Real estate investment is a popular way to build wealth. However, the biggest disadvantage is you may not be able to liquidate your asset easily. Moreover, finding the right property which can give good returns is in itself a challenge. For instance, constant repair or maintenance work or finding the right tenant can be a significant hurdle that can destabilise your budget. Also, the requirement for large amount of money and the paperwork can make buying and selling a property cumbersome. As such, Real Estate Investment Trusts (REITs) can be an option.
Let’s explore whether REITs offer a better option for senior citizens for passive income.
What Is REIT?
A REIT is a trust that owns real estate like office spaces, malls, etc., and earns rental income from them and distributes it to the unitholders in the form of dividends. These are like mutual funds but invest in real estate instead of equity, debt, etc. So, it is a passive way of investing in real estate. As per the Securities and Exchange Board of India (Sebi) rules, a REIT is required to distribute 90 per cent of its income to the unitholders as dividends. Currently, there are only three REIT trusts In India. The first one was launched in 2019.
Are They Dependable Source Of Income?
According to Priyadarshini Mulye, Sebi-registered investment advisor and certified financial planner, REITs earn rental income from the properties they own and then distribute it to the investors. This way, “It offers relatively hassle-free investment in real estate”.
Anybody who wants to gain exposure to real estate but does not have a large amount of money to invest can still invest in real estate through REITs. Generally, REITs offer quarterly or monthly dividends to the unitholders.
Additionally, REITs offer better liquidity than investing directly in a property. However, these investments are not risk-proof. REITs do not offer the same liquidity as instruments like fixed deposits. Also, even though they are mandated to offer dividends, it is not guaranteed.
Mulye states, “REITs though offer dividends, they are not guaranteed. So, if one is looking to generate regular income, then he/she can’t depend on this income. Also, it is taxed as per the respective tax slab rate. So, senior citizens will add on the taxation”.
She says REITs manage and operate portfolios of real estate in different cities. Thus, many microeconomic factors, such as interest rates, taxes, work culture of the population, etc., can affect the demand and capital appreciation of the real estate.
So, it is important to consider factors like cash flow regularity, liquidity, investment amount, and the risk-taking capacity to decide whether investing in a REIT would be suitable.
For senior citizens who are risk averse, “They should invest their money in options like MIS (Post Office Monthly Income Scheme), senior citizens savings schemes, post office FD, bank FD, and mutual funds after taking all due information about it e.g. rate of interest, associated risk, liquidity, etc. They should consider their risk appetite, goal, and investment tenure before investing. Regular review of the portfolio is a must,” Mulye explains.
Therefore, instead of solely depending on REITs for regular cash flow (dividend income), one should pay attention to diversification in a way that can generate regular income, remain liquid in emergencies, and give capital appreciation in the long term.