News is abuzz with stories of real estate sales picking up in major markets in India. This could well be the turnaround in a sector that has been lagging behind the rest of the economy for more than five years now.

In real estate, you now have more than one option to take exposure to this sector, if you so desire. For those who are uncertain about the commitment to purchase outright, there are options like REITs and real estate funds too.

Before deciding which, one works for you, don’t forget to do a cost-benefit analysis.

REITs – Real Estate Investment Trusts

Real estate investment trusts or REITs are a relatively new investment option in the Indian market. They have, however, been around in the global arena for many years. In structure, a REIT is like a mutual fund, it owns, operates and manages income-generating properties.

However, unlike a mutual fund scheme, the REIT itself is a publicly listed and tradable company. When you buy a REIT, you are essentially buying an equity stock.

Your income from the REIT in large part will come from the income distribution in the form of dividends. This income is generated through rental from the properties owned and managed by the REIT. As per regulation, the REIT must distribute 90% of the income generated.

REIT investing is a simple way to benefit from the income generation opportunity offered by real estate. There is no hassle of buying or owning property to benefit from rental yields. You can simply buy the REIT stock and hold. Keep in mind though that REIT investing is a long-term option, you shouldn’t look for quick gains.

Real Estate funds

These are alternate investment funds that pool in investor money and then directly invest in various types of real estate properties. Some funds are dedicated to residential real estate, others to commercial projects and some could be a mix.

The fund collects money and, in most cases, then lends it forward to the real estate company. The interest received on this lending is one source of income.if the fund has taken an equity stake in the project, then only upon the transference of stake to another entity is value unlocked.

This is a high-risk proposition; over the years most RE funds have delivered less than expected returns even in a long 7–10-year period.

Unlike REITs where 70%-80% of the projects are completed and already income-generating, RE funds usually invest or lend to underdevelopment projects and that’s where the risk arises.

These funds require a minimum commitment of Rs 1 crore and are closed-end in nature.

Direct purchase of Real Estate

This is perhaps the riskiest way to invest in real estate.

There are many things to check including clear title, cost of purchase, location, quality of construction, stamp duty, registration cost and so on. Along with that, it is the buyer’s responsibility to find a tenant and secure rental income.

Investing via funds or REITs surpass the hassle of selecting the best property to invest in, along with all the paperwork and some risk of dealing with deal closures and rent collection.

Takeaway

If you are investing in real estate with the idea of simple diversification, starting with REITs is a good option. It will give you a predictable income over the years. RE funds are less accessible and come with higher risk, relatively. Direct investment in property though, is the riskiest and with the most variables. Choose what suits your needs and priorities.