In this post, we will be talking about real estate investment funds, types of real estate investment funds, the difference between REIT and real estate investment funds, and lots more.
An investment fund is an organization or entity formed to collectively purchase securities such as real estate, stocks, and bonds and pool investor money.
- You’ll learn the type of real estate investment funds
- The differences between REITs and real estate funds
- Understanding how to start a real estate investment fund
- Answers to some frequently asked questions on real estate investment funds
What is a Real Estate Investment Fund?
As an investment entity, real estate funds open the way for investors/traders to invest in different properties without applying the exact amount of capital they would as an individual investor. By pooling traders/investor money, real estate funds allow people to explore different types of properties.
Some funds focus on purchasing large residential properties, while other funds might focus on buying commercial properties that can quickly be sold. While the rules for each real estate fund are different, the funds offer people (investors) the opportunity to liquidate their shares and receive funds when they need them most.
Are Real Estate Funds a Good Investment?
Real estate funds offer the benefits of real estate investment without the difficulties and challenges of direct ownership. These funds can provide rates of return at a lesser risk than individual property investments.
Types of Real Estate Investment Funds
Below is a list of the type of real estate investment funds
Real estate ETFs (exchange-traded funds):
Real estate ETFs (exchange-traded funds) are passively managed investment vehicles. The ETF funds track an underlying index, which enables people (investors) to earn market-matching returns. Real estate exchange-traded funds (ETFs) are open to the general public and trade on major stock market exchanges.
Real estate mutual funds:
Real estate Mutual funds are professionally-managed investment vehicles. Real estate Mutual funds invest money pooled from people (investors) into a diversified portfolio of real estate opportunities, including real estate-related companies, REITs, and direct ownership of the real estate.
Some real estate mutual funds are open to all investors if they meet the investment requirement (minimum investment requirement). People can purchase some mutual funds through a financial advisor, though some are available through online brokerages.
Real estate private equity funds:
Private equity funds are targeted and managed by high-net-worth clients and institutional investors. Because of that, most real estate funds (private) are only available to accredit institutional investors, not the general investing public.
The difference between a REIT and a real estate fund
Below is a list of the key differences between REITs and real estate funds.
- Ninety percent (90%) of a REIT’s taxable income is paid out as dividends to shareholders, and those dividends are where traders/investors make their money. Real estate funds provide value for investors through appreciation, so they may not be the best choice if you want short-term profit or passive income.
- REITs trade on major exchanges, and their prices fluctuate throughout the trading session. Most REITs are liquid and trade under substantial volume. Real estate funds don’t trade like stocks, and real estate funds’ share prices are updated once a day. People can buy a real estate fund through an online brokerage or directly from the company that created it.
- REITs own, finance, and operate income-producing properties and invest directly in real estate. Real estate funds invest in real estate-related stocks and REITs.
The 2% rule in real estate
The 2% rule is known as the guideline that real estate investors (s) use to determine if the rental property they want to buy is worth the investment. To make a better investment in rental property, investors have to ensure that the monthly rent the property produces makes at least 2 percent of the purchase price.
How much money is needed to invest in REITs
Investors need from $1,000 to $25,000 to invest in REITs. REITs were first created in the 1960s to allow investors to participate in the commercial real estate market; the REITs (real estate investment trust) is one of the cheapest and easiest options (for as small as $1,000 depending on the type of real estate investment trust) for adding real estate to a portfolio.
These are securities, and they are traded on major exchanges like stocks. REITs invest in real estate directly, either through mortgage investments or through property purchases. Many real estate investment trust specializes in a specific region or a particular type of real estate.
A real estate investment trust (REITs) offers investors a relatively high dividend and a highly liquid method of investing in real estate. Some real estate investments are not quick or easy to get out of. An exchange-traded real estate investment trust (REIT) is.
Moreover, people can start small with a little bit of cash. If they are in it for the long term, consider one of the REITs that offer a DRIP (dividend reinvestment plan).
How to start a real estate investment fund
Investing in or starting a real estate investment fund can be lucrative. However, like any investment, this comes with financial risks too. To make sure investors get the best from investing in a real estate investment fund, below are some key points to consider:
Structure of the Fund
A real estate investment fund can be closed or open, and the structure determines how people (investors) leave the fund. For open funds, investors can opt out of the fund before the project is completed. On the other hand, people (investors) cannot leave a closed fund until an agreed-upon time.
People are giving the sponsor their hard-earned money when investing in a real estate investment fund. Therefore, always ensure that the fund’s sponsor has experience in and knowledge of real estate funds and is trustworthy. Also, the management should be transparent about previous returns and ventures.
Investors should Identify the kind of assets the fund is considering and wants to venture into. A suitable property will appreciate and be profitable to you.
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There are a lot of reasons to invest in real estate and more reasons to invest in a real estate fund. Real estate investment funds are a special way to diversify an investor’s portfolio without taking on the hassles of direct ownership.
Are REITs better than real estate?
Direct real estate offers investors more tax breaks than REIT investments, and real estate gives investors more control over decision-making. A lot of REITs are publicly traded on exchanges, so they are easier to sell and buy than traditional real estate.
Are REITs better than rental property?
Its simplicity is a significant advantage of buying REIT shares rather than rental properties. REIT allows for sharing in rental income and value appreciation without being involved in the hassle of actually buying, selling, or managing property.
Is there a real estate fund?
Yes, there is a real estate fund. A real estate fund is a mutual fund that invests in securities offered by public real estate companies.
See the video below for additional explanations: