What Are REITs?

The Easiest Way to Invest in Real Estate Without Buying Property

What Are REITs?

The Easiest Way to Invest in Real Estate Without Buying Property

🔹 What is a REIT?

A Real Estate Investment Trust (REIT) is a company that owns and manages income-generating real estate — like office buildings, malls, warehouses, and hotels — and distributes the income (mostly rent) to investors.

Think of it as a mutual fund for real estate.

You invest in the REIT by buying its units (like shares), and in return, you get:

• Regular income (dividends/rent)

• Capital appreciation if the property values or rents go up

• Liquidity, since listed REITs can be traded on the stock market

🔹 How Does a REIT Work?

1. The REIT collects rent from tenants across its portfolio

2. After deducting expenses, it distributes at least 90% of income to investors

3. Investors earn dividends + possible capital gains

🔹 Types of REITs (Globally)

🔹 Benefits of Investing in REITs

✅ Steady Income (via rentals)
✅ Diversification (invest in multiple properties with small amount)
✅ Liquidity (listed REITs can be bought/sold like stocks)
✅ Low Ticket Size (start with as little as ₹1,000)
✅ Transparency & Regulation (SEBI oversight in India)

🔹 Indian REIT Landscape (2024–25)

Yield = approximate. Can vary based on NAV and distribution policy.

🔹 REITs vs Physical Property

🔹 Who Should Invest in REITs?

• 🧑‍💼 Professionals looking for passive income

• 👩‍🎓 First-time investors in real estate

• 💼 HNIs/Family Offices seeking diversification and post-tax yield

• 👨‍👩‍👧‍👦 Retirees looking for steady cashflow

🔹 Risks to Consider

• Sensitive to interest rate hikes (affects yield appeal)

• Vacancy risk in office or retail sectors

• Capital values may fall during economic slowdowns

• Tax on distribution components (interest is taxed at slab rate)

🧠 Pro Tips

• Buy REITs when interest rates peak → lock in high yield

• Use LLPs or family trusts to receive REIT income tax-efficiently (if you're an HNI)

• Reinvest dividends if you're looking for compounding, not cashflow
  
  

  What’s the Problem With Holding REITs Personally?

  REIT distributions come in 3 components:

  1. Dividend → Tax-free (if from post-tax profits)

  2. Interest → Taxed at your slab rate (30%+ for HNIs)

  3. Rental Income → Taxed at your slab rate (again, 30%+)

  So, if you're a high-income individual:

  • You could lose 1/3rd of your REIT income to taxes.

  • You can’t claim expenses the way a business entity can.

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  🔹 2. Solution: Use an LLP or Private Family Trust

  Structure	How It Helps
  LLP (Limited Liability Partnership)	Treated as a partnership firm. Taxed at 30% flat but can claim expenses like admin, advisory, infra costs. Profits distributed to partners are tax-free in their hands.
  Private Trust (Specific or Discretionary)	Allows pooling family wealth. If structured right, income can be split or taxed in the hands of beneficiaries — possibly at lower slab rates or within exemptions.

   

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  🔹 3. LLP Structure for REIT Investing

  🧱 How it Works:

  1. Form an LLP (e.g., "XYZ Capital LLP")

  2. Partners: You, spouse, family members, or another entity

  3. LLP opens a Demat + Bank Account

  4. LLP invests in REITs

  5. LLP receives rental/interest/dividend income

  6. LLP files tax return, pays flat 30% tax (plus surcharge/cess)

  7. Distributes post-tax profit to partners → exempt in their hands

  ✅ Can claim admin fees, research, legal, infra, family office costs
  ✅ Can reinvest profits tax-efficiently
  ✅ Great for wealth compounding + control

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  🔹 4. Family Trust Structure for REIT Investing

  🧱 How it Works:

  1. You set up a Private Trust (Revocable/Irrevocable, Specific/Discretionary)

  2. Appoint trustee (can be yourself or CA/lawyer)

  3. Name beneficiaries (your family, kids, parents)

  4. Open Demat + Bank Account in trust’s name

  5. Trust invests in REITs

  🔍 Taxation:

  • If revocable trust: taxed in settlor’s hands

  • If specific trust: income taxed in beneficiary’s hands (can split across family)

  • If discretionary trust: taxed at maximum marginal rate (MMR) unless structured carefully (e.g., for minors, non-taxable beneficiaries)

  ✅ Protects assets from personal liability
  ✅ Can help split income across lower-taxed family members
  ✅ Great for succession planning

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  🧮 Example Comparison

  Method	REIT Yield	Post-Tax Income (on ₹10L)	Comments
  Held Personally	7%	~₹5.1L (after 30% slab)	No deductions
  Held via LLP	7%	~₹5.6L (after 30% firm tax) + deduct expenses	Tax on LLP only
  Held via Trust	7%	~₹6L (if split between 2 lower-tax members)	Asset protection + flexibility

  Final Thought

  HNIs and family offices don’t invest in their own names — they use entities like LLPs and Trusts to:

  • Save tax

  • Control wealth

  • Ensure smooth succession

  • Claim legitimate expenses

  REITs are a perfect asset class to hold via these structures — clean cashflows, no active operations, and scalable returns.