Once upon a time, in the bustling city of Mumbai, two friends, Aman and Rohan, were on a mission to grow their wealth. Aman had always dreamed of owning real estate, believing it was the ultimate sign of success. Rohan, on the other hand, was intrigued by the idea but was wary of the challenges that came with it.
One day, Aman excitedly told Rohan about a property he had found. “It’s perfect!” Aman exclaimed. “A commercial office space right in the heart of the city. I can already imagine the rental income flowing in!”
Rohan smiled, but his thoughts were elsewhere. He knew the process Aman was about to embark on—the endless paperwork, the hefty loan, the constant search for reliable tenants, and the ongoing maintenance. “Aman, have you considered the effort and time this will take?” Rohan asked.
Aman shrugged. “Sure, it’s a lot of work, but it’s worth it, right? Real estate is the best investment.”
Rohan nodded but then leaned in closer. “What if I told you there’s a way to invest in real estate without all that hassle?”
Aman looked puzzled. “What do you mean?”
Rohan explained, “Have you heard of REITs? They’re Real Estate Investment Trusts. Think of them like mutual funds, but for real estate. You can invest in commercial properties without buying them outright. Instead of dealing with builders, tenants, and loans, you invest through a manager who handles everything—from finding tenants to maintaining the properties. And you still earn rental income in the form of dividends.”
Aman was intrigued. “But how do I know it’s a good investment? And what about the risks?”
Rohan smiled. “That’s the beauty of REITs. The properties they invest in are usually completed and income-generating, so there’s less risk compared to unfinished projects. Plus, they have to return at least 90% of their earnings to investors like us. But, of course, like any investment, there are risks. The value of the properties could drop, or the demand for office space might decline, especially after something like the pandemic.”
Aman was silent, weighing his options. “So, how do I get started?”
Rohan continued, “In India, there are already a few REITs listed, like Embassy Office Parks and Mindspace Business Parks. You can buy units on the stock exchange, just like you would with shares. Or, if you’re looking for more diversity, there’s a Kotak International REIT Fund of Funds that invests in both Indian and international REITs.”
Aman was sold on the idea. “This sounds much easier than buying a property outright. But is it as profitable?”
Rohan nodded. “It can be. REITs typically focus on Tier-1 cities where rental yields are higher. Over the past year, they’ve offered dividend yields of 6-8%. And unlike buying a property, you can start with a much smaller investment of INR 50,000/- —no need for big loans.”
Aman grinned. “You’ve convinced me, Rohan. This sounds like the smarter way to invest in real estate.”
But wait before you leave keep few things in your mind;
“Aman,” Rohan began, “if you’re looking for regular income, REITs can be a good option. But remember, it’s wise to only allocate a small portion of your investment—maybe 8 to 10 percent maximum —to them.”
Aman nodded. “That makes sense. But how do I make sure I’m choosing the right REIT?”
Rohan leaned forward. “You need to do your homework. Check how full the properties are, what kind of tenants they have, how long the leases last, and the quality of the buildings. Also, look at the REIT’s financial health.”
Aman was grateful for the advice but still had some concerns. “But what if I want to sell quickly? Are REITs easy to trade?”
Rohan shook his head. “That’s the tricky part. REITs are still new, and they can be volatile and hard to sell quickly. If you’re not comfortable with that uncertainty, you might want to explore other investment options.”
Aman was grateful for the advice but had the last question. “What about taxes? I heard it can get complicated.”
Rohan smiled. “It can be, but let me simplify it for you. Right now, the dividends you get from REITs are tax-free for you because the REITs are invested in something called SPVs, or Special Purpose Vehicles. These SPVs haven’t chosen the concessional tax rate, so they’re not taxed at the usual rate you might expect.”
Aman was intrigued. “So, if they did choose that concessional tax rate, what would happen?”
“In that case,” Rohan explained, “the income would be taxed at your regular tax slab rate. Also, if any income from the REIT becomes taxable, the REIT would deduct a 10 percent withholding tax before giving it to you. But don’t worry—you can adjust this when you file your income tax returns.”
Aman was relieved. “So, as long as I keep an eye on the REIT’s tax status, I should be fine, right?”
“Exactly,” Rohan said. “Just keep in mind that while REITs offer some tax benefits now, things could change. That’s why it’s important to stay informed.”
Aman thought for a moment. “So, REITs are good for some regular income, but I shouldn’t rely on them too much, right?”
“Exactly,” Rohan said with a smile. “They can be a part of your investment mix, but don’t put all your eggs in one basket.”
Aman felt more confident now, ready to make a balanced decision.
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