Yes, you read that right, you now don't need a lot of capital if you are looking to invest in real estate in India. Very recently, REITs (Real Estate Investment Trusts) were launched in India. REITs are corporations that act like mutual funds for real estate investing. These corporations buy and manage real estate properties and distribute the income to their shareholders. By investing in shares of such REITs, you own a part of the real estate portfolio without having to own or manage any property yourself.
Pros and Cons of REITs vs Real Estate
REITS
Pros
No barrier to entry: You can invest as little as you'd like to own a share of the rental property
Ease of transaction: It is similar to buying and selling shares in stock market. You are free to buy or sell these REITs whenever you'd like. This keeps your capital liquid
Hassle-free: No need to talk to tenants or do repairs. There is no management required on your part
Diversification: You are buying a small share of 100s if not 1000s of properties
Cons
Dividend yields: You are typically paid in form of dividends. If you look at the chart below you would see that from a price perspective REITs severely underperforms the stock market. This is because REITs typically pay a higher dividend yields, 3.9%, than the stock markets, 1.4%. As you are paid in dividends, you are taxed at a high rate
Mercy of the REITs manager: Your investment is fully managed by someone else and you have no control over it.
Hard to judge investment: It is way harder to judge or estimate returns on your investment.
Real Estate
Pros
Tax advantages: Owning real estate has several tax advantages compared to REITS. Depreciation is written off and saves you a lot of taxes
Complete Control: You own the property and are free to do whatever you like with it. You chose tenants, renovations etc
Predictible cash-flow: You have a good idea of your payments and your income out of the investment.
Cons
High barrier to entry: It takes a lot of money and time to buy a property
Illiquidity: Your capital is extremely illiquid and its hard to frequently buy or sell real estate
Time: You need to do research, talk to lots of people, do paperwork, and many more things before you buy a property.
So what should you buy?
If you are someone who wants to invest for the long run then owning real estate is better. You save a lot on taxes and you can control your investments. Also if you are someone who knows has real estate experience then REITs are not a great investment. With selective careful investments, you can grow your capital faster.
Wealth is created with concentration and preserved with diversification.
You can use this real estate to leverage more and buy even more properties in the future.
If you are someone who doesn't have the time or money to buy real estate but wants to diversify his/her income in more asset classes then REITs is a good investment.