The Complete Guide to REITs

Table of content

What is REIT ?
Types of REITs
Eligibility for REITs
Benefits of REITs
How to invest in REITs

What is REIT ?

The increasing market strength and flourishing economies have brought the government’s attention towards the development of infrastructure and realty market. Owing to this, the Real Estate Investment funds are of great significance to investors who are seeking to reap the benefits of investment.

The sole purpose creating Real Estate Investment Trusts (REITs) is to channel the money which can be used for the development of operational functioning or ownership of real estate, further become a source of income for the investors. Irrespective of the size of the investment, REITs give the investors an opportunity to be the shareholders of the investment trust by investing in it, and benefits them through good returns. Alongside, come advantages like portfolio diversification and long-term capital appreciation. The biggest benefit and guarantee that one can get when investing in REIT is that they have a provision of getting enlisted in the known stock exchanges.

what is reits

An infographic explaining REIT

Types of REITs

  • Equity REITs

    In such REITs, the owners lease their property to individuals or companies to make money. The income generated, is then distributed amongst REIT investors as a dividend. The investments in equity REITs usually happens in office and industrial, retail, residential, and resorts and hotels.

  • Mortgage REITs

    No physical property is owned in Mortgage REITs. EMIs against the property from owners and builders are received, and the earnings (difference of interest earned on mortgage and cost of funding the loan) are then distributed among the investors as dividend. The revenue comes from the interest generated on the mortgage loans.

  • Hybrid REITS

    These REITs invest in both the mentioned REITs. A combination of the two, they own properties and mortgage loans. In practice, hybrid REITs are preferred over any individual REITs.

Factors that define eligibility for REITs for organizations looking to enter this domain

Organizational requirements

  • Must be formed in any of the states as a corporation taxable for federal purposes.
  • Must have board of directors or managers with transferrable shares
  • REIT should have a minimum of 100 shareholders from its second year of operation
  • REIT should not have more than 50 per cent of its shares in the hands of five or less individuals during the last half of the taxable year
  • The asset base of the company must be Rs 500 crores
  • NAV updation needed twice every year

Operational requirements

  • Must derive 75 per cent of its gross income from rea estate related sources. An additional 20 per cent must be from real estate or other sources including dividends, etc.
  • The remaining 5 per cent should be from non-qualifying sources like service fees or a non-real estate business, etc.

Dividend distribution requirements

  • 90 per cent income should be distributed to the investors as dividend

Compliance requirements

  • Form 1120-REIT must be filled with the IRS.
  • Annual letters should be sent to shareholders for the details of beneficial ownership of shares.

While the pre-requisites for investing in REITs provide the much needed transparency to the market, there are numerous other benefits that revolve around them for the people who invest in them.

Benefits of REITs for people investing in them:

  • Easy investment

    Unlike other property investments, REITs are not capital intensive, and thus can be taken into consideration. Also, with very few profitable investment opportunities left in the market, they act as a medium to safeguard money and also get good returns.

  • Lower liquidity risk

    Although it cannot be eliminated, the risk is certainly much lower than directly investing in property. Along with this, they also help investors earn good returns, giving them an added bonus. Moreover, since REITs are regulated by SEBI, the chances of a fraud also decrease.

  • Transparent

    The disclosing of capital portfolio after every 6 months and annually, lest the investors see a clear picture about their investment.

  • Higher dividend

    Since approximately 90 per cent of income is paid as dividend to the REIT investor, the relatively higher dividend makes them an option worth exploring.

  • Less headache

    Owning the property is the first benefit that REITs offer. Furthermore, the investors can also take advantage of the guidance from property managers about generating money from trust members.

 How to invest in REITs?

How to invest in REITs

How to invest in REITs

For investors, REITs give them an option to invest their money in real estate assets. The invested money is used for the development of real estate. The real estate then yields profit in the form of rental income and more.The income generated is then distributed back to the investors.

 In conclusion, REITs have all the benefits that an investor and owner can think of. However, the real picture will come to light when the implementation on the ground level will start. Will it be a positive or a negative, only time will tell.

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