REITs and Real Estate are two prominent means of investing in real estate. Let’s look at the pros and cons of both investments and which one should you select
Real estate has traditionally been a favoured method of investment among Indians. It makes a solid complement to any portfolio and enhances your wealth as well as functions as a superb diversification tool. Physical real estate has been preferred by investors for a long time but recently Real Estate Investment Trusts (REITs), have started to acquire popularity.
Real Estate Investment Trusts (REITs):
A real estate investment trust (REIT) is an investment trust that owns, operates, and funds real estate with the main purpose of generating revenue. It oversees a portfolio of real estate assets that have high value and produce steep rent and leases. REITs often search for large as well as small investors who want to park their money in real estate without having to own or maintain the property themselves. These investors then earn dividends which are effectively the rent or lease that is shared amongst themselves.
In India, REITs can only hold commercial buildings. At Least 80 percent of the properties it has invested in must be complete and rent producing while the remaining 20 percent might be under development.
REITs are fantastic investment tools for investors searching for a stable payout since once in at least every six months, you will get dividends on your investment in a REIT. Over a long length of time, it also enjoys sustained capital appreciation. Also, as they are regulated by Sebi, REITs have better transparency than conventional real estate dealings. It is audited by specialists and much of the information is published publically.
A fundamental downside of REITs is taxes. It not only does not provide you any tax relief but the dividends are also taxed. It can also be influenced by market volatility and thus investors with low-risk appetite must not invest.
Real Estate:
Traditionally, investing in real estate implies buying a property. These might be residential as well as commercial in nature. Such properties include houses, flats, farmland, office space, etc.
As a real estate investor, you may acquire and keep property, or fix it up and sell for a profit. You can also acquire land to develop a property to hold or sell.
While there are a number of advantages to purchasing a property including tax savings on home loans, more management, etc there are also certain cons. The biggest drawback is that the full expenditure of a property rests on you. From downpayment to EMIs, to other registrations, you have to deal with all of them. Secondly, you cannot buy a house till and until you have a significant corpus saved. The initial investment in a real estate property is enormous. Also, it is not required that you will be able to sell the property as and when needed. It might take longer to locate a buyer at the price you expect from the property.
Real Estate vs REIT
You don't have to purchase the entire property with REITs, the initial investment is far lower than in actual real estate.
You may easily sell your units with REITs since they are traded in the stock market. This is a big advantage over real estate, where you must find a buyer for your property yourself.
You don't own any property if you buy in REITs, but if you invest in actual real estate, you receive a piece of property that you may use as you see fit.
Investing in REITs, unlike tangible real estate, does not allow for a property to be cancelled or delayed owing to permission. You don't have to deal with the burden of purchasing and maintaining the property; instead, you simply invest in it.
Physical real estate, on the other hand, doesn't pay dividends unless it's put up for rent.
If you take out a home loan to buy a property, you can take advantage of tax advantages. Such advantages are not provided by REITs. Even dividends are subject to taxation.
REITs and physical real estate are excellent methods to diversify your portfolio and participate in the real estate market. While REITs are a wonderful investment option if you don't have a lot of money saved and don't want to deal with the hassle of owning your own home, if you do have money saved and are ready to invest, actual real estate is also a viable option.
Comments