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What is Real Estate Investment Trust (REIT)?2 min read

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.
  3. 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.
  2. Transparency: As REITs are regulated by SEBI they are transparent.
  3. Liquidity: Most REITs trade on public stock exchanges and hence are easy to sell and buy, which makes them liquid assets.

Limitations:

  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.
  2. Risks: 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.
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