What Is a Real Estate Fund?
Investors often advocate for keeping a diverse portfolio to mitigate risk. This involves investing in a variety of different sectors that won’t be affected by the economy in the same way. For example, the pandemic halted tourism (which drove down the stock value of travel-related industries) but was a boon for home improvement and healthcare funds.
Investing in real estate is another way to diversify your portfolio. Instead of focusing entirely on one form of investment (like different industries in the stock market), you can spread your wealth across a variety of growth options, each with its own levels of risk and potential rewards. Even if you’re new to investing, you can still consider placing your money in a real estate fund. Learn more about this option and what it means for you.
Why Invest in Real Estate?
There are several benefits of investing in real estate funds or real estate directly. Every investment comes with risks, but there may be multiple rewards for choosing this option, including:
- You can enjoy passive income: While some investments take several years to drive returns, you can rent out your property and start receiving monthly payments almost immediately.
- It’s considered a low-risk choice: There will always be demand for land and people will always need places to live. Even in a turbulent market, real estate is often considered a safe bet.
- You have full control over the investment: Rather than following hedge-fund rules and requirements to receive dividends, you can choose when you want to liquidate your assets and how you want to profit from the sale.
- It’s considered an inflation hedge: In times of high inflation, landlords can increase rental fees, thus growing their profits.
- You can live in your investment: Unlike stocks, bonds, and other forms of digital investing, you can potentially live in your investment if you need to. Many people who purchase starter homes when they are young and then family homes as they get older do just that.
Though real estate is considered a good investment in many cases, everyone has unique and specific investing needs. If you’re interested in pursuing this option, talk to a financial advisor. They can walk you through the different choices available to you — including the potential for investing in real estate mutual funds.
How Real Estate Funds Work
Mutual funds are companies that specialize in diversification. The company invests in several different companies and industries as part of its portfolio. People can then buy shares in these mutual funds to invest in the same groups of companies. Essentially, the mutual fund does the work for you in developing and managing diverse investments, which is often a relief for novice investors.
A real estate mutual fund focuses primarily on property-related companies. Instead of the fund having a diverse number of industries, a real estate mutual fund might include ones of different sizes, locations, and target markets. These companies usually invest in real estate investment trusts (REITs) to provide additional diversification and security.
Using the pandemic as an example again, a real estate mutual fund might have taken a hit from employees not returning to the office (lowering commercial office space property values) but this would be balanced by rising home equity rates and rising rental costs.
What Is a Real Estate Investment Trust (REIT)?
A real estate investment trust (REIT) is a company that invests in different aspects of property buying, selling, and management processes. Some REITs own office buildings across the country or invest in companies that develop and manage apartment complexes. These equity REITs collect revenue from rent and investment dividends. Other REITs provide loans for mortgages or purchase existing mortgages, which allows them to turn a profit through interest collection. They are known as mortgage REITs.
A real estate mutual fund might invest in different types of REITs to keep a diverse portfolio. Someone looking to invest in real estate can opt to work with a mutual fund or contribute to a REIT directly.
Other Types of Real Estate Investments
You aren’t limited to real estate mutual funds or REITs if you want to invest in real estate without actually buying property. Some of these options are reserved for accredited investors, so they might not be an immediate option. However, you can bring them up with your financial advisor to see what you need to know.
Private Equity Funds
A private equity fund in real estate is similar to a mutual fund in that a large group of people invests toward one goal. However, these funds often require long-term investment (usually longer than 10 years) and are only open to accredited investors and their qualified clients.
Real Estate Syndications
A real estate syndication occurs when a group of people comes together to buy investments. For example, 10 people might pool their funds to buy an apartment building and then split the profits from the monthly rent accrued and the eventual sale of the property.
Crowdfunding occurs when several people buy into a project with the potential to reap a profit on the returns. This could be a good way for a new investor to practice buying into real estate and reaping rewards as a result. There is crowdfunding for real estate options in both commercial and residential properties.
Advantages of Real Estate Mutual Funds
There are several benefits of real estate funds over traditional real estate investment. Here are a few reasons why you might consider this option.
- Increased accessibility: Buying property is expensive and it takes both money and time to manage. Mutual funds might be a better option if you have a smaller budget or prefer a hands-off approach.
- Reduced risk: Mutual funds, by their nature, are relatively low-risk. Your investment might be safer than if you bought a physical house or office building.
- Liquidity: Selling property takes time and comes with additional costs in the form of Realtor fees. However, you can liquidate your mutual fund investment whenever you need to.
- Improved diversity: Choosing a real estate investment fund can diversify your portfolio beyond stocks and bonds.
Real estate mutual funds are often considered a long-term investment; however, you can set your own time period for how long you want your money to grow. With this option, you have more control over your investments without having to manage the properties yourself.
Limitations of Real Estate Mutual Funds
While real estate investment funds are designed to be low-risk and accessible, every form of investment comes with potential drawbacks and limitations. Consider these risks before you invest so you feel completely informed about and comfortable with your decisions:
- Real estate can be volatile: Your investments might take a dip in the short run if the real estate market changes.
- The assets you invest in have their own risks: Hurricane Ian caused more than $50 billion in property damage across hundreds of thousands of buildings in 2022. The real estate you invest in can be damaged or destroyed by a variety of uncontrollable and unforeseeable threats.
- You might invest or liquidate at the wrong time: Even the best investment funds can’t protect against human decision-making. You might not leave your investment in the fund long enough or choose inopportune times to move your money.
While real estate mutual funds might be a solid investment strategy, there are forces out of your control that could impact your potential profits and losses.
Who Should Invest in Real Estate Funds?
You don’t need to be a real estate expert to put money in REITs and mutual funds. You don’t even need enough money for a down payment on a home to get into the real estate game. These funds are often perceived as low-risk options with minimal barriers to entry — which makes them ideal for many investors. Real estate mutual funds could be a good way to grow your investing experience while diversifying your portfolio.
Keep in mind that these funds aren’t right for everyone. Investors who can handle higher-risk options and want higher returns might opt for private equity funds instead. Other investors might only consider REITs as a way to hedge the rest of their portfolios.
The choice depends on your experience, tolerance for risk, and financial goals — both in the long and short term. Before you invest, talk with a professional advisor to learn more about your options.