REIT vs. Real Estate Funds
REITs are corporations, trusts, and associations that invest directly in income-producing real property. They can be traded like stocks. A real estate fund is a type of mutual fund which focuses primarily on investing in securities offered publicly real property companies. You can use both to diversify your portfolio of investments, but there are important differences.
REITs
The structure of a REIT is very similar to a mutual fund. Investors pool their capital to purchase a share in commercial real estate. They then receive income from the shares. However, there are key differences. REITs must pay at least 90% of their taxable income each year in shareholder dividends. Individual investors can earn income from real property without having to purchase, manage or finance any properties.
There are three types of REITs:
Equity REITs:
Own and Operate Income-Producing Real Estate.
Mortgage REITs:
lend money directly to real estate operators and owners through mortgages and loans or indirectly through the acquisition of mortgage-backed securities.
Hybrid REITs:
combine equity with mortgage REITs.
Equity REITs generate the majority of their revenue from rent from real estate properties, while mortgage REITs can profit from interest on mortgage loans.
REIT portfolios can include apartments, data centers, healthcare facilities, infrastructure, office buildings, retail centers, self-storage, timberland, and warehouses.
Real Estate Funds
Real property mutual funds are just like regular mutual funds. They can either be actively or passively managed. Passive funds are typically able to track the performance of a benchmark Index. For example, the Vanguard Real Estate Index Fund ( VGSLX) invests in REITs that purchase office buildings, hotels, and other properties. It tracks the MSCI US Investable Market Real Estate Index 25/50 Index.
There are three types:
Real Estate Exchange Traded Funds own shares of REITs and real estate corporations. These ETFs trade just like stocks on major stock exchanges.
Real Estate mutual funds can either be closed-end or open-end and can be managed actively or passively.
Private real-estate investment funds are professionally managed funds that invest directly in real property properties. These funds are only available to accredited high-net-worth investors. They typically require a large minimum capital.
Real estate funds are primarily invested in REITs or real estate operating companies. However, some real estate funds also invest in properties. As a result, real estate funds are more likely to appreciate than REITs and provide investors with short-term income. However, real estate funds offer diversification and a wider asset selection than individual REITs.
REITs vs. Real Estate Mutual Funds
Let's look at some of the key differences between REITs (real estate funds) and REITs:
REITs invest in real estate directly and finance, own, operate or finance income-producing assets. REITs are a common investment option for real estate funds.
REITs trade on major stock exchanges similarly to stocks, with their prices changing throughout each trading session. Many REITs trade in large volumes and are highly liquid. Real estate funds are not like stocks, and share prices are updated once per day. A real estate fund can be purchased directly from the company or via an online brokerage.
90% of the taxable income from a REIT is paid as dividends to shareholders. Investors make their money with these dividends. Real estate funds can be a great choice if you are looking for passive income or short-term profits.
The Summary
REITs and mutual funds for real estate offer investors an alternative way to gain access to real estate. Investors do not need to finance, own, operate or finance real estate properties. The steady income stream of dividends from REITs is a common way to make a living. Real estate funds, on the other side, however, are attractive for longer-term investors because they create a lot of their value through appreciation.
