Real Estate Mutual Funds
What Is a Real Estate Mutual Fund?
One way to invest in commercial real estate is through a real estate mutual fund, which is a type of investment comprising securities of entities that purchase real estate — most commonly real estate investment trusts, or REITs. In a sense, real estate mutual funds are an order of magnitude beyond REITs, which are investment pools that focus on the direct acquisition of income-producing real estate. Real estate mutual funds operate like REITs in that they are also structured around capital pooled from multiple investors, but they pull the focus back a step farther, targeting investments in different REITs as well as a plethora of different types of real estate companies — including real estate software companies, real estate brokerage firms, and even property management companies.
Unlike REITs, however, real estate mutual funds have the benefit of being professionally managed. Additionally, in most cases, real estate mutual funds are operated based on substantial industry research and analysis. These benefits, while definitely better for less experienced real estate investors, often come at a cost — and that isn’t just a comment on the relatively high maintenance fees typically associated with real estate mutual funds, either.
The trade off for having professional fund management and research is that Investors of real estate mutual funds have very small roles in the actual operations of the fund. Unlike owning stocks, shares of a mutual fund don’t come with any voting rights. This means that investors can’t participate in deciding which acquisitions the fund makes, or how any issues regarding the fund get resolved.
How Does a Real Estate Mutual Fund Work?
As with syndication and REITs, real estate mutual funds pool capital from multiple investors. This capital is then utilized to purchase securities on behalf of the fund in accordance with the fund’s investment objectives. Real estate mutual fund investments are typically managed by a fund manager, who handles all of the day-to-day operations of the fund — including deciding which securities to acquire and when they are to be bought or sold. In fact, the role of the investors is basically only to provide the capital for the investments.
Investors participating in the fund own shares based on their capital investment. While they do not receive any passive income from their investment like the monthly dividends that REIT investors earn, they generally make their profit based on an appreciation of value on their shares — which can lead to a significant return on investment upon selling a stake. For this reason, investors usually choose real estate mutual funds in mid- to long-term investment strategies.
Benefits of Investing in Real Estate Mutual Funds
- Professional portfolio management
- Low initial entry cost
- Limited risk
- Relatively high liquidity
- Potential for capital growth
- Passive real estate investment
- No control over the fund’s operation
- No passive income
- Subject to both real estate market and stock market trends
- Fewer tax benefits
- Higher maintenance fees
What are the benefits of investing in real estate mutual funds?
The benefits of investing in real estate mutual funds include:
- Professional portfolio management
- Low initial entry cost
- Limited risk
- Relatively high liquidity
- Potential for capital growth
- Passive real estate investment
Real estate mutual funds almost always have a professional portfolio manager and are typically constructed after significant expert research. Investors of real estate mutual funds purchase stakes in the form of shares or units, which are acquired at the price set by the fund’s net asset value. That value is calculated daily, based on the different closing prices of the securities included in the fund.
What types of real estate investments are included in mutual funds?
Real estate mutual funds typically include a diverse mixture of shares of REITs and real estate companies, such as real estate brokers, property management companies, and real estate software companies. (Source)
What are the risks associated with investing in real estate mutual funds?
The risks associated with investing in real estate mutual funds include:
- No control over the fund’s operation
- No passive income
- Subject to both real estate market and stock market trends
- Fewer tax benefits
- Higher maintenance fees
Additionally, investors of real estate mutual funds have very small roles in the actual operations of the fund. Unlike owning stocks, shares of a mutual fund don’t come with any voting rights. This means that investors can’t participate in deciding which acquisitions the fund makes, or how any issues regarding the fund get resolved.
What are the tax implications of investing in real estate mutual funds?
Real estate mutual funds carry fewer tax implications for investors than REITs. REITs are required to distribute 90% of their revenues as dividends to their investors, leaving only 10% for further investment. This means that investors in REITs may be subject to higher taxes than those investing in real estate mutual funds.
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How do I choose the right real estate mutual fund for my portfolio?
Choosing the right real estate mutual fund for your portfolio depends on a variety of factors, including your investment goals, risk tolerance, and the amount of capital you have to invest. It is important to do your research and understand the different types of real estate mutual funds available, as well as the fees associated with each fund. Additionally, you should consider the fund's track record and the experience of the fund manager.
When researching real estate mutual funds, you should look for funds that have a good track record of performance and a fund manager with a proven track record of success. Additionally, you should consider the fees associated with the fund, as well as the liquidity of the fund. You should also consider the fund's investment strategy and the types of investments it makes.
Finally, you should consider the amount of capital you have to invest and the amount of risk you are willing to take. Different funds have different levels of risk, so it is important to find a fund that is suitable for your investment goals and risk tolerance.