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Real Estate Investment Trusts (REITs) - An Introduction


Real estate, for many, is being able to buy a property, rebuild it according to their own tastes and call it a home. Owning their own home is a dream come true for many families. But for some, it is much more than that. It is an alternate source of income, a path to early retirement and financial freedom.

So, what really is real estate investing –
In layman terms, real estate investing is “Buying a Property - Renting it Out - Enjoy the monthly flow of Rental income” OR “Buy a Property – Fix it – Sell it for a profit”. In all fairness, its not as easy as it sounds but it conveys the point.

Going through all this requires a lot of time, effort and most importantly – CAPITAL. Unlike other sources of Investment like stocks, bonds or mutual funds, which can be purchased with minimal capital, investing in real estate requires a huge amount of capital (depending upon the property) and some financing as well.

Frankly, not all of us can afford to go purchasing rental properties either due to lack of time, knowledge, capital or all three. In addition to that the hassle of dealing with different types of tenants, property management, repairs and maintenance sounds like too much of a headache for an alternate source of income.

But real estate is one of the most attractive investments and a great option to diversify your portfolio. There must be another way for people like us to invest in real estate without having to go through all this trouble.

Fortunately, Real Estate Investment Trusts (REITs) is the alternative that gives us all the benefits of owning a rental property, without the hassles of managing it. Before diving into REITs, we will first briefly understand about Investment Trusts (ITs).

Investment Trusts (ITs)
Investment Trust (IT) is a trust incorporated for the purpose of buying and holding securities of other companies. The units of an IT are listed on a stock exchanges enabling investors to buy and sell them from the market, rather than through a fund management company. ITs generate profit as and when the value of their underlying investments increases.

Real Estate Investment Trusts (REITs)
Now that we have become familiar with the concept of investment trusts, grasping the basics of REITs will be simpler.

REITs are trusts that own or finance income producing real estate, either in their own name or through a Special Purpose Vehicle (SPV) , lease them out and collect rent from the properties, then distribute that income as dividends to shareholders.

Just like any other business, REITs need capital to finance their operations. The way REITs do so is by offering their stock to the public – either by way of IPO (Initial Public Offering) or by Private Placement to select institutional investors.

These external funds enable the REIT to buy/finance real estate, develop and manage it for the purpose of generating profits.

They provide all investors a chance to own real estate without having to worry about financing/capital requirements and managing the property.

This post is just an introduction to the REIT asset class. In the next article we'll take a look into the Types of REITs and the Real Estate assets they own.

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