REITS, Real Estate Funds & Real Estate Mutual Funds: The Comparison

What is REIT?

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

Types of REITs

There are three main types of REITs, Equity, Mortgage, and Hybrid REITs. Let’s see what they are:

• Equity REITs, Equity REITs own and operate income-generating real estate.
• Mortgage REITs, Mortgage REITs lend money to real estate owners and operators either directly through mortgages, loans, or indirectly by obtaining securities backed by a mortgage.
• Hybrid REITs, Hybrid REITs are a combination of equity and mortgage REITs.

What is a Real Estate Fund?

Real Estate Funds are a type of mutual fund that focuses on investing in securities offered by public real estate companies. Like mutual funds, real estate funds can either be actively or passively managed. The funds that are passively managed track the performance of a benchmark index. 

Types of Real Estate Fund

There are three types of real estate funds:

• Real estate exchange-traded funds: This type of fund owns the shares of real estate corporations and REITs. 
• Real estate mutual funds: This type of fund can be open- or closed-end and either actively or passively managed.
• Private real estate investment funds: Private real estate investment are professionally managed funds that invest directly in real estate properties. These are available only to accredited, high-net-worth investors and typically require a large minimum investment.

What is a Real Estate Mutual Fund?

Real estate mutual funds are professionally managed pooled investments that invest in a variety of vehicles like stocks and bonds. Investors purchase mutual fund shares or units which are brought or acquired at the fund’s current net asset value. The value is calculated once a day and is 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 both offer diversification and an affordable way for individual investors to invest in various segments of the real estate market. 

The Differences Between Them

REITs are directly invested directly 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 either 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 cut down on 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

In general, REITs can provide a steady source of income through dividends while Real estate funds create much of their value through appreciation which is ideal for long-term and steady investors. Real estate mutual funds are liquid and are accessible like REITs. These funds can create an avenue for investing in a wide range of properties. Like real estate funds, long-term investors are the ones to reap the rewards of dividend income and capital appreciation.