The Comparison REITs, Real Estate Funds and Real Estate Mutual Funds.

Investors often mix up REITs, Real Estate Funds, and Real Estate Mutual Funds. But these three investment vehicles have significant differences that need to be understood. This article will explain the definitions and compare their features.

last updated Wednesday, January 1, 2025
#Real Estate Mutual Funds #REITs

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John Burson

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In the investment world, REITs (Real Estate Investment Trusts), Real Estate Funds, and Real Estate Mutual Funds are often discussed interchangeably. However, they are distinct investment vehicles with unique features. Understanding these differences is essential for making informed investment decisions. This article will define each of these investment types and compare their characteristics, helping you identify which may suit your financial goals.

What is REIT?

REIT, or Real Estate Investment Trust, is a company that invests directly in real estate using properties or mortgages. They are bought and traded like stocks. REITs are similar to mutual funds, where investors combine all the funds to buy a share of commercial real estate to generate income. REITs are required to pay a minimum of 90% of taxable income each year as dividends. This helps the investors earn real estate income without buying or financing properties.

Types of REITs

1. Equity REITs: These REITs invest in and own income-producing real estate, such as shopping malls, office buildings, and residential complexes.
2. Mortgage REITs: These REITs provide financing to real estate owners and operators by purchasing mortgages or mortgage-backed securities.
3. Hybrid REITs: A combination of both equity and mortgage REITs, these REITs invest in real estate properties as well as real estate-related debt.

What is a Real Estate Fund?

A Real Estate Fund is a pooled investment vehicle, typically in the form of a mutual fund, that focuses on investing in securities of publicly traded real estate companies, including REITs. These funds can either be actively managed, where fund managers make decisions about which assets to buy and sell, or passively managed, where the fund tracks the performance of a specific real estate index.

Real estate funds offer an efficient way for individual investors to gain exposure to real estate markets without the complexities of directly purchasing properties.

Types of Real Estate Funds

1. Real Estate Exchange-Traded Funds (ETFs)
   These funds invest in shares of real estate companies and REITs and are traded on stock exchanges like regular stocks. ETFs typically track a specific real estate index.
2. Real Estate Mutual Funds
   These funds pool investor money to invest in a mix of real estate stocks, REITs, and sometimes direct real estate properties. They can be open-end (where investors can buy/sell shares daily) or closed-end (where shares are limited and traded on exchanges).
3. Private Real Estate Investment Funds
   These funds invest directly in physical real estate properties. Unlike public funds, private real estate funds are available only to accredited or high-net-worth investors and typically require a high minimum investment.

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What is a Real Estate Mutual Fund?

Real estate mutual funds are professionally managed pooled investments in various vehicles like stocks and bonds. Investors purchase mutual fund shares or units brought or acquired at the fund’s current net asset value. The value is calculated daily and based on the closing prices of the securities in the fund’s portfolio. Both real estate mutual funds and REITs work the same, more or less. They offer diversification and an affordable way for individual investors to invest in various real estate market segments. 

The Differences Between REITs and Real Estate Mutual Funds

REITs are directly invested in real estate and own or operate income-producing properties. It trades on major exchanges, and the prices fluctuate throughout the trading session. Most REITs are very liquid and trade under substantial volume. Almost 90% of the taxable income is paid as dividends to shareholders.

Real estate funds invest in REITs and real estate-related stocks. The funds don’t trade like stocks. The share prices are updated only once a day. You can buy a real estate fund directly from the company that created it or through an online brokerage. Real estate funds provide value through appreciation.

Like REITs, real estate mutual funds give individual investors with limited capital access to diversified or concentrated real estate investments because they have low investment minimums. Depending on their investment strategy, real estate mutual funds can be a more diversified investment vehicle than REITs. This can reduce transaction costs for those looking for greater diversification concentrated in one or a few funds. They also have the benefit of professional portfolio management and research.

Conclusion

Both REITs and Real Estate Funds provide investors with opportunities to diversify their portfolios and gain exposure to the real estate market. While REITs offer a reliable income stream through dividends, they are more focused on income-producing properties. On the other hand, Real Estate Funds, particularly mutual funds, tend to focus on long-term capital appreciation, offering more diversification and professional management.

If you're seeking liquidity and income, REITs might be the better choice. However, if you’re looking for a more diversified investment strategy with potential for both growth and income, Real Estate Funds and Real Estate Mutual Funds could be more suitable.

Understanding these distinctions will help you make informed decisions based on your financial goals, risk tolerance, and investment timeline.

Frequently Asked Questions (FAQs)

1. What is the main difference between a REIT and a Real Estate Mutual Fund?

REITs (Real Estate Investment Trusts) directly invest in income-producing real estate properties like commercial buildings and residential complexes. They generate income through dividends and are traded on stock exchanges. On the other hand, Real Estate Mutual Funds typically invest in REITs and real estate-related stocks. These funds focus on capital appreciation and diversification but do not own properties directly.

2. Are REITs a good investment for income generation?

Yes, REITs are an excellent choice for investors looking for regular income. By law, they must distribute at least 90% of their taxable income as dividends, which makes them a steady income generator. REITs are ideal for those who want to earn income from real estate without owning physical properties.

3. Can I invest in Real Estate Funds through a brokerage account?

Yes, you can invest in Real Estate Funds through a brokerage account. Real Estate ETFs (Exchange-Traded Funds) are publicly traded and can be bought and sold like regular stocks. Real Estate Mutual Funds can also be purchased through a brokerage, though they are priced once a day based on the fund’s net asset value (NAV).

4. What are the risks involved in investing in REITs or Real Estate Funds?

Investing in REITs or Real Estate Funds involves risks such as market volatility, interest rate changes, and property market fluctuations. REITs can be impacted by changes in rental income, property values, and the broader economy. Real Estate Funds carry similar risks but can also include exposure to private real estate investments, which tend to be less liquid. It's important to assess your own risk tolerance before making any investments.

5. Who should consider investing in Real Estate Mutual Funds?

Real Estate Mutual Funds are ideal for investors looking for diversification and professional management without the complexity of directly managing real estate. These funds offer exposure to a broad range of real estate-related assets and are suitable for long-term investors seeking capital appreciation with some income potential. They are perfect for those who prefer a hands-off approach to real estate investing.

 
 
 

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