Understanding Real Estate Investing
The real estate sector has occupied the limelight for most of the investors compared to many other avenues available for investment in India. A home was perceived to be a dream of many middle-class families. On the other hand, traditional real estate investing requires huge capital, which turns out to be a significant barrier to most aspiring investors.
This blog tells how everybody can enter into real estate investing with an investment as small as ₹400 by using Real Estate Investment Trusts. REITs make available an easy and feasible way for investment in real estate without copious capital requirements.
Allure of Investing in Real Estate
The reasons that make real estate investing pretty alluring are:
Capital Appreciation
Rental Income
Diversification of investment portfolio
As land becomes scarcer, the value of real estate tends to rise over the years. This capital appreciation, when combined with rental income, enables many investors to generate substantial wealth.
Challenges in Traditional Real Estate Investment
While real estate investment is often highly lucrative, it certainly comes with its own set of issues, which include the following:
High initial capital requirement
Property management can be very time-consuming
Legal and administrative burdens
The demands of property ownership—finding tenants, arranging maintenance, dealing with issues of law—are likely to be too complex for many.
What are REITs?
Real Estate Investment Trusts are a vehicle that can help alleviate these issues. A REIT is an investment vehicle that allows people to pool their money to invest in real estate, much like a mutual fund. In doing so, each can have as much exposure as desired in the real estate market without the problems associated with directly owning property.
How REITs Work
REITs do this by taking money from many investors and using the money raised to acquire and operate income-generating real estate. The income acquired from the properties is subsequently passed down to the investors via dividends.
Investors can purchase shares of a REIT, just like any other stock, and collect an income off the rents received from the properties and appreciation in value.
Why Invest in REITs?
The benefits of investing in a REIT are as follows:
Low Cost of Entry
Diversification across a variety of different properties
No hassle of property management
Liquidity is more like that of stocks
REITs enable investors to easily sell their shares and buy, thereby providing the liquidity that is often absent in traditional investments in real estate.
Types of REITs
There are a variety of REITs available, all of which have slightly different targets within the real estate market. These include the following:
Equity REITs
Mortgage REITs
Hybrid REITs
Commercial REITs
Residential REITs
Each of these provides a different set of benefits and risks, which are rooted in the underlying assets and investment strategy.
How to Invest in REITs
Investing in REITs is relatively straightforward. The steps through which you can do this are as follows:
Research available REITs in the market.
Open an account with a brokerage platform.
Choose how much money you would like to invest.
Buy shares in your chosen REIT.
Monitor regularly.
Invest just a little, and you'll start realizing the benefits that come with being a real estate owner.
Measuring REIT Performance
Performance evaluation of REITs is an important consideration when investing in them. Some of the critical metrics to be viewed include:
Dividend yield
Price-to-earnings ratio
Debt-to-equity ratio
Funds from operations (FFO)
An investor can be better placed in making decisions regarding their investments if they understand these metrics.
Possible Returns on REITs
Every investor seeks to gain as much as possible out of their investment. REITs can generate quite interesting returns, typically in the range of 8% to 12% annually. It is, however, important to note that past performance may not necessarily guarantee future results.
For instance, some of the REITs have shown five-year returns of around 22%. These returns may be influenced by several factors, including market conditions, efficiency in management, and others.
Risks Associated with REIT Investments
Despite the several advantages, there are a few risks associated with investments in REITs, including:
Market volatility
Interest rate fluctuations
Economic downturns
Investors must know about these risks and take them into account while choosing any investment instrument.
Future of REITs in India
The REIT market in India is still in its nascent stages but has good growth potential. With increasing urbanization and the development of infrastructure, commercial real estate demand is bound to rise in times to come.
REIT investments could very well turn out to be the most crucial decision by many investors' portfolios in order to take advantage of the rising real estate market.
Conclusion
One great way to get exposure to real estate with very little capital is through REIT investing. Knowing how REITs are structured and the various benefits and risks they have on investors, you will be better positioned to make viable investment decisions that best align with your financial goals.
In the burgeoning Indian real estate market, REITs shall most likely be one of the major factors that would set the trend and character for investment. Start your journey today to know more about the potential of REITs in enhancing your investment portfolio.
