If you want to increase your wealth and have a safe financial future, you have been to the right blog. This blog covers the apt amount of detail for you to invest safely and grow your money by investing in a real estate investment trust.
A real estate investment trust is a company or enterprise which allows investors to invest their money in the real estate market without getting involved in complexities. It is one of the easier ways to secure your money for growth, as it does not require you to have a large capital, typically required for ownership of new properties.
So, in this blog, we will discuss how to invest in real estate investment trusts and their advantages, types, and examples. Now get ready to enhance your knowledge about real estate investment trust: a new and one of the less focused ways of investment, especially in Pakistan, where only one registered company is giving you a proper place to invest in real estate investment trust.
What is a Real Estate Investment Trust?
Real Estate Investment Trust is a company that either owns, operates, or finances the real estate. It provides the below-mentioned opportunities or offers to its investors:
- Invest in a diverse portfolio of properties in a professional and lawful way.
- Provide a significant portion of its earnings to shareholders.
In the blog’s next section, we will discuss different types of REITs to broaden our knowledge about real estate investment trusts.
Types of REITs
There are several types of REITs based on their specialization. These types include:
- Equity REITS
- Mortgage REITs
- Hybrid REITs
- Specialty REITs
We will discuss all these types in this subsection of the blog in detail.
This sector of real estate investment trusts owns income-generating properties. These properties usually include offices, apartments, and shopping centers. The revenue is usually generated in the form of rental income. So, we can say that equity REITs are primarily companies responsible for generating rental income.
Mortgage REITs focus on real estate mortgages rather than directly owning properties. The revenue is generated as interest earned by lending mortgages to real estate owners. Mortgage REITs are more susceptible to risks because they are sensitive to changes in interest rates. At the same time, they comparatively offer higher returns.
As the name suggests, this sector combines two types of REITs; mortgage and equity REITs. They are a diversified approach to real estate investment, earning revenue by investing in physical properties and mortgage loans.
Specialty REITs focus on those sectors of real estate properties which don’t lie in other types of real estate investment trusts. These properties include medical facilities, theaters, cinemas, etc. The revenue is collected through rent, which is earned via these properties.
Now, you have a vivid concept of real estate investment trusts and their types, so we will jump to the pros and cons of investing in these companies.
Advantages of Real Estate Investment Trust
In this section of the blog, we will focus on the pros of investing in real estate investment trusts and evaluating them as one of the safe ways of investment. The advantages of REITs include:
- Passive Income
- Professional Management
- Potential for Capital Appreciation
One of the prominent benefits of investing in REITs is the diverse range of offers they give and the diverse portfolio of properties in which investors can invest. Some real estate investment trusts specialize in providing investment opportunities in any specific sector of real estate, thereby allowing investors to target one sector that aligns with their goals. The positive attributes of diversification include
- The exposure of investors to properties across different sectors and geographic locations.
- The reduction of risk which is related to investing in single property or location
REITs are duty-bound by law to distribute a substantial amount of their income as dividends to shareholders. Therefore, investing in a real estate investment trust allows investors to get a considerable share without directly getting involved in property management. Investors can focus on their primary business with continuous income from REITs in rent or property appreciation.
Investing directly in real estate can be a headache because of its complex and time-consuming responsibilities. A direct investor has to deal with managing, maintaining, and repairing their property, which can be dispiriting tasks. So, by investing in REITs, you can sit and enjoy rewards in the form of dividends without taking the daunting tasks of maintenance and management to your head.
Again, comparing direct real estate investment and REIT investment, we learned that direct investments are hard to deal with as they are illiquid, meaning you have to give extra effort and time to sell or buy a property. Whereas in REIT investment, you can buy and sell properties on major stock exchanges. Buying and selling allow the flexibility to enter or exit any project without delay. Moreover, it is suitable for traders who want real estate exposure and prefer trading in the stock market.
Potential for Capital Appreciation
Besides being a source of continuous income generation, REITs are also a source of capital appreciation. As the value of real estate properties increases from time to time, the value of the shareholders’ dividend on the taxable income of REITs gets appraised too. So, this combination of income generation and capital appreciation can result in attractive total returns.
Disadvantages of Investing in Real Estate Investment Trust
Returns are not guaranteed
Although investments made in REITs are comparatively safer, there is always a risk associated with investments. Returns associated with REITs are not guaranteed because the real estate market is always susceptible to ups and downs, and the share of investors depends on a dividend of the company’s taxable income.
Returns are sensitive to interest rates
An investor’s income from investment in REITs depends on the company’s taxable income. As interest rate changes with time depending on government policies, the value of return also changes. In case when the interest rate increases, the value of REIT stocks decreases.
Tax on dividends
The government of Pakistan has given a pass-through status to rental profits, which means that you don’t have to pay taxes on them. Yet the income on which dividend is paid to investors is always exposed to taxes. So, the return is taxed according to short- and long-term capital gains.
As real estate assets show slow growth, it is not an appropriate source of income for investors looking for larger returns in a short period. Therefore, investments in this sector show comparatively slow development compared to equity stocks.
This section of the blog has provided considerable information about the pros and cons of investing in REITs; the next section will focus on the points which should be followed while making decisions for investment.
Key Considerations for Investing in REITs
REITs offer attractive benefits to investors along with potential losses, so it is essential to consider several factors before making an investment decision:
- Research and Due Diligence
- Risk Profile
- Fees and Expenses
- Market Conditions and Outlook
In the next subsection of the blog, we will discuss each step of the consideration process in detail.
Research and Due Diligence
A basic principle always followed while making any investment is thorough research. So, before investing in a real estate investment trust, you need to analyze its financial statement, portfolio, management team, and, most importantly, its market presence, track record, and any risk associated with its operations.
Businesses, investments, and entrepreneurship always come with risk, so you must perform a risk analysis before deciding to opt for any investment. Risks associated with real estate investment trusts include market conditions, changes in interest rates, economic conditions, and the property’s geographical location. So, access your risk tolerance and risk associated with REITs to align your financial returns with your investment goal.
Fees and Expenses
As discussed earlier, REITs provide an additional benefit of professional management, thereby offloading you from the excessive tension of property management and maintenance. As everything comes with money, these companies charge investors a fee for managing their properties. So, before investing in any REIT, consider this point first.
Market Conditions and Outlook
Before choosing any REIT for your investment, consider the current market condition and real estate outlook based on overall economic conditions, rental market trends, etc. Understanding the broader market conditions can provide insights into the potential performance of the chosen REIT.
Uptill now we clearly understand how to conduct the research process before investing in REIT, further we will explore real estate investment trusts in Pakistan. To date, Pakistan has only one authentic and registered REIT.
It is the only registered REIT management company. It is a joint venture of the Dolmen Group and Arif Habib Group. The main aims of the company include:
- Bringing real estate investment within the reach of common investors.
- Launching and managing REITs on carefully selected and commercially viable real estate properties.
At the end of the blog, we can conclude that REIT offers you a promising opportunity to invest in real estate with the benefits of continuous return, a passive income source, professional property management, capital appreciation, etc. Besides these benefits, REIT investment also has a risk associated with it which can be reduced by conducting thorough research.
If you want to invest in real estate without the extra burden of maintaining and managing your property, then a real estate investment trust is a compelling opportunity.