REITs vs. Real Estate Funds: An Overview

An investment trust in real estate (REIT) can be described as a company or trust that invests directly in property that produces income and is traded as stocks. The real estate fund is a kind of mutual fund that focuses primarily on investing in the securities provided by public real estate firms. Although you can utilize either to diversify your portfolio of investments, There are some key distinctions to be aware of.

KEY TAKEAWAYS

• The real estate investment trust (REIT) can be described as a company that invests in real estate that produces income and is sold and bought as a stock. 1
• Real estate funds are a form of mutual fund that invests in public securities provided by real estate firms, including REITs.
• REITs can pay dividends regularly, and real estate funds add value via an appreciation. 1

REITs

A REIT (REIT) structure is like a mutual fund in that investors pool their capital to purchase shares of commercial real estate and later earn a profit from their claims, but with a few key distinctions. REITs must pay at least 90% of their tax-deductible earnings as dividends to shareholders. Tips every year. 2 This permits individuals to earn income from real estate without acquiring or managing the properties independently.

There are three significant kinds of REITs. 3

• Equity REITs manage and own property that earns income.
• Mortgage REITs offer loans to real estate operators and owners directly via mortgages and loans or indirectly through acquiring the mortgaged securities.
• Hybrid REITs are a mix of mortgage REITs and equity.

Most of the income associated with equity REITs is derived from the rental of real estate properties. The revenue for mortgage REITs comes through the earnings from mortgage lending. 4

REIT portfolios comprise apartment complexes, data centers, health facilities, hotels, infrastructure retail centers, office buildings, Self-storage, timberland, and warehouses. To illustrate below, we’ve compiled a list of the most profitable sectors for 2019, as per the National Association of Real Estate Investment Trusts: 5

Real Estate Funds

As with regular mutual funds, these funds can be active and actively managed. Funds that are managed passively generally track an index’s performance. Benchmark index. For instance, it is the Vanguard Real Estate Index Fund ( VGSLX), which invests in REITs that purchase hotels, office buildings, and other property and tracks its performance against the MSCI US Investable Market Real Estate 25/50 Index. 6

There are three kinds of real estate investment funds:

• The Real Estate Exchange-Traded Funds (REIT-ETF)own the shares of real estate companies and REITs. As with other ETFs, they trade similarly to shares on major exchanges.
• The real estate funds are closed- or open-end and are either actively or actively managed.
• Private real property investment funds can be professionally managed directly into real estate property. They are only available to accredited investors with high net worth and usually need a significant minimum investment.

The funds that are real estate-related invest in REITs and operating real estate businesses; however, certain real estate funds invest directly into properties. Funds that invest in real estate gain value predominantly by an appreciation and do not generally offer investors a short-term source of income like REITs could. However, they can provide more investment options (and diversification) than REITs.

Key Differences

Here’s a look into the main distinctions between REITs and estate funds:

• REITs invest directly into real estate. They also manage, own, or finance properties that generate income. Real estate funds generally are invested in REITs and related stocks to real estate.
• REITs are traded on exchanges precisely the same as stocks are sold, with their price changing throughout trading sessions. They are generally very liquid and trade in large volumes. They do not sell as shares, and prices are not updated daily. You can purchase an investment in real estate directly from the company that made it or through a web-based broker.
• 90% of REIT’s tax-deductible earnings are distributed in dividends to shareholders. These dividends are how the investors make their money. 4 Real estate funds can provide an appreciation in value. Therefore, there are better options than this for passive income and short-term profits.

Are Real Estate Investment Trusts (REITs) Appropriate for Long-term Investors?

REITs, or real estate investment trusts (REITs), must pay large portions of their profits to shareholders in dividends. This makes them an excellent source of income instead of capital gain. This makes them more suitable for investors who are who are looking to earn income. Investors looking for appreciation over time and want access to property might prefer mutual funds that are specialized in this particular asset class.