Real Estate vs. REITs Funds: An Overview

The term “real estate investment trust” (REIT) can be described as a type of corporation trust, association, or trust that invests directly in income-producing real estate. It is traded as a stock. Real estate funds are a kind of mutual fund that is primarily focused on investing in the securities provided by real estate firms that are public. Although you can utilize either to diversify your portfolio of investments, there are some important distinctions to consider.

KEY TAKEAWAYS

• The real estate investment trust (REIT) is a company that invests in income-producing real estate. It is purchased and sold as a stock. 1
• The real estate fund is a kind of mutual fund that invests in securities provided by real estate firms that are public, which include REITs.
• REITs pay regular dividends. Real property funds are a source of appreciation. 1

REITs

The structure of a REIT (REIT) structure is similar to the mutual fund in that investors pool their capital to purchase an interest in commercial real estate and later receive income through their shares, but with a few important differences. REITs must pay at least 90% of their tax-deductible earnings in the form of shareholders’ dividends every annually. 2 This permits investors who are not a part of the REIT to earn a profit from real estate without needing to acquire or manage any property in their own.

There are three kinds of REITs. 3

• Equity REITs operate and manage income-generating real estate.
• Mortgage REITs offer loans to real estate operators and owners either directly via mortgages or loans or indirectly through the acquisition of the mortgaged securities.
• Hybrid REITs are a mixture of mortgage and equity REITs.

The majority of revenue with equity REITs stems from rents on real estate properties, and the income related to mortgage REITs comes from the interest they earn by mortgage lending. 4

REIT portfolios can include apartment complexes and data centers, health facilities, hotels, infrastructure retail centers, office buildings, timberland, self-storage, and warehouses. To illustrate, Here’s a breakdown of the sectors that have performed best in 2019 based on the National Association of Real Estate Investment Trusts: 5

Property SectorTotal Return in 2019

Industrial 48.7%

Data Centers 44.2%

Timber 42.0%

Infrastructure 42.0%

Source: National Association of Real Estate Investment Trusts (Nareit)

Real Estate Funds

Similar to regular mutual funds rea, real estate funds are able to be active and actively managed. The funds that are passively managed generally are able to track the performance of an index. Benchmark index. For instance, the Vanguard Real Estate Index Fund ( VGSLX) is a fund that invests in REITs that purchase hotels, office buildings, and other properties, following an index called 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. Similar to other ETFs, they trade similarly to claims on the major exchanges.
• Mutual funds for real estate are closed- or open-end and can be actively or managed passively.
• Private funds for investment have been professionally managed and invested directly into residential real estate. They are only available to accredited investors with high net worth and generally need a significant minimum amount of investment.

The funds that are real estate-related invest in REITs and operating real estate businesses; however, a few fund managers invest directly in real estate. Funds that invest in real estate gain value predominantly by an appreciation and typically do not offer investors a short-term source of income in the same way REITs can. However, they are able to provide a wider choice of assets (and diversification) as opposed to buying individual REITs.

Key Differences

Let’s take a look at the major distinctions between REITs and estate funds:

• REITs invest directly into real estate. They also operate, own, or finance properties that generate income. Real estate funds usually are invested in REITs and related stocks to real estate.
• REITs are traded on exchanges exactly the way 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 stocks, and price updates are made only once per day. You can purchase the real estate fund directly from the company that made it or through an internet-based brokerage.
• 90% of REIT’s taxable earnings are distributed in dividends to shareholders, and it is through tips that the investors make their money. 4 Real estate funds create an appreciation in value; they’re not the best option when you are looking for the benefit of passive income as well as short-term profits.

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

Investment trusts in real estate (REITs) are required to pay the majority of their profits to shareholders in dividends. This makes them an excellent source of income rather than earnings from capital. This makes them better suited to investors seeking income. Investors who are looking for appreciation over time and are looking to get access to property might prefer mutual funds that are specialized in this particular asset class.

Which Is More Liquid: REITs or Real Estate Funds?

Because REITs are listed and traded on the major stock exchanges, they are much more liquid than the mutual fund share that can only be exchanged at the closing of the day after they have their net asset value (NAV) settled. However, REITs are not all publicly traded. Certain REITs are non-traded REITs or REITs not traded on exchanges. They are also not in liquid form. 1

Can You Short the Housing Market With REITs?

You are able to trade short REITs the same as other stocks insofar as there are enough shares to lend. However, it is important to note that REITs pay regular, fairly high dividends and dividends, and the short is accountable for delivering the prize in the direction of the longer. An alternative is to sell individual homebuilder stocks and housing exchange-traded funds (ETFs) to get around this problem.

The Bottom Line

REITs, as well as real estate mutual funds, give investors a means to gain access to real estate without having to manage, own, or finance property. The general rule is that REITs are an income stream that is steady by way of dividends. Real estate funds, however, are able to generate a large portion of their value via appreciation, making them appealing to long-term investors.