What is a Real Estate Investment Trust (REIT)?
- A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate.
- Similar to Mutual Funds REITs pool the capital of numerous investors.
- This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
How REIT works?
- Most REITs operate along with a straightforward and easily understandable business model – By leasing space and collecting rent on its real estate, the company generates income which is then paid out to shareholders in the form of dividends.
- REITs must payout at least 90 % of their taxable income to shareholders—and most payout 100%. In turn, shareholders pay the income taxes on those dividends.
- The Properties in a REIT portfolio may include apartment complexes, data centres, healthcare facilities, hotels, infrastructure etc.
- In general, REITs specialize in a specific real estate sector.
- However, diversified and speciality REITs may hold different types of properties in their portfolios, such as a REIT that consists of both office and retail properties.
- Many REITs are publicly traded on major securities exchanges, and investors can buy and sell them like stocks throughout the trading session.
- These REITs typically trade under substantial volume and are considered very liquid instruments.
Types of REITs
Majorly there are three types of REITs they are:
1. Equity REITs:
- These structures generate money when owners lend spaces such as large residential townships, office spaces, shopping malls to tenants on lease.
- The generated income is then divided among investors through dividends.
2. Mortgage REITs:
- Under this structure, there is no concept of an owner.
- This arrangement means the finances taken against debt to develop real estate projects.
- Typically, mortgage REITs generate income through EMIs that are further distributed among investors through dividends.
- Hybrid REITs. These REITs use the investment strategies of both equity and mortgage REITs.
Advantages of REITs:
Investors can benefit from investing in REIT in these ways:
1. Dividend income:
- As dividend is nowadays considered as the greatest passive income source, investors can benefit as REIT provide substantial dividend income and steady capital growth for the long term.
- As REITs are regulated by SEBI they are transparent.
- Most REITs trade on public stock exchanges and hence are easy to sell and buy, which makes them liquid assets.
1. No tax-benefits:
- When it comes to tax-savings, REITs are not of much help.
- For instance, the dividends earned from REIT companies are subjected to taxation.
- One of the major risks associated with REITs is that it is susceptible to market-linked fluctuations.
- Investors should always invest as per their risk appetite
3. Low growth:
- Capital appreciation is quite low in the case of REITs.