Real estate has always been a preferred mode of investment among Indians. It makes a strong addition to any portfolio and grows your wealth as well as acts as a great diversification tool. Physical real estate has been picked by investors for a long time but recently Real Estate Investment Trusts (REITs), have started to gain popularity.
Let's understand how they differ
Traditionally, investing in real estate means buying a property. These could be residential as well as commercial in nature. Such properties include houses, apartments, lands, office space, etc.
As a real estate investor, you can buy and hold property, or fix it up and sell for a profit. You can also buy land to build a property to hold or sell.
While there are a lot of advantages of buying a property like tax benefits on home loans, more control, etc there are also certain disadvantages. The main disadvantage is that the entire expense of a property falls on you. From downpayment to EMIs, to other registrations, you have to deal with all of them. Secondly, you cannot buy a property until and unless you have a good corpus saved. The initial investment in a real estate property is huge. Also, it is not necessary that you will be able to sell the property as and when needed. It can take time to find a buyer at the price you expect from the property.
A real estate investment trust (REIT) is an investment trust that owns, operates, and finances real estate with the main aim of generating income. It manages a portfolio of real estate assets that are high value and generate steep rent and leases. REITs generally look for large as well as small investors who want to park their money in real estate without having to buy or manage the property themselves. These investors then receive dividends which are basically the rent or lease that is divided amongst themselves.
In India, REITs can only own commercial properties. At Least 80 percent of the properties it has invested in must be complete and rent generating while the other 20 percent can be under construction.
REITs are good investment instruments for investors looking for a steady dividend since once in at least every six months, you will receive dividends on your investment in a REIT. Over a long period of time, it also sees stable capital appreciation. Also, since these are regulated by Sebi, REITs have higher transparency than regular real estate deals. It is audited by professionals and most of the information is available openly.
A key drawback of REITs is taxation. It not only does not give you any tax rebate but the dividends are also taxed. It can also be affected by market volatility and so investors with low-risk appetite must not invest.
REITs vs Real estate
The main difference between the two is, in REITs you do not have to buy the entire property, you can buy units of the trust, hence the initial investment is way less than in physical real estate.
Secondly, REITs are traded on exchanges, so it will be very easy to sell your units unlike in real estate where you have to look for a buyer.
Thirdly, if you invest in REITs you do not get to own any property, but you get a property of your own which you can use however you want in case you invest in physical real estate.
While investing in physical real estate, a number of times a property can be canceled or delayed due to permission but in REITs, it is not possible. You have no hassle of buying the property and maintaining them, you just invest in them.
REITs give regular dividends which is not the case in physical real estate unless you give them up for rent.
Finally, if you take a home loan to buy a house, you get tax benefits. REITs do not offer any such benefits. Even the dividends are taxed.
Both REITs and physical real estate are great ways to invest in the realty sector and to diversify your portfolio. However, if you do not have a heavy corpus saved and want to avoid the difficulties of buying a house, you should prefer investing in REITs but if you want to own a house and have the initial investment amount ready, physical real estate is also a good choice.