Real Estate Investment vs. REIT

Before we discuss about what is s better in terms of Investment option between a REIT and a Real Estate Asset, first let’s understand what is a REIT.

A REIT is a Real Estate Investment Trust, which is similar to a Mutual Fund, however, a REIT only invests in income generating real estate assets. A REIT is managed by a professional fund manager just as a fund manager manages a Mutual fund.A REIT allows an Investor to own a piece of property without physically owning it.

When it comes to Real Estate assets we are primarily talking about residential real estate and commercial real estate. Commercial Real Estate could be then further classified into Office Space, Shops, Hotels, etc.

Some of the factors which would influence one’s decision to invest either in a REIT or a physical real estate asset are the capital, expertise, control, diversification, taxes, liquidity and passiveness.

The capital or in other words the investment amount required to be invested in a REIT is much lower compared to investing in a physical real estate like either residential or commercial. This is one major hindrance as the upfront capital as well as the total capital required to invest in a physical real estate is quite high as compared to an Investment in a REIT. The minimum subscription amount for a REIT is Rs.50,000/- which is way lower than the amount required to own a physical real estate asset.

One needs a lot more expertise to invest in a Real Estate asset especially if it is s bought from an Investment point of view. Not every Individual real estate Investor would have the required expertise to make an informed decision. As we already discussed earlier; a REIT is managed by a professional fund manager who has the required qualification, expertise and experience and a team to assist him to make correct investments in income yielding real estate assets through a REIT. In case one is interested, several e-learning platforms like the Real Estate Management Institute have a module on REITS which gives a good basic understanding on the topic.

Diversification is an important aspect of Investments be it either, equity or real estate investments. It’s never a good idea to put all your eggs in one basket. For an Individual investor, it may be difficult to diversify in various real estate assets at the same time. A REIT helps in diversification as the amount pooled in by various investors is invested in various rent yielding real estate assets and thus eliminates the risk of concentration in one real estate asset. This also enables an investor to own a piece of different real estate assets.

One of the aspects which works in favor of a physical real estate asset is, even if say hypothetically, the market value of the asset becomes half, still you can get income from it in form of rent and can still hold on to it. It gives you a sense of holding on to a physical asset. Investment in a REIT is more liquid compared to an Investment is a physical real estate. It could take months to sell a real estate property however units of REIT’s can be sold with a click as it’s a digital transaction.

Taxes to be paid for holding a real estate asset in form of a property tax along with the maintenance charges of a property could also be cumbersome. This aspect is not present when you are holding units in a REIT. Passive income in form of dividends at regular intervals also makes REIT’s lucrative investment option.

The Residential and Commercial real estate market are both going thru a blip currently so both the Investment options have some pros and cons.It would make sense to have an exposure to both keeping in mind an Individual’s risk appetite.

• Author: Real Estate Management Institute – REMI

About Real Estate Management Institute - REMI:

The Real Estate Management Institute- REMI is a leading educational institute offering real estate courses in India. REMI currently provides certification programs, executive courses, customized training workshops and other management programs for the real estate industry. REMI offers world-class best practices, a global curriculum and international certification in real estate through its collaboration with the Institute of Real Estate Management (IREM®), USA, that enables new entrants, early-stage professionals, entrepreneurs and leaders adapt to an ever evolving regulatory regime. Along with in-class learning, REMI also offers a series of online programs that cover modules focused on enhancing the learners technical, business and soft skills required in the real estate industry.

Our flagship Certification in Business Management, the Owner Developer Program, the Broker Certification Program, Real Estate Digital Marketing and Construction Management Program are just the tip of the ice iceberg.

In line with REMI’s vision for industry development - to increase the supply of trained professionals in real estate and enhance the skill set of existing professionals - we offer a number of customized corporate training programs to Real Estate Industry and allied Organizations in the sector. These Corporate Training Courses are designed in line with organizational goals and objectives.

Valaina is an electrical engineer from the University of Mumbai. She works with Real Estate Management Institute and loves to write content on real estate investments.