What are real estate funds?
Many of us have heard of currency investment funds when investing in stocks, bonds, and so on. However, there are other ways to make money on investments – we talk about what real estate funds are.
You can not only buy an apartment and receive money by renting it out. If you are interested in this area and you are well versed in it, invest in REITs, that is, real estate funds.
In essence, a REIT is a company that invests in real estate and receives income from them. The system is very similar to equity funds. However, the money is not distributed to start-ups or advanced companies, but to land, apartments, construction of cottages, etc.
Thus, a real estate fund can only have money in different currencies, real estate, lease agreements, debt instruments and investment shares, shares of rental funds. Trust securities can be bought or sold on stock exchanges.
The main characteristic of a real estate fund is that it invests at least 70% of its assets in properties. In addition, the fund receives most of its profits from rent, mortgage interest or real estate sales, and has at least 100 shareholders.
Types of real estate funds
In fact, real estate funds are a business in the corresponding segment. Any person with access to the exchange and any amount of money has the opportunity to invest in such funds. There are several types of REITs.
- Equity, which includes most of them. These are management companies that buy objects and earn money by renting them out. Equity funds differ from developers in that they do not sell objects as soon as they are completed. In this case, they are part of the investment portfolio.
- Mortgage funds include a small part of the funds, about 10%. They cover real estate transactions with mortgages and direct lending. The interest earned on mortgage loans generates income.
- Mixed funds, that is, combining the features of the first and second types, combine the two previous ways of earning. There are few such funds.
- Public OTC real estate funds are registered by a special commission, but are not traded on national stock exchanges. These are private REITs, that is, companies exempt from special registration and not traded on stock exchanges. Usually their papers are available only to institutional investors.
Types of many funds
- Development, intended for the development of land or objects, that is, resale, development, repair, etc.
- Land, specializing in operations with land plots: land surveying, transfer to another category of use, development, etc.
- Rental, created for profit from the rental of houses, apartments, offices and other residential, commercial and other real estate.
- Construction, focused on the construction of new facilities or their purchase at the development stage. They receive money from resale.
- Combined funds receive income using the instruments of all other types of funds. These include the majority of REITs.
The funds are invested in apartments, hotels, construction of schools and hospitals, offices and other types of real estate. An investor can become the owner of the fund’s assets through an exchange-traded fund. In addition, he can buy shares of individual companies, while receiving large dividends.
Compare the benefits for yourself: if the average dividend yield on stocks is about 3%, for REITs it is about 6%. This is because real estate funds do not pay income tax, and are also required to pay shareholders a large part of the income. Thus, by adding at least 10% REIT to your stock portfolio, you can significantly increase its profitability and reduce risks.
Benefits of Real Estate Investment Funds
Liquidity: The entry threshold for REITs is significantly lower when compared to buying properties outright. You can conduct transactions on the exchanges daily and quickly.
High yield: dividends bring an average of 4 to 10 percent per annum. This is noticeably more than the interest that investors receive by buying shares.
Security: you diversify your investments, make your portfolio more diverse and secure. If something happens in any of the areas, you will have an airbag.
Outpacing inflation: As a rule, real estate prices rise in parallel with the depreciation of the currency. Now that the official inflation rate is 8% lately, this seems unrealistic. However, based on past experience, real estate prices are adjusting faster than anywhere else.
There are risks, especially for mortgage funds. Interest rates may rise. This will lead to a decrease in the value of mortgage assets, or the borrower will repay his debt ahead of schedule.
In addition, for many investors, dividends from real estate funds are taxed at a rate of 30%. It would seem that this can be avoided: to fill out the W-8BEN document, created in order not to pay taxes to two countries. After that, the resident recently pays only 10% in the US, as well as only 3% income tax in the current tax. It is not that simple! By law, this is possible for ordinary investment funds, but not for REITs, that is, the tax cannot be avoided.
Can you invest in real estate funds?
Corporations that invest in liquid real estate are called investment trusts. Closed-end real estate mutual funds are funds that buy securities offered by REITs and other public companies. Funds provide returns on assets, while trusts pay dividends.
You can earn real estate income by actively researching each developer. Or you can earn passive income by investing in investment funds. This can be done through REITs: buy assets on a public exchange or the New York Stock Exchange. When evaluating funds, consider financial metrics and the dividend factor, use technical analysis.