REIT vs. Real Estate Fund: What’s the Difference?

Investing in real estate provides many opportunities to build wealth. Two common ways to access these investment opportunities are to invest in real estate investment trusts (REITs) or in real estate funds. Both provide investors with similar returns, but there are important differences to understand before investing in either. To better understand the difference between real estate investment trusts and real estate funds, let’s dive in and discuss their similarities and differences.

Table of Contents

• 1. Real Estate Investing Options: REITs vs. Real Estate Funds
• 2. How Do REITs and Real Estate Funds Differ?
• 3. Pros and Cons of Investing in REITs
• 4. Getting the most out of Investing in Real Estate Funds
• Q&A

1. Real Estate Investing Options: REITs vs. Real Estate Funds

Real estate has long been a popular investment option with the potential to yield high returns over time. However, different paths exist for investing in real estate, from buying property outright to investing in publicly traded Real Estate Investment Trusts (REITs). Two of the most popular and widely available real estate investing options for the average investor are REITs and real estate funds.

• REITs are securities that trade on the major exchanges like any other stock issued. These publicly traded REITs are investments in large portfolios of real estate owned or managed by a professional management team. These teams often have access to the best development and capital sources on deals larger than what the average individual investor can access.
• Real estate funds provide an institutional investment vehicle for doctors, pension plans, and other institutional investors, as well as wealthy individuals accredited as investors by the SEC. Private real estate funds successfully compete for large deals and reap their benefits. Generally, fund performance is generated on cash flow from rental income and capital gains from buying and flipping real estate.

2. How Do REITs and Real Estate Funds Differ?

Real Estate Investment Trusts (REITs) and Real Estate Funds offer many similarities, but there are some key differences worth understanding.

Types of Investments

• REITs are passively managed investments that raise capital from shareholders to purchase many different types of income-producing real estate assets, such as office, retail, and apartment buildings.

    

• Real Estate Funds are actively managed investments that pool investor money to purchase a limited set of real estate assets, such as a single property or small set of properties.

Return Potential & Risks

    
• REITs are typically higher-yielding investments that require less capital. This makes them attractive as a diversified vehicle for investors seeking income and capital preservation, but investors are also at greater risk of facing dividends being cut when real estate markets are down.

    

• Real Estate Funds offer higher potential returns, but come with higher risk due to their smaller asset pool and lack of diversification. This makes it imperative for investors to conduct deep due diligence and verify the fund management team’s track record before investing.

3. Pros and Cons of Investing in REITs

Advantages

• REITs can provide investors with higher liquidity challenges, allowing for more flexible investments.
• They offer the unique advantage of allowing for diversification of investments, which can reduce risk.
• REITs also provide investors with the ability to take advantage of a number of tax benefits, including deductions on taxes for profits gained through investments.

Disadvantages

• Investors are likely to face higher fees associated with investing in REITs due to the level of management they require.
• The methods investors have used to evaluate REITs have not always proven successful, resulting in the possibility of losses.
• Finally, because REITs are listed on stock exchanges, there is always the potential for volatility due to market movements.

Investing in REITs can be a great way to diversify a portfolio and take advantage of the various tax benefits associated with them. While there are advantages to investing in REITs, there are also risks associated with them, including high fees and expenses, the potential for market volatility, and the difficulty of evaluating their long-term performance. As with any investment, it is important to research and understand the risks and rewards of investing in REITs before making any decisions.

4. Getting the most out of Investing in Real Estate Funds

Strike While the Iron is Hot

Real estate investing is a great way to grow your wealth, and real estate funds are an even greater opportunity. While these funds involve pooling your money with other investors, they’re a great way to get in the market without having to manage a property yourself. Here are some simple tips to help you get the most out of investing in real estate funds:

• Do your research – It’s essential to understand the terms and conditions of a fund you’re investing in
• Explore the market – Having knowledge of the market in which you’re investing is key for success
• Leverage your investments – Real estate funds can act as a smart way to leverage your money

In addition to these measures, it pays to be on the lookout for new opportunities. As the market changes, so do the real estate funds. If you’re able to spot these changes early, you could get invested in a fund just before the rate of return begins to skyrocket. Stay aware of market information, and you could maximize your investments significantly.

Q&A

Q: What is a REIT?
A: REIT stands for Real Estate Investment Trust, which is a company that invests in income-producing real estate, such as office buildings, shopping centers, apartments, and hotels. REITs can also be publicly traded, meaning investors can buy and sell shares in the company on stock exchanges.

Q: What is a Real Estate Fund?
A: A real estate fund is an investment product that pools money from investors to buy income-producing real estate. They provide an alternative to direct investing in real estate and usually invest in a much broader range of formats such as office buildings, industrial complexes, land, and retail outlets.

Q: What are the differences between REITs and Real Estate Funds?
A: The main difference between REITs and real estate funds is that REITs are publicly listed companies that invest in income-producing real estate, while real estate funds are an investment product that pools money from investors to buy income-producing real estate. Real estate funds also tend to be more diversified in terms of property types, while REITs may have a narrower focus. Additionally, REITs are more liquid, since they are traded on the stock exchange, meaning investors can buy and sell shares more easily.

No matter which real estate vehicle you decide to go with, it’s important to do your own research and understand the inherent risks and rewards of each. Invest wisely and you can reap the benefits of a real estate investment without the hassle of buying and managing a property yourself.