3 ways to invest in real estate for lucrative returns reits fractional ownership mutual funds

Real estate has been among the most rewarding and stable investment over the years. Further its attractiveness has gained manifold in both the residential and commercial space even though the prices are on a northward journey. 

In fact, fast-forwarding to 2023, retail investors, particularly the younger demographic, now have various avenues to invest in real estate without depleting their financial resources, enabling them to earn passive income at an early stage. Let’s delve into how individuals can invest in real estate without relying on significant bank loans or substantial cash reserves.

So, as an investor in a case you are scouting for options to take a dig into the real estate world:

Here are three lucrative ways as suggested by Mananki Parulekar, Co-Founder, Claravest Technologies:

Option 1: Fractional Real Estate Ownership Platforms

Fractional Ownership represents the latest trend in India’s real estate market. Analogous to sharing a giant pizza with friends, fractional ownership involves purchasing a small piece or “fraction” of an expensive property, offering rental yields and property appreciation. Fractional ownership platforms facilitate investments in commercial and residential properties in high-growth Indian areas such as Navi Mumbai, Pune, Goa, Hyderabad, etc., allowing for multiple real estate investments.

These platforms handle property management, operational logistics, due diligence, and tenant acquisition, enabling investors to enjoy earnings from the comfort of their homes.

Depending on the user’s investment goals, fractional ownership provides the following –

Residential Real Estate: This option is for people who want to invest in high-growth locations for property appreciation. Residential real estate also generates rental income, so investors can receive passive income while the property price appreciates. Residential real estate also allows investors to invest in vacation homes, in this scenario, investors can earn rental income and property appreciation and enjoy a luxury villa with their friends and family.

Commercial Real Estate: This option is for people who want to invest in pre-leased commercial assets and their goal is to receive rental returns. Commercial real estate does provide property appreciation, but it is generally lower than residential real estate (this thesis depends on where the property is located).

Option 2: Real Estate Investment Trusts (REITs)

The Real Estate Investment Trusts Regulations, enacted in India in September 2014 after substantial modifications, opened the door for retail investors to participate. A Real Estate Investment Trust (REIT) is an entity that directly invests in income-generating real estate, traded like a stock on the public market. Three primary types of REITs include Equity REITs (income-generating properties), Mortgage REITs (providing loans to real estate companies), and Hybrid REITs (a combination of equity and mortgage REITs).

SEBI has recently introduced Small and Medium-sized REITs (SM REITs) for assets valued between Rs. 50 crores and Rs. 500 crores. (For an asset or multiple assets to qualify as a REIT, the total value of the assets has to be Rs. 500 crores, along with other requirements.) SM REITs bring this asset value down to Rs. 50 crores. SM REITs is a new concept that will allow fractional ownership platforms with an asset AUM of Rs. 50 crores to convert their asset(s) into a REIT structure to allow retail investors to trade it on the public market, with a minimum ticket size of Rs. 10 Lakhs.

While REITs and SM REITs offer straightforward buying and selling of real estate asset(s) shares on the public market, their performance may be influenced by market volatility.

Option 3: Real Estate Mutual Funds

Real estate mutual funds are invested in securities from real estate sectors. The funds act as capital to support real estate companies in constructing properties. These mutual funds invest in various REITs or other real estate sector-related stocks, specifically focusing on equity-related REITs.

All three options provide retail investors access to the real estate sector, and the choice depends on individual investment objectives. REITs and Real Estate mutual funds may be suitable for those seeking faster liquidity, whereas a fractional real estate ownership platform is more advantageous for investors aiming for rental income (for commercial real estate) and for investors aiming for property appreciation, self-use and rental income (for residential real estate).