REITs: Pros & Cons of Investing in Real Estate Investment Trust (2024)

Before getting into the pros and cons of investing in REITs, one must understand the whole concept of REIT. REIT stands for Real Estate Investment Trust. It allows an investor to invest in real estate assets without necessarily owning a property.

A REIT is essentially a company or institution that collects money from investors and uses it to manage, maintain, and sell real estate properties. In a way, REITs behave like mutual funds that pool money from investors with common investment objectives and then invest that money in market-linked instruments.

One can invest in a REIT by buying REIT stocks from the stock markets. When a REIT company makes profits, the value of its shares increases, resulting in gains for investors. One can also invest in REIT mutual funds if one wants to invest in a REIT company. However, before one invests in REIT stocks or REIT funds, one must thoroughly understand the advantages and disadvantages of investing in REITs.

What are the advantages of REITs?

REIT stocks and mutual funds have emerged as popular investment tools in recent years. There are some good reasons to invest in these instruments, as investors get to enjoy several REIT benefits. Here are some key advantages of investing in REITs:

• Higher Returns

  Whenever an investor seeks to invest their money, they look for instruments that can provide them with maximum returns. REITs are one of the investment tools that provide very good returns in the long term. It allows an investor to grow their wealth through steady capital appreciation over the years.

• Steady Income

  By investing in REITs, one can secure high returns on their investment and ensure a steady flow of income. REIT companies are required to distribute 90% of their profits as dividends to their investors. These dividends are provided to investors annually, providing them with regular income.

• Flexibility

  REITs are highly flexible investment instruments. Unlike fixed deposits and other traditional investment tools, they do not have lock-in periods. As a result, one can easily trade REIT stocks through the stock exchanges anytime during market hours.

• Strictly regulated

  Like other stocks and mutual funds, REITs are also tightly regulated by the Securities and Exchange Board of India (SEBI). This ensures that they maintain transparency and accountability toward their investors.

  See Also

  What if Your REIT Doesn’t Meet Its Distribution Requirement?

• Real estate investment

  REITs allow investors to invest in real estate assets even if they don’t have the requisite finances. One can start a SIP in a REIT mutual fund with as low as Rs. 500 per month. This also allows an investor to earn passive returns on their investment.

• Portfolio diversification

  Portfolio diversification is very crucial for every investor. And there are very fewer diversification options better than real estate assets. Hence, adding REIT stocks and mutual funds can be a great way to diversify one’s investment portfolio away from other riskier investment options.

• Tax-free returns

  REITs are designed to provide partially tax-free returns to investors. When a REIT company receives rental profits and distributes them to its investors, they are treated as a pass-through entity and hence, does not attract tax.

What are the disadvantages of REITs?

Although there are several benefits of investing in REITs, there are some downsides to it as well. Below are the disadvantages of REITs for investors:

• Returns are not guaranteed

  Like any other stock or mutual fund, returns from REITs are not guaranteed. Hence, they are not for risk-averse investors. However, investments made in REITs usually carry lesser risks as compared to other equity instruments.

• Returns are sensitive to interest rates

  The Reserve Bank of India (RBI) changes the repo rate from time to time, which also causes the interest rates to change. And any changes in the interest rates directly impact the returns generated by REITs. When the interest rates increase, the value of the REIT stocks usually declines, and vice versa.

• Tax on dividends

  Although the government has given a pass-through status to rental profits, dividend income received by investors is subject to income tax. Returns from REITs are also taxed as per the Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) taxation rules.

• Slow growth

  Although REITs can offer outstanding returns in the long term, they could be more useful for short-term investors. It is because real estate assets tend to show slow growth. As a result, investors looking for multi-bagger returns in the short term may opt to invest in equity stocks rather than REITs.

Conclusion

After knowing the pros and cons of investing in REITs, one should be able to make an informed investment decision. REITs are usually good for long-term investors looking for decent returns. However, one should research for the best REITs to invest in before investing their hard-earned money.

Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim/disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.