Difference Between Direct Real Estate Investing and REITs
- In REITs, investors invest in a diversified portfolio of commercial real estate assets. With the direct investment pathway for commercial office space, investors invest in a single office building.
- Individual investors can enjoy real estate through REITs without having to own or manage real assets.
- Direct real estate offers higher tax advantages than REITs and gives investors more decision-making power.
- REITs are easier to buy and sell than traditional real estate because many of them are publicly traded.
The difference in returns between real estate investing and REITs
There is a significant difference between the returns of the two investments:
- One can expect a realistic return on investment from REITs in the range of 7-8% per year, after adjusting for management fund management fees.
- With REITs, the return on investment will be highly structured, realistic and risk-averse. REITs are ideal for investors who want stable income with minimal risk.
- REITs are required to distribute at least 90% of taxable income to shareholders, and dividend yields of 5% or more are very common.
- During periods of inflation, the value of real estate tends to rise as house prices and rents rise, providing a higher return for REIT investors.
How do REIT investors get returns?
REITs, like any other business, need capital. REITs create money by renting, leasing or selling the assets they buy. Shareholders elect a board of directors, which is responsible for selecting investments and recruiting a team to oversee them on a day-to-day basis. FFO, which stands for funds from operations, is the most common way to calculate REIT income.
REIT investors can earn two types of income:
- Capital gains after sale of REIT shares
- Dividend income
REITs will be an excellent choice for investors who want to diversify their portfolios beyond the gold and equity markets. It’s a good place to put your money if you’re a newbie real estate investor looking to diversify your portfolio without taking on too much risk.
If you desire cash flow, tax incentives to offset that income, and high earning potential, direct real estate investing may be a preferable alternative. It’s also a great option if you want more control over your money and prefer a hands-on approach.
REITs are a good option for investors who do not wish to manage or operate real estate, as well as those who do not have the funds or cannot obtain financing to do so. REITs are also a wonderful method for new real estate investors to get into the business.
Individual investors can invest in the income generated by owning commercial real estate with REITs, without having to purchase commercial real estate themselves.
Is it still too early to invest in REITs?
REITs have already been introduced in India and investors have seen excellent returns. The success of the REIT offering in India has sparked interest in this new investment vehicle, and we expect more REIT listings to follow soon.
Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India Real Estate Trust are the only three REITs currently eligible to invest in India.
To note – Read all documents, terms and conditions before going ahead with the REIT investment decision. Do research before investing.