would result in greater risk due to any erroneous decisions.
- REITs provide relaxation from a liquidity crunch.
So, an individual can stay tension free and be mentally freed from any investing effort or stress yet reap substantial returns on a regular basis.
However, nothing comes cent percent risk-free.
Illiquidity: Non-traded REIT investments are not easily re-saleable on the open market.
Non-assessable share value: Non-traded REITs generally do not give proper share value of assets until it’s quite sometime i.e 18 months after their offering closes. This may take up a significant amount of time, making it difficult for one to assess their non-traded REIT and its volatility.
Varied Interests: Non-traded REITs typically have an external manager rather than their own employees. This may lead to conflicts of interest with shareholders.
Interest rate:REITs do not generally perform well with increasing interest rates.
Most critical step: Selection of REIT Individuals must be very cautious while selecting the REIT in which they'd invest. This one step is most risky if improperly handled and it might land up the individual in a great loss.
Looking at the cons if you feel REIT’s aren’t for you, check out Real Estate crowdfunding platforms. With crowdfunding platforms, investors can directly invest in good Real Estate properties in the prime locations with high returns. Assetmonk offers curated high growth potential Real Estate properties with stable returns and good capital appreciation.
However, the ratio of why invest to why not invest in REITs is way higher than any other market stocks. Therefore, it'd be more beneficial for you to invest in REITs and not shun investing in it just considering the risks.
Ever since REITS have started, they have been a mini-investment and massive yielding investment option with a lower risk rate. So, why not give it a try after all?
- Capital required for investment is very less.
- REITs generate stable monthly income and good capital appreciation as well.
- They are useful for portfolio diversification.
- Non-traded REIT investments are not easily re-saleable on the open market. Therefore, they create a problem of illiquidity.
- Non-assessable share value: Non-traded REITs generally do not give proper assessable share value i.e up to 18 months before their offering closes and this makes it difficult for you to assess non-traded REIT and its volatility.
- Equity REITs: These are the ones that own large real estate properties like shopping malls, office spaces, massive residential townships, healthcare, etc.
- Mortgage REITs: These REITs do not own properties but only provide finances for real estate projects.
- Public non-listed REITs: These REITs are registered with SEC but are not traded on national stock exchanges.
- Private REITs: These are exempted from registration with SEC and their stocks are not traded on a national stock exchange.
As REITs have less relationship with other stocks, bonds, etc they come under lower-risk investment options.
You can purchase REIT shares in: 1. Any listed major stock exchanges 2. REIT mutual fund 3. REIT exchange-traded fund and so on
90% of REITs income should be distributed among its shareholders as directed by SEBI. This results in distributing higher dividends to the shareholders.
REITs invest in offices, warehouses, apartment buildings, medical facilities, data centers, cell towers, infrastructure, and hotels, etc.
With increasing interest rates, REITs cease to perform well.