Invest in Real Estate for Rs. 500?
Well well well! Today’s topic is one that is close to every Indian’s heart - Real Estate.
And all those of you who have been following my articles, know that I personally am not a fan of real estate as an Investment. If you’re buying it from an emotional perspective, to live in it, then awesome! Please go ahead! But if you’re looking to take a loan and buy a residential or commercial real estate as an investment, then you need to give it a deep thought (or just read the article HERE 😛)
Let me just recap why real estate may not be the best kind of investment for everyone:
Huge amount of money needed: Property isn’t something that you can buy using a few thousand rupees. You’ll need at least 20 lakhs, to buy property even in remote areas, which is a huge sum of money
Interest payment (if purchased on loan): If you purchase the property on loan, you’re paying 7% interest on the loan that you take, so you should be getting a return of at least 15% per annum on the property (7% interest + 7% inflation) to even recover your money (leave alone making a profit)
Other costs: Annual society maintenance, stamp duty and registration charges are additional costs which people don’t consider while buying real estate and calculating returns
Property appreciation (especially in in metros) is not as high as it was until 2010. So you may not get as good an appreciation on your property as your parents got pre-2010
Liquidity problems: It is not easy to sell off real estate, as getting buyers takes at least a few weeks. So if you need money quickly, you can’t depend on the real estate that you’ve purchased
(Having said that, if you are well-versed with real estate and know how to identify properties that are selling at a low value which you expect to increase, that’s great! Please go ahead!)
Now that we’ve recapped why I don’t like real estate for investment, if you still want to invest in real estate, a great way to do it is by investing in REITs.
A REIT (or Real Estate Investment Trust) is a product similar to a Mutual Fund, which pools in money from thousands of investors (both big and small) to create a fund. This fund is managed by a trust (hence called Real Estate Investment Trust).
So you, as an investor, will buy x units of a REIT, and the money contributed by all people like you, is pooled in. Now, the trust that manages this fund then uses the pool of money to buy commercial real estate, which is then rented out.
The rental income that is earned from this commercial real estate is then distributed to investors who have invested in the REIT.
Now, SEBI (regulator of capital markets) mandates that 90% of the income earned by the REIT needs to be distributed to the investors. So you as an investor, will earn this in the form of dividends.
And it’s not just the rental income which the investor earns. Any appreciation in the value of the property also increases the value of the REIT unit. So if you sell the unit, you get more than what you had paid for. Which means that you don’t just earn rental income, but also get benefits of appreciation of property value.
Here are some advantages of buying REITs over buying physical property:
Before that, if you’re not a subscriber yet, why don’t you hit the button below and subscribe to this weekly newsletter? We try and simplify finance in 5-minute newsletters every Sunday.
Alright, let’s move on!
Benefits of REITs:
You don’t need to hunt for the property you’d like to buy. The REIT does this work
You can invest as low as Rs. 500 to buy a REIT unit, whereas in order to buy a commercial real estate property, you’ll need at least 20 lakhs
You can sell off the REIT much more easily compared to selling your physical property
And some disadvantages are:
You have limited choice. There are currently only 3 listed REITs that you can invest in, compared to the millions of commercial office spaces which you may find more interesting
Eventually, 10% of the income is still with the REIT, so you’ll be getting 10% lesser income by opting for REITs
Since 90% of the income is paid out to investors, there is very less capital available to the REIT to expand and grow
The yields currently are quite low, in the range of 6-9% (as per housing.com), but expected to rise once the REIT market matures
Now, let’s say you do decide to invest in a REIT. Which are the REITs you can invest in, and how can you invest?
Like I mentioned earlier, there are only 3 listed REITs that you can invest in:
Embassy REIT: This REIT has 42.8 MSF (million square feet) of Real Estate. They’re majorly are present in Bangalore (74% of the properties are in Bangalore), followed by Mumbai (10%) and then Pune (9%)
Mindspace REIT: This is sponsored by K Raheja Corp Group. It has a strong portfolio of office spaces across Mumbai, Pune, Hyderabad & Chennai with a total leasable area of 31.8 MSF.
Brookfield India REIT: They have commercial properties in Mumbai, Gurugram, Noida & Kolkata. Their total portfolio comprises 18.6 MSF, out of which 4.7 Million SqFt will be developed in the future.
Now the last part - How do you invest in REITs?
It’s really simple. If you want to invest in REITs at the time of launch of the REIT, you buy a lot, which will cost about Rs. 10,000-15,000. This is similar to an IPO or an NFO. If you want to invest in REITs after launch, you can simply buy units like you buy shares from any platforms like Zerodha, Groww, Upstox etc. You can buy as little as one unit, which today costs less than Rs. 500 for any of the 3 REITs. Which is why, if you’re keen on real estate, you can actually do some investment for as low as Rs. 500. So why buy the entire property?
Well, that’s it for today guys! Hope you liked this short explainer on REITs.
Please feel free to revert to this email if you have any questions. I read all emails that I get, and also reply to all of them!
Also, please hit the like button here on Substack and share this on WhatsApp if you found it useful! It helps the algorithm show it to more users 😊
PS: Last week, a lot of you shared the post on LinkedIn and Instagram, so thank you for that! Please reply to this email and let me know when you would like to have a Google Meet call to help understand your finances better!
Till then, happy investing!