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The REIT (Real Estate Investment Trust) Way To Invest In PropertyBy djain128, Section Gurgaon Real Estate Property
Is there a way to reap the rewards of property investment without having to undergo the tiring process of acquiring a property? Yes, through Real Estate Investment Trusts or REITs.
REITs make their money from developing and renting or selling commercial and residential spaces. BUYING A house is not easy. Anybody who has been through it will tell you how difficult it is. The legwork to find the right flat in the right location, the piles of legal documents to wade through, tying up the loan and finally getting the registration process through. Doing all this may be worth the while when you are acquiring that dream house of yours. But is it worth undergoing all this when you buy property for the sake of investment? Is there a better way to invest in property? An option by which you will not have to undergo the painful process all over again and at the end of it all discover that the property you acquired has slumped in value? There may soon be, when Real Estate Mutual Funds make their debut in the Indian markets. For four decades now, Real Estate Investment Trusts or REITs, as they are called in the U.S., have helped American investors buy into the property market without many of its accompanying hassles. Here is how they work. REITs - What are they? (Click on "Full Story" for more.)
REITs are companies that buy, sell, manage and develop real estate assets. Much like mutual funds do, REITs put together the investments of many individuals and institutions; and then deploy this money in real estate. So if you want a piece of the action in the real estate market, all you have to do is buy shares of a REIT. This entitles you to a share of the income generated by the REIT from its property investments.
So, how does a REIT make its money? In several ways -- Buying and selling property, thus pocketing gains from any appreciation in value Developing commercial space Renting and leasing commercial space, and Financing mortgages and loans on property In developed countries, there are REITs that specialise in one or more of these activities. Equity REITs, for instance, make their money from buying, developing or owning property. They make much of their money from the rents and lease charges that they get from their tenants; a part of their income may also come from gains made on the appreciation in property values. Mortgage REITs are engaged exclusively in financing property deals. They derive their income from the interest earned on loans to real estate owners. Hybrid REITs, as their names suggest, may combine the two activities to generate income. Why the REIT route Institutions such as insurance companies and pension funds are major investors in REITs in the developed world. But here's why individuals should also take a serious look at the REIT route: Most of us do want to own at least one home by the time we retire. But having said this, it is not very easy to decide when to take the plunge. Buy a home early in your life and you may find yourself committed to huge EMIs for the next 10-15 years. Not to talk of the risks you take if you buy when property prices are sky-high. Postpone the home-buying to a very late stage in your life, and you may find rising rent commitments making a big hole in your wallet. Other obligations that you may have to your family such as education expenses and medical bills also discourage you from pushing home-buying to a very late stage in your life. REITs can actually help you get around this dilemma. If you had access to REITS, you could invest instalments of say, Rs. 5,000 or Rs. 10,000 in a REIT every month. Or you may simply put away small sums in the REIT from time to time, whenever you have a surplus. Over time, even if rents or property values do rise, you need not worry that the property you desire will be out of reach. Remember, the sum that you have saved up in your REIT is swelling in line with property values! When the time comes, you can simply liquidate your REIT units and buy your home. When you buy a Rs. 50 lakh-apartment in Alwarpet, you would be risking all on how property values behave in that small locality. Property prices in the suburbs of Chennai may be booming, but you would still be worse off if values in Alwarpet have not budged, 15 years hence. With REITs, you "diversify" such risks. Through the REIT, you get to taste prices across several localities as well as various kinds of property -- commercial and residential. You do not need to put all your eggs in one basket! A REIT employs a horde of real estate professionals and legal eagles, who will make sure that every piece of property acquired has a clear title and is not embroiled in a legal morass. These experts will be on hand to fight any legal battles arising out of the property; which you, as an individual, may not have the resources to do. The growing popularity of REITs with investors has prompted 19 countries to flag off REITs on their shores. We, in India, do not as yet have access to real estate investment vehicles such as REITs. But if you are hooked by the concept, you may not have to wait too long before you can actually put it into practice. The Association of Mutual Funds of India, along with the stock market regulator is already working on a proposal to flag off Real Estate Mutual Funds in India, which will work much like the REITs. Once REITs do sweep into the Indian markets, investing in property will surely become less daunting for millions of investors in the property market.
Source The Hindu dt 11-9-04 by AARATI KRISHNAN.
FAQ about REIT
Q : What are the advantages of investing in a REIT?
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