Finance / REIT · September 26, 2021

6 Reasons Why REIT are Better Investment Than Physical Asset

Introduction

REIT which stands for Real Estate Investment Trust is an organization that functions by collecting money from a pool of investors and investing it in real estate assets.

They are similar to mutual funds. The money that gets raised is used as capital to fund projects like commercial properties with high rental yield. They also include luxurious residential properties with high demand.

Reasons Why REIT is a Better Investment

The following are the reasons why are holding REITs better and why an investor should considering investing in these schemes:

1. Higher rental income with capital appreciation

Real Estate Investment Trust, just like physical assets can fetch a valuable rental yield with capital appreciation. REITs invest in real estate projects by thorough research as well as analysis that target high yield projects with prominent landmark.

These projects come with a high probability of capital appreciation over time. Thus, giving its investors a better source to invest in real estate.

These real estate also provide a rental income like any other real estate asset which can be a great source for generating a passive source of income.

Also, the rental income gets credited on monthly or quarterly basis depending from company to company. The rental income generated is in proportion to your investment in the same way how mutual funds distribute dividends.

2. One can start with a small capital

As you know investing in real estate requires large capital. Thus, this heavy investment may not be feasible for a retail investor to invest in high end real estate projects like malls, metros and high rise commercial infrastructure.

REITs have made it possible for retail investor to put their money in such real estate entities and taste the benefits of their investment.

The process is similar to IPO bidding process where a REIT is floated and the investors get a chance to bid for it. The minimum entry level is decided from company to company and it can range from Rs. 45,000/- to 1,00,000/-.

After the bidding process is undertaken, the desired investor get their REIT units allotted in their demat account.These units can then be traded on the stock market.

Also read How Does An IPO Bidding Process Actually Work to understand more about the backstage activities involved in IPO bidding.

3. Higher liquidity than physical assets

Physical assets are least liquid. The sole reason being there is always a mismatch of demand as supply. It is laborious to find buyer for your assets and the process can take up to weeks.

This challenge of holding real estate properties has now been over taken by REITs. They are traded daily in the secondary markets which makes it effortless to buy and sell real estate on a click of a button.

4. No need to worry about the paperwork

Buying a physical real estate property can come with a lot of hassle of paperwork like Sale Deed, Declaration, NOC, transfer of share certificates etc. This process can be time consuming.

There can be a high chance of frauds and scams that can take place while property transactions. Also, there are hefty fees on consultancy charges from lawyers and not forgetting tax implications.

Thus, all this can be eliminated by just considering to invest your desired amount via REITs.

5. No hassle on maintenance requirements

Holding a physical asset requires frequent maintenance and retrofitting.

This process can again be cost cutting for an investor thus reducing the profit potential. Physical maintenance requires adequate man power and cost.

In fact, there may be cases one may not be physically present around the property, and in such situations you may need to hire a property consultant to maintain the property.

There is no additional maintenance requirement in the case of REITs. The company that manages the real estate assets will take care of all the necessary maintenance requirements.

6. Easy to buy and sell at fair valuation

Buying REIT units are as easy as buying stocks and mutual funds. As these units are traded on the stock exchange they are more or less available at fair market valuation.

On the other hand, buying and selling of physical assets at fair valuation can be challenging as one needs to negotiate for the right price to reach for conclusion.

I will be writing a separate blog sharing some tips to buy REIT units for a cheaper price, so do subscribe to the newsletter to receive updates via email.

In a nutshell

ParticularREITPhysical asset
Rental income and capital appreciationHighModerate
Capital requirementLowVery high
LiquidityHighVery low
Paperwork requirementNilRequired
Maintenance cost and hassleNilRequired
Buy / sell at fair valuationsPossibleVery hard

In conclusion

Finally, there are many pros of owning physical assets as well and one must thoroughly understand the risk potential and decide what suits them the best.

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