The benefits and drawbacks of investing in REIT

pros-and-cons-of-reit

Real estate investment trusts, commonly known as REITs, are firms that own and operate real estate with the goal of generating income. These companies manage portfolios containing valuable real estate properties and mortgages. For example, they lease properties, collect rent, and distribute the collected rent as income and dividends among shareholders. Keep reading to learn more about REITs and the advantages and disadvantages of investing in REITs.

How do REITs work?​

A REIT is a company that owns a diverse portfolio of income-generating properties. This portfolio can include various property types such as office buildings, retail centres, self-storage, apartment complexes, healthcare facilities, hotels, timberland, and warehouses.

Similar to mutual funds, REIT India pools money from multiple investors who are issued units representing fractional ownership. Investors receive income from these properties through regular distributions, including dividends, interest, and capital repayment.

What are the benefits of investing in REITs?

Steady Income

REITs in India provide a stable and predictable income source, offering a reliable passive income stream beneficial for retirees or income-focused investors. By law, these companies must distribute at least 90% of the taxable income as dividends to shareholders.

Diversification

REITs own a diverse portfolio with different tenants, reducing the risk of depending on one property or tenant. REIT investment in India gives you access to various real estate assets in different places, like homes, offices, factories, healthcare facilities, and infrastructure projects.

Accessibility advantage

REIT in India provides a more accessible entry into real estate compared to the substantial upfront capital usually needed for direct property investment. With lower investment requirements, even investors with modest capital can participate in the market, potentially experiencing growth and generating income that might otherwise be challenging to achieve.

Transparent and simple process

The process of buying and selling REITs is transparent, simple, and flexible. Investors can easily access information about REIT prices and actively participate in trading throughout the day.

Professional property management

Expert professionals manage REITs, relieving investors from the time-consuming and knowledge-intensive tasks associated with property management. Expert management ensures efficient property upkeep, positive tenant relations, and strategic decision-making, potentially resulting in better returns and reduced risks.

Potential risks of REITs

When evaluating REIT pros and cons, it's crucial to consider potential risks, especially with non-exchange traded REITs, as they are not traded on a stock exchange. Some cons of investing in REITs are:

Lack of liquidity

Non-traded REITs are typically illiquid investments, meaning they cannot be quickly sold on the open market. Therefore, if you find yourself in a situation where you need to raise funds by selling an asset, selling shares of a non-traded REIT may not be a readily available option.

Subject to market risk

Similar to other investments, REITs are susceptible to market fluctuations. Economic downturns or shifts in interest rates can influence the value of real estate assets, potentially resulting in declines in REIT share prices. Investors should anticipate potential volatility and maintain a long-term perspective to go through such market cycles.

Dividends are taxed as regular income

Despite being generally tax-efficient, it's important to note that REITs come with tax considerations. Dividend income from REITs is usually taxed at ordinary income tax rates, which could be higher than capital gains tax rates. Moreover, not all dividends received from REITs qualify for preferential tax treatments.

Conflicts of interest

REITs usually have an external manager instead of their own employees. In this structure, the REIT may pay more fees to the external manager based on property acquisitions and assets under management, which may not necessarily align with the interests of shareholders.

The final word

REITs, through their diverse portfolios, steady income streams, and professional management, make real estate accessible to a broader investor base. However, potential drawbacks, such as lack of liquidity, market susceptibility, and tax considerations, should be carefully evaluated.

Frequently Asked Questions

Q: Are REITs a good fit for short-term investors?

A: REITs, like most real estate investments, are generally better suited for long-term investors.

Q: I'm a young investor with limited capital. Can I still invest in REITs?

A: Absolutely! One of the key advantages of REITs is their accessibility. Compared to the hefty upfront capital often required for direct property ownership, REITs allow you to participate with lower investment thresholds. It makes them an excellent option for younger investors or those with limited capital.

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