Real estate investment is not just a reserve for the already well established and financially comfortable. Even people whose account balances are not in the eight or nine digits can benefit from real estate.
REITs are Real Estate Investment Trusts. They are pools of funds meant for collective investment in real estate. Imagine a project that costs 300 million shillings. Very few people in the country can afford to handle this kind of project on their own. Very few can walk into a bank and get help to finance such. However, through a REIT, several people can come together and make it happen then they will each get a little piece of the revenues at the end of every financial year. REITs are regulated by the Capital Markets Authority and managed by different companies in the country.
There are different types of REITs. There are I-REITs where the aim is to have long term income distributed at the end of the financial year. You have a choice of commercial, residential or a mixture of both. There are also D-REITs which are funds meant for the development of big real estate projects like malls or landmark buildings. At the completion of the project, a decision can be made into an I-REIT or it can be sold off. There is another type called Islamic REIT that is specific to projects approved by Sharia law. The first two are the most common in Kenya.
1. Opportunity for the middle class
In this country, finally getting to that point where you can own a rental property takes a lot of sweat, pain, and tears. Unless you are crooked, peddling drugs or stealing public funds, there is very little doubt that you will be able to save up enough to build your own rental property before you are grey-haired with arthritis laden bones. Another option is to be born rich where you inherit buildings or money from your parents to own rental property.
However, REITs make this possible for people in their thirties and even twenties to come by rental income honestly through wisdom and hard work. They provide opportunities for the middle class to benefit from the real estate sector. With about one million shillings, you can have a good chunk of REITs units from which you will get income at the end of the financial year. If you have a salary of 100,000 shillings a month, you can make it such that by the end of two years in employment you have saved up enough to get in on this.
In real estate the income is usually pretty predictable. See, in other forms of investment like stocks, your income will be highly dependent on how the company performs in one particular year among other factors. Your REIT income will be dependent on the percentage of occupancy of the buildings your money has been put in. You know how much every tenant is paying in rent every single month. Therefore, by the end of the year, you should be able to have a ballpark figure of how much you will receive. You will also benefit from appreciation in real estate as well as the astuteness of the REIT manager. D-REITs are however a lot less predictable than I-REITs because there is no telling how long a property will remain on the market.
Predictability is great because you can plan the next year with a good idea of the funds that will be available to you. You can plan your next investment with more precision when you know how much money will be coming in at the end of the year.
If you own an actual building, it will take some time for you to get liquid when you need it. It will take a long time for you to find a seller for the building. This will be after you have had it valued and renovated so that it fetches a higher price. Depending on the market and economy in general, you may or may not be able to find a buyer. The buyer might not pay the entire amount upfront. You may only want to sell a portion of the building. Very few people will agree to co-owning a rental property. However, with REITs you can plan to sell your units then you will have the cash. You can also sell only a portion of your units.
While this will not be quickly cashed in, it is relatively quick compared to the alternative. It does offer a degree of flexibility in comparison to traditional investing and outright property ownership.
Without diversification, you are exposed to concentration risk. Concentration risk is a situation where if you focus your funds on one form of investment you are left vulnerable if that investment does not go as expected. If you diversify, however, one loss can be offset by another form of investment.
Think about it like this, if you have a thousand shillings then put all of it in your right pocket. Then you sit on the left side of the matatu thus exposing your right pocket. Unbeknownst to you, there is a pickpocket nearby who will dip into that pocket. At the end of the day, you might not even have enough to pay your fare. However, if you have the same thousand shillings in different denominations in different pockets. You will still have something left over to pay your fare and eat after the pickpocket has cleaned out the right pocket.
REITs offer the chance to improve in different forms of real estate. You could invest in residential and commercial options as well as some of those mortgage funds. Your money will be spread in different ways and you will have some cushion.
5. Access to expert help
REIT managers are usually very skilled professionals who seek not only to help you understand how this works but also help you make the right decisions especially when it comes to diversification. Diversification can be tricky for someone who never attended a real estate class. You may look at the markets but you will not know how to use those numbers and percentages properly so that your money is appropriately spread across options.
The professionals are also bound to be very honest and transparent. Investors in REITs always know which properties have been invested in as well as the percentage of vacancies. You will be informed when there is a termination of a lease and when there is a new or renewed lease. You will know exactly how much every unit is bringing in. Some go as far as helping you predict negative changes so that you can prepare for them.
REITs are not subject to additional taxes. They will be taxed only to the extent to which you are taxed as an individual. You do not have to worry that this will attract an additional charge. This is unlike rental income which must be filed every month and charged at 10%.
1.Unsuitable for emergencies
We can agree that there is a certain level of liquidity that comes with owning REITs as opposed to owning an actual rental building. However, it will take some days for you to be able to gain approval to sell your REIT units and cash out. You will not be able to compound your earnings and withdraw before the year comes to a close. You will have to wait until the end of the financial year for you to get your portion of the revenue. This is terrible if there is a sudden illness in your family or your house catches fire. You should therefore have a different fund for emergencies. You could open an account and send a portion of the REIT money to that account for urgent situations so that you are not rushing to sell your units.
2.Normal real estate challenges
Your income will be affected by things that normally affect the real estate market. Issues like political unrest will still affect your income, especially if the property is located in a particularly risky area. A good example is a mall in Kibera. This area is prone to violence and insecurity when there are elections. As an election approaches, there might be a notable decrease in interest in the property which will also cause a decrease in your income. Other issues like the economy and government policy will affect your REIT income as well.
This was introduced a few years ago and seems to be doing well with reports of double-digit improvements in 2019. It is a wonderful opportunity for the upwardly mobile who seek to burst through the glass ceiling that causes financial stagnation for people in their thirties. All the best!