What is REIT and how can you invest in it? Here’s how it works

Ever wondered how you can earn from real estate without buying a flat, chasing tenants for rent, or getting buried under property paperwork? That's where Real Estate Investment Trusts (REITs) come in.Real Estate Investment Trusts (REITs) are structured investment vehicles that allow investors to access income-generating real estate without directly buying property. "Real Estate Investment Trusts (REITs) are pooled investment vehicles like mutual funds," the Securities and Exchange Board of India (Sebi) says.

What is REIT?

Sebi defines REITs as instruments that allow participation in real estate markets in a structured and regulated manner.

It states that REITs provide investors an opportunity to invest in income-generating real estate assets through a listed and regulated framework, as part of its broader explanation of REIT and InvIT structures.REITs operate under a framework intended to improve transparency and liquidity in real estate investment. These are regulated by the Sebi, which lays down the rules and regulations governing their formation, functioning and operation.

The structure of REITs is similar to a mutual fund and includes a sponsor, a management company and a trust. The trust holds real estate assets on behalf of unit-holders and protects their interests, while the management company manages the property portfolio.Sebi says that the tripartite structure is designed to enhance investor safety. REIT income comes mainly from rental earnings and capital gains from property sales.

Profit is calculated after deducting management expenses and fees paid to professionals, including the management company and trustees.

How a company qualifies as a REIT

To qualify as a REIT, a company must meet specific eligibility criteria as prescribed under the applicable regulatory framework.These requirements ensure that only eligible entities with proper structure and compliance standards can operate as REITs, safeguarding investor interests and maintaining transparency in real estate investment activities.

Types of real estate investment trusts (REITs)

Equity REITs are the most common and invest in income-generating commercial properties, earning mainly through rentals. Mortgage REITs (mREITs) provide loans and mortgage-backed securities, generating income from interest.Hybrid REITs combine both equity and mortgage investments, earning from rent and interest. Private REITs are offered via private placements and are not listed or Sebi-registered for public trading.Publicly traded REITs are listed on stock exchanges and regulated by Sebi, while public non-traded REITs are registered but not exchange-listed and are less liquid.

How you can invest in REIT

Investors can invest in REITs in a similar way to purchasing shares of publicly listed stocks on major stock exchanges. One direct method is buying REIT units through stocks, allowing investors to invest directly in listed REITs.Another option is investing through mutual funds, which provides diversification by pooling money into REIT-linked funds managed by asset management companies. Investors can also choose exchange-traded funds (ETFs), which offer indirect ownership in REITs along with the benefit of portfolio diversification.