Investing in REIT vs. Real Estate
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8 March 2019 - 14:00, by , in NRI, No comments

There is a lot of debate about investing in Real Estate Investment Trust and how it is different from investing in the Real Estate market. REIT is a relatively newer concept in India however it is a very popular instrument of investment in western countries.A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. REITs have been modelled after mutual funds and provide investors a chance to earn all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders.

REITs and actual real estate investments are different from each other.

The first and the foremost, REITs have expenses and take fees for managing the portfolio. 3% off the top can cut into your cash flow when the REITs you invest in are only generating 6% net. You essentially lose 33% of potential returns this way.

Both have situations where people would prefer one vs. the other and they have very different uses. There would be exposure overlap in a diversified portfolio if investments are made in both, however each has their place.

A REIT is generally needed to gain access, as a part owner (via equity shares) of properties that may otherwise be too costly to own. REITs also give more passive requirements on time because although thorough due diligence must be conducted on every investment, minute details would not consume time.

Owning real estate properties would be preferred to reserve as much cash flow as possible and to build a portfolio, for example, starting with an apartment, followed by a duplex, a 6 unit multifamily, and then maybe an office or a retail store.

Investing in an exchange traded REIT can get capital appreciation in the form of a special dividend if the property is sold off the portfolio, but generally have little to no control as to when to realize that capital gain. REITs goals are geared 1st towards generating steady consistent revenue streams with capital appreciation as a secondary goal. One may have a personal timing issue in taxes that may make locking in that gain on sale that is different than a REITs management team. There is always a possibility to want to dispense an asset or two that the REIT manager may not want to. If an investment is made in a multifamily REIT, one may not want to lose the portfolio and geographic diversification and cash flow in favour of optimizing gains and losses.

Investing in REIT can be compared to investing in Gold Bonds. Indians are partial to buying physical gold rather than in Gold Bonds, implying that having one’s own investment in property will always provide Indians greater satisfaction than mere paper investments. The Indian property market is now almost stabilized and it is the right time to buy self-owned homes. While it is human tendency to wait and watch, the bottom of the market cannot be fathomed at the best of times.

At the end of the day, REITs are investment instruments and not a means to acquire actual property – which is always high on every Indian’s wish-list. A budget that clearly favours purchase decisions for first- time home buyers and is a step closer to the Prime Minister’s mission to provide Housing for all by 2022 is in place. 2017 is certainly the year to make home ownership a reality.

 

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