How Do Real Estate Investment Trusts Work

How Do Real Estate Investment Trusts Work Buying Guide

Earlier, we have talked about how investing in real estate assets is a safer option. With every new digital currency coming into the market it has become difficult to understand the volatility and the profitability it would reap. Investors should also understand how REITs report results and fund their operations, as this varies from most publicly traded firms. Once investors have a better grasp of these factors, they will be able to determine whether a REIT can continue to pay its shareholders large dividend income while investing money to develop its commercial real estate portfolio. Real estate and infrastructure are two significant industries that contribute to a country's economic prosperity. The Indian real estate business is not only the second-largest job creator in the country but it is also expected to generate 13% of India's overall GDP by 2025.

What is REIT?

A real estate investment trust (REIT) is a business that owns, operates, or funds income-producing real estate. REITs.They are similar to mutual funds and combine the capital of several investors. 

“REITs are increasingly becoming an attractive investment vehicle providing investors a stable cash flow and favorable dividend yields. They offer diversification and an opportunity to invest beyond traditional assets, which is especially critical in an environment of ultra-low interest rates” says Vikram Garg, Managing Director at Blackstone India. 

Types of REITs:
Real estate investment trusts are classified into three kinds:

  • Equity REITs:

Equity REITs are real estate firms that buy, manage, build, and rent out income-generating commercial properties. Rents are the major source of income for this real estate investment trust type. The produced rents are subsequently paid to the stakeholders as dividends. Shopping malls, office buildings, and rental flats are just a few examples.

  • Mortgage REITs:

MREITs are firms that finance income-generating businesses or invest in mortgage-backed securities. Mortgage loan interest is the primary source of income for such real estate investment trusts. It is crucial to remember that MREITs are vulnerable to interest rate changes. Profits can be reduced if interest rates rise.

  • Hybrid REITs:

Hybrid REITs are formed when a company invests in both mortgage- and equity-based REITs. Rents and interest are generated for the investors in this case.


Why Invest in REITs?

  • SEBI regulates REITs, ensuring investor protection.

  • Stable dividend rates can provide a continuous stream of income.

  • REITs can be purchased like shares, just how mutual funds function.

  • REITs tend to have diverse portfolios. 

Advantages of investing in REIT:

Most REITs trade on public markets, they are simple to purchase and sell—a characteristic that mitigates some of the conventional disadvantages of real estate. REITs provide good risk-adjusted returns and consistent cash flow. Furthermore, a real estate presence may be beneficial to a portfolio since it provides diversity as well as dividend-based income and the payouts are frequently larger.

  • Diversification

  • Transparency

  • Stable cash flow

  • Liquidity

  • Managed by experts 

  • Diverse Portfolios

While there are several benefits to investing in REITs, there are a few drawbacks to this asset. Not only are real estate investment trusts vulnerable to market swings, but distributions are also severely taxed. A real estate investment trust might thus open the way for a new class of real estate assets such as co-living or working spaces. REITs not only guarantee high-income returns but if encouraged, will also create a channel for small retail investors to invest in high-value real estate projects.


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