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

Drawbacks of Investing in Real Estate Mutual Funds

• 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