REIT vs Physical Real Estate: Meaning, Benefits & Differences

New investors interested in entering the real estate industry, might be familiar with the concept of the Real Estate Investment Trust (REIT).  It is a fresher approach than  conventional real estate ownership where the proprietor must maintain the assets. 

REITs allow you to start with less  capital. Also, you get sufficient time to assimilate the factors influencing the property market. On the other hand, real estate ownership offers psychological satisfaction, long-term security and acts as a source of passive income. 

Although both approaches will help you with portfolio diversification, you must know their advantages and disadvantages. So, without further ado, let’s get straight into it. 

What Are REITs?

REITs are companies that own and operate real estate to generate income. These are corporations that handle portfolios of high-value real estate and mortgages. For example, they lease properties and collect rent on them. The collected rent is then distributed to investors as income and dividends.

Both large and small investors may put their money into this investment option and reap the rewards. Small investors may seek to pool their resources with other investors to engage in major commercial real estate projects. REIT properties include data centres, infrastructure, hospital units, housing complexes, etc. 

How Can You Invest in REITs?

REITs collect funds from various institutions and retail investors to invest in real estate assets and offer monthly dividend payments to the investors. Predominantly  these properties include office spaces. Again, SEBI has mandated that all REITs should distribute not less than 90% of their profit to unit holders in the form of  interest, dividends, or both. 

Investing in REITs is comparatively less stressful than buying physical properties as you select the investment  based on their previous performance. Moreover, you don’t  need to anticipate a particular property’s revenue-generating potential actively. Right from managing amenities to selling specific units, the concerned REIT manages everything.  

However, although it saves you time and effort, REITs also have their fair share of disadvantages.

What Are the Advantages Involved in REIT Investing?

Do you want to avoid the hassles of being a landlord and simultaneously  earn dividend income from real estate investments? Then REITs can be the best investment instrument for you. Here are some of the advantages of  REIT investments:

  • Easy to purchase: Buying units of REITs is similar to buying a company’s shares on a stock exchange platform. You have to register by providing your KYC details while creating a brokerage account, and then you are good to go. 

Also, you get access to property assets that would have been beyond your reach otherwise. You can compare the past business records of a REIT and take an informed decision without going too harsh on your budget. 

  • Many REITs are liquid: You can buy and sell publicly traded REITs during trading hours. On the other hand, investing directly in real estate might not be easy for everyone as it requires enough time to find prospective buyers before locking in a lucrative deal. 

Additionally, when you sell your REIT holdings, you do not need to pay closing expenses, agent fees, etc. The  deal gets closed almost immediately if there are enough interested buyers.

  • Investment sum is not hefty:  REITs need to impose a minimum sum that can be invested. As per the notification from Securities and Exchange Board of India (SEBI) dated July 30, 2021, changed the minimum investment requirement of ₹50,000 to ₹10,000. Furthermore, the minimum lot size requirement of 100 units of REIT funds in India was brought down to 1 unit. It is quite lower compared to physical real estate. 

When you decide to increase your wealth via a REIT, there is no investment requirement for management, marketing, renovation and other  interrelated elements. On the contrary, these factors ideally come into play with physical real estate investments, which make REITs an affordable investment instrument for budding investors. 

  • Passive dividend income: SEBI has made it compulsory for all REITs to distribute 90% of their earnings  among their  unit holders. For this reason, the  income via dividends is relatively assured without troubling yourself with property management nuances. REITs manage the funds of their  investors systematically, ensuring significantly lower operating costs. 
  • Managed by experts: When you invest in a trustworthy REIT, you do not need to individually scout properties to channel your funds for optimum profits. Instead, the market experts predominantly  invest in commercial properties so that the  chances of generating a regular income stream is  higher. 

Remember, the greatest highlight for an investor in REIT vs physical real estate is you do not need to be wealthy to invest in REITs. Anyone can buy and sell REIT shares, and they do not require accreditation. 

What Are the Disadvantages Associated With Buying REITs?

Undoubtedly, REITs are ideal if you’re a beginner at real estate investing. However, there are some factors you should consider before getting started.

  • You have limited control over property selection: Although you buy shares of a particular property, you do not control the business proceedings. For example, as a retail investor, you do not get to control the management, maintenance, and renovation activities. Moreover, the fund managers can even sell the holdings without permission from the unit holders when they consider the chances of gaining an optimal  profit.
  • REITs offer little diversification: At least 80% of the funds are utilised to buy commercial spaces like office buildings, retail stores, co-working spaces, etc. The fund managers refrain from purchasing ownership rights to  other sorts of direct real estate, like residential complexes. 
  • Revenue generation is subject to market risks: Although real estate prices do not follow the stock market pattern, REIT investments do. Therefore, if you are buying shares of a publicly traded REIT, keep an eye on the daily market proceedings. 

Now that you have a baseline idea about the pros and cons of REIT investing, we suggest you go through investment nuances associated with physical real estate investment. 

How Can You Invest in Physical Real Estate?

There are many ways you can invest in individual properties directly. One can start their investment journey by purchasing:

  • Single-family homes
  • Condos
  • Office buildings
  • Storage units
  • Warehouses
  • Under construction projects, etc. 

Direct property investors can generate passive income by leasing their holdings. While buying, you may settle the amount on your own or enter into a partnership deal. Before closing a deal, it demands proper market research to earn significant profit while reselling the asset. 

What Are the Advantages of Buying Physical Properties?

Many well-researched and proven benefits are associated with physical real estate investment, which attracts a large  pool of young investors. 

  • Stable cash flow: Whether you are the  sole owner of a rental property or share it with other owners, you get a  passive monthly income. The revenue can be in the form of rental income, property appreciation, and equity build-up over time. 
  • Investors can leverage their purchase: Provided you do not have the entire sum required to buy physical real estate; there  is always an option to borrow money. Attractive loan packages are offered by banks and NBFCs when you meet certain eligibility criteria. You can check the particulars by visiting the lender’s official website. 
  • Real estate mostly shows capital appreciation: Adding real estate investments is a great way to diversify your wealth-generating portfolio . No one can predict the growth of a particular asset class in the short-term , but historically we have witnessed that property values seldom depreciate with time. 

Get strong  research and take expert advice before investing your money in the real estate sector for long-term benefits. 

  • Consider several tax benefits:  Owning investment property opens the door to certain tax benefits. you can deduct expenses such as mortgage interest, property taxes, the cost of repairs, depreciation and eligible operating costs. These deductions allow you to reduce your taxable earnings and even offset a portion of your rental income for as long as you own the property.
  • You play an active role in investment: Everything is under your supervision, from choosing the property type and location to managing them daily. Moreover, you can limit someone’s access to your private space as and when you like. When investing in physical real estate, you will always see that there is no need to follow a set pattern of inputs. You can ultimately finalise a decision even if you hire a property management company. 

What Are the Disadvantages of Buying Physical Real Estate?

Some significant drawbacks that veteran investors have been consistently facing are discussed below: 

  • Reselling physical real estate is not so easy: Liquidating your property assets requires a reasonable timeframe; you will need to find the right client who is ready to give  the quoted price. In such a scenario, you can arrange emergency funds more easily by selling your holdings registered under REIT. 

Therefore, it is ideal to add physical real estate investments to your portfolio from a long-term outlook and as a hedge against inflation. It is highly advised to rely on something other than physical real estate in times of financial crisis. 

  • Purchasing a property often calls for financing: Financing institutions sometimes deny lending large sums, especially for rental properties. Such critical scenarios arise when the real estate market needs to perform better. 

Often the owner defaults on repayment because their tenants fail to pay them on time. As a result, your credit score gets affected, disallowing you to take emergency loans later on if needed. 

  • Property management is costly: Being a real estate owner, renovating the amenities of the property and all aspects of marketing fall on your shoulders. Thus, you would need to  spend sufficient resources to make the residential or commercial space compelling enough for the tenants. 

REIT vs Physical Real Estate: How to Choose the Ideal Investment Option?

For real estate investors with a limited budget, REIT investing can be an ideal option. Also, when you buy unit assets via an investment trust, there is no need to worry about property management. However, revenue generation via REITs is subject to market risk, which is not in the case of  physical real estate. 

Thus, if you are ready to make a long-term commitment, you can consider investing directly in real estate. However, if liquidity is a crucial factor for you,  investment in  REIT makes more sense. It is because shares can be traded anytime within trading hours.  

Frequently Asked Questions (FAQs)

Q1. How do REITs differ from Real Estate Crowdfunding?

Ans. Investing in REITs allows one to enjoy indirect ownership of property without engaging in the hassles of managing the property. On the other hand, real estate crowdfunding requires you to directly purchase a property by opting for peer-to-peer lending. Additionally, REITs must be listed on a stock exchange; however, crowdfunding doesn’t have any such requirement.

Q2. What is the minimum required sum to invest in REITs?

Ans. Previously, the minimum investment required was  around ₹  50,000; however, SEBI has now reduced  this sum to around ₹  10,000. The reason for introducing this initiative was to encourage more listings and improve liquidity within the REIT market. 

Q3. Is real estate investment worth it?

Ans. No accreditation is required for someone who wants to invest in a REIT. Also, this will offer you a good hold over the real estate investment sector and gain profits. You can withdraw the earnings accumulated at any time, provided there are enough interested buyers to purchase the unit.

Jatin is an Investment Professional in the making with expanding expertise in the debt and equity markets. He has completed his Bachelor of Technology in Civil Engineering from the Manipal Institute of Technology. He has helped build Wint Wealth in various capacities ranging from being a member of the Investor Relations Team to contributing actively at the Founder's Office. He has been an integral part of the Assets Team for about a year now.

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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The article may also contain information which are the personal views/opinions of the authors. The information contained in this article is for general, educational and awareness purposes only and is not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision, whether related to investment or otherwise, taken on the basis of this article.

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