The Hindu Business Line : Home, sweet home

"MOM, you are going to enjoy living in this old age community," Shekar said. His mother listened listlessly as she was being driven to her new home. Shekar's friend, Ram decided to break the tension.

He asked Shekar, "Hey, what do you think about investing in real estate?"

Shekar said, "Owning real estate for rental purposes has major advantages. You get a steady income. You can sell the property anytime. And you can use it as a mortgage to get loans for emergencies."

Ram thought for a minute and said, "But doesn't it have its disadvantages of maintenance and other issues? Also, what if I don't have sufficient money to invest?"

Shekar said, "Well, you can talk it over with friends who might be interested in investing and enter into a legal agreement with them."

Ram said, "Hmm! My friends might be interested in investing in property but the big question is, what if one of them wants his share within a few months of buying this property."

Shekar's mom suddenly spoke, "If you want to own a rental property without the hassle of managing it, simply invest in real estate investment trusts (RIETs)."

Puzzled, the men asked, "What is that?"

She began, "RIETs offers many advantages to an investor who doesn't have a lot of money to invest in real estate, but at the same time wants to own a piece of property. It is a kind of investment pool that returns the income to its owners. The government created the RIETs in the 1960s to allow individuals to participate in the real estate programme.

"It is basically a company that owns and operates real estate and allows anyone to invest in it and profit from the rental income." "Interesting!" said Ram. "I agree that real estate is an income-producing investment. You can predict your earnings and also profit from the appreciation of the value of real estate. So, which companies form part of this trust?"

Shekar's mom said, "For a company to be a part of a REIT, it has to invest at least 75 per cent of its total assets in real estate. Thus, when you invest say $100,000, at least $75,000 of your money is invested in real estate. Based on the current economic conditions, the company can either keep the rest of the money as cash or invest in government securities or it can even invest the entire amount in real estate. The board of directors of the REIT decides that. Once your investments are used to buy real estate, the company gets real income every year mostly from rent or from selling properties."

Shekar exclaimed, "Mom! I am stunned. How do you know such things?"

His mom was still reeling from the shock of being sent away by her only son, couldn't bring herself to talk to him.

Ram came to the rescue and said, "Now what is the difference between investing in say, oil companies and an REIT?"

She said, "Good question. An REIT has to pay back a minimum of 90 per cent of its profits to its investors. Let us assume, the company made $20-million profit a year and your investment of $100,000 produced a $10,000 profit. The company must pay back at least $9,000 to you and use the rest for buying additional properties, if required.

"The company might even pay back the entire $10,000 to you. However, you are guaranteed to get a minimum of $9,000 cash. This is known as dividends."

She added with a touch of sarcasm. "Sometimes you definitely know that you are going to get good returns for toiling for many years."

"Do these REIT companies issue shares to the public?" asked Ram.

"Yes," said Shekhar's mother "Also, there is no difference between buying shares of Google and those of a real estate investment trust company. All you have to do is open an account in a brokerage firm, and buy the shares of the company that runs REITs."

Ram volunteered, "I guess there are more than hundreds of companies that run REITs; some might specialise in residential properties, some on commercial, such as office buildings and shopping malls."

"You are quite smart, young man," she complimented Ram. "Actually, in addition to stable income an investor also profits from the share price appreciation of the REITs. These shares are traded in the stock exchange. Thus, an investor not only gets steady income in the form of dividends but also from the long-term appreciation of the share prices. By investing in REITs, an investor gets the double advantage of being in the real estate as well as the stock market."

Shekar decided to add his part, "Does REIT offer better returns over the long run than even stocks and bonds?"

His mom said, "Over a 30 year period, between 1973 and 2003, S&P 500 returned 12.19 per cent, which is considered very good. REITs did better by returning 14.18 per cent.

"In fact, you can use REITs for your retirement accounts. As you know, the government offers many retirement benefits like 401-K, IRA and Roth IRA. If you prefer investing in real estate for your retirement, then instead of buying and managing real estate, you can simply invest in REITs."

Ram asked a loaded question, "Now, what if you need cash for emergencies? I recollect you had once pooled money to help Shekar buy his home?"

Shekar's mom smiled wryly and said, "Even though you are investing in REIT companies, you are actually buying the shares of a company.

"Thus, anytime you need cash, you can always sell the shares. Investing in shares is more liquid than investing in actual real estate. If you need to sell your home, it takes time. By investing in a REIT, you have the biggest advantage of investing in rental properties, and when you want to sell your shares, it is a question of simply placing an order through your broker."

Shekar's mom was surprised to see Ram at the old age home, the next day. "Aunty," he said, " I am terribly sorry that Shekhar sent you here. I would like you to come and live with me, if you like. Will you?"

She thought for a minute and said, "If REITs are an alternative to buying real estate, then Ram is the alternative for Shekar. I will get my bags."

(Racy@TheHindu.co.in)

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