KW: Real Estate Funds vs. REITs.
A company, trust, or association that invests directly in real estate that generates income and is traded like a stock is known as a real estate investment trust (REIT). A specific class of mutual fund called a real estate fund is one that prioritizes investment in securities provided by publicly traded real estate corporations. Both may be used to diversify your investment portfolio, but there are some important distinctions to be aware of.
A mutual fund’s structure and a REIT’s are similar in that investors pool their money to purchase shares in commercial real estate and subsequently get income from those shares like real estate income funds, but there are some important distinctions.
A minimum of 90% of taxable income must be distributed to shareholders in the form of dividends each year for REITs. Individual investors may now profit from the real estate market without having to invest in, manage, or finance any properties themselves.
REITs come in three primary categories
- Equity: REITs acquire and manage properties that generate revenue.
- Mortgage: REITs provide financing to owners and operators of real estate either directly through mortgages and loans or indirectly through the purchase of securities backed by mortgages.
- Hybrid: Equities and mortgage REITs are both included in hybrid REITs.
Rent from real estate properties accounts for the bulk of the income associated with equity REITs, whereas interest on mortgage loans accounts for the majority of the income associated with mortgage REITs.
Real Estate Funds
Real estate mutual funds can be handled actively or passively, much like normal mutual funds. The performance of those that are passively managed is generally followed. For instance, the MSCI US Investable Market Real Estate 25/50 Index is followed by the Vanguard Real Estate Index Fund (VGSLX), which invests in REITs that purchase office buildings, hotels, and other assets.
Real estate funds come in three different categories:
- Shares of real estate firms and REITs are owned through real estate exchange-traded funds (ETFs). These trade like equities on well-known exchanges, much as other ETFs.
- Mutual funds for real estate can be managed actively or passively and can have an open- or closed-end structure.
- Professionally managed funds are called private real estate investment funds to make direct real estate investments. These have a high minimum investment requirement and are only open to authorized, high-net-worth individuals.
Although some real estate funds invest directly in homes, real estate funds often invest in REITs and real estate operating businesses. Real estate funds typically do not offer investors short-term income in the same way as REITs may. Instead, they acquire value primarily via appreciation. However, compared to purchasing individual REITs, real estate funds can provide a considerably wider variety of assets (and diversification).
REITs make direct real estate investments and either own, manage, or finance buildings that generate income. In REITs and companies with a real estate focus, real estate funds often invest.
Similar to stocks, REITs trade on significant exchanges, and their prices shift during the trading day. The majority of REITs trade with high volume and are quite liquid. Share prices for real estate funds are only updated once per day, and they do not trade like stocks. A real estate fund can be purchased directly from the business that established it or through an internet brokerage.
Investors profit from dividend payments made to shareholders by REITs, which account for 90% of their taxable revenue. Real estate funds create value via appreciation, so they might not be the best option if you’re looking for short-term gains or passive income.
Which is more liquid, real estate funds or REITs?
When compared to mutual fund shares, which may only be redeemed at the end of the trading day when the net asset value (NAV) is settled, REITs are often more liquid since they are listed and traded on significant stock exchanges.
Investors get access to real estate through REITs and real estate mutual funds without having to own, manage, or finance any real estate themselves. Dividends from REITs may often offer a consistent stream of income. Contrarily, real estate funds gain a significant portion of their value through appreciation, which draws long-term investors.