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If we want to put it in just one sentence, we can say, real estate funds are collective investment products. I know that was a difficult definition to grasp. Don’t worry. We will explain real estate funds in the most tangible way. Let’s start.

What Is a Real Estate Fund?

A real estate investment fund is a combination of investments. These investments do not have their own legal personality and are of a non-financial nature. Besides, its objective is to raise funds from multiple investors to buy real estate of urban nature.

Furthermore, these properties are profitable through obtaining income from leases. Another option to obtain income is the purchase and sale operations, but the focus is on the rental.

On the other hand, there are indirect real estate investment funds. They buy securities in the mortgage market. They are those that are guaranteed by real estate, such as bonds, certificates, and mortgage shares.

It is also possible to make indirect real estate investments through the purchase of shares in real estate companies. In other words, they create a portfolio with securities issued by other real estate entities and participation in the mortgage market.

One of the greatest advantages of investments through real estate funds, whether direct or indirect, is the taxation they offer to the participant.

Considering this issue, we have REIT funds. You need to observe their difference, as well.

The Difference Between REITs and Real Estate Funds

Another controversial issue is the difference between REITs and real estate funds. You need to know it if you want to grasp the real estate funds deeply.

REIT mutual funds invest directly in real estate and own, operate, or finance income-producing properties. On the other hand, real estate funds typically invest in REITs and real estate-related stocks. Hence, we can say that real estate funds are not related directly to the properties.

The other main difference is on stocks-related issues. REITs funds trade on major exchanges the same way stocks do. Therefore, their prices change throughout the trading session. It means every second. Real estate funds don’t trade like stocks. They update their prices just once a day. You can buy a real estate fund directly from the company that created it, or through an online brokerage.

The most important difference between them is income and tax. You must pay 90% of a REIT’s taxable income as dividends to shareholders. Thus, real estate investors make their money through this. On the other hand, real estate funds provide value through appreciation. Hence, they may not be a good choice if you want passive income or short-term profit. You can make money in a longer-term process.

The Benefits of Real Estate Funds

Everybody who wants to invest is looking for more money. Whether you are one of the realtor online agents or an investor, you look for generating more real estate leads and more money in this industry. However, it might be important to consider the source that you are investing in. We shouldn’t put all our eggs in one basket. However, investing in real estate funds provides more control and flexibility. Here, we will explain some benefits.

1- More Flexibility

Investing in private equity real estate funds is one of the most flexible sources. You don’t need to put all your money in a specific stock. There is an option for you to invest in different companies which are dealing in this industry.

There are many funds focused on different real estate geographies and asset classes.  It allows the investor to choose which types of properties they want to purchase and where. 

2- Much Better Tax Efficiency

As you may know, most real estate funds are aiming to last longer than one year. Therefore, you will tax at the long-term capital gains rate instead of the short-term capital gains rate, which is much less.

3- Preferred Returns

A preferred return is offered to a private real estate fund. In addition to their pro-rata share of the fund’s overall net profits. We know that there is no payment guarantee for a preferred return.  However, they assure all real estate fund investors that they will receive the initial profits from the fund’s investment activities before the fund’s sponsor receives its share.

10 Best Real Estate Funds

We know that the coronavirus crisis has caused some problems for investors when carrying out an operation.  We are going to tell you which are the 10 best real estate funds to light your way in this issue.

1- iShares Core US REIT ETF

This fund generally invests at least 90% of its assets in the component securities of the underlying index. Besides, it may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The index measures the performance of U.S. listed equity real estate investment trusts (“REITs”), excluding infrastructure REITs, mortgage REITs, and timber REITs.

2- Real Estate Select Sector SPDR

This investment focuses on the yield performance of publicly traded equity securities of companies in the real estate Select Sector Index. The fund generally invests at least 95% of its total assets in the securities comprising the index. Additionally, the index covers securities of companies from the following industries: real estate management and development and REITs, excluding mortgage REITs.

3- Fidelity® MSCI Real Estate ETF

This real estate fund invests at least 80% of assets in securities included in the fund’s underlying index. The index of this fund represents the performance of the real estate sector in the U.S. equity market. It may or may not hold all the securities in the MSCI USA IMI Real Estate 25/25 Index.

4- Schwab US REIT ETF™

The investment focuses on the total return of the Dow Jones Equity. It is mentioned that these real estate investment trusts are classified as equities. The index excludes mortgage REITs. It is defined as REITs that lend money directly to real estate owners. Besides, it lends the money indirectly through the purchase of mortgages or mortgage-backed securities, and hybrid REITs. It is the fund’s policy that under normal circumstances it will invest at least 90% of its net assets in securities included in the index.

5- Vanguard Real Estate ETF

The investment tries to provide high income and moderate long-term capital appreciation. It focuses on tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index. Additionally, it measures the performance of publicly traded equity REITs and other real estate-related investments.

The advisor puts the effort into tracking the index by investing all, or substantially all, of its assets-either directly or indirectly through a wholly-owned subsidiary. We can say it is itself a registered investment company in the stocks that make up the index. This real estate fund is holding each stock in approximately the same proportion as its weighting in the index.

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6- Fundamental Income Net Lease Real Estate ETF

The index is composed of U.S.-listed equity securities. It is related to the companies that derive at least 85% of their earnings or revenues from real estate operations in the net lease real estate sector. They invest at least 80% of the fund’s net assets, plus borrowings for investment purposes in corporate real estate companies.

7- First Trust S&P REIT ETF

This real estate fund will normally invest at least 90% of its net assets in the REIT trust funds that comprise the index. The index focuses on measuring the performance of publicly traded REITs domiciled in the United States that meet certain eligibility requirements.

8- Americold Realty Trust

Americold is one of the publicly-traded REITs. It specializes in temperature-controlled warehouses. Americold owns 185 cold-storage warehouses representing 1.1 billion cubic feet of storage space across the U.S., Canada, South America, and Australia.

This is one of the youngest operators on the list of the best REITs to buy in 2021.

9- SPDR® Dow Jones REIT ETF

The fund generally invests at least 80% of its total assets in the securities comprising the index. The index is designed to provide a measure of real estate securities that serve as proxies for direct real estate investing, in part by excluding securities whose value is not always closely tied to the value of the underlying real estate.

10- VanEck Vectors Mortgage REIT Income ETF

The fund generally invests at least 80% of its assets in securities. It comprises the fund’s benchmark index. The Mortgage REITs Index may include small-, medium- and large-capitalization companies. The fund is non-diversified.

Is It Worth Investing in Real Estate Funds?

It’s no secret that real estate investing has always been very popular. Is it really worth it, or is it an investment with more drawbacks than benefits?

Although as a tangible asset, known to all and easily understood, housing has little competition, investing in real estate funds presents a series of problems that we must know in advance. We summarize them below.

1- The Initial Outlay Is Very High

Investing in real estate is not for everyone. Since the initial outlay is very important. Specifically, if we compare it with an investment fund or with a customized pension plan.

With the home, however, you must save at least 20% of its purchase value (most banks only grant mortgages for 80% of its value) and an extra 10-12% to cover expenses of incorporation and purchase-sale taxes.

2- You Have Very Little Liquidity

The second drawback of this type of investment is that real estate is an asset with very little liquidity. Hence, if at any time you need to convert your investment into cash, you will have to wait to sell the home. However, you must bear in mind that it is not good that you can sell overnight.

3- It Involves Many Indirect Costs

The down payment is not the only money outflow you need to worry about. In other words, homes involve a series of indirect costs that have a strong impact on their profitability. Furthermore, most investors do not take this into account.

To the financial costs related to the purchase of the property (taxes, notary fees, property registration…) are added the maintenance costs, the community of neighbors, the payment of the IBI, the contracting of insurance, the purchase of furniture, repairs. Keep them in mind when doing numbers.

4- Diversification in Real Estate Investment Is Nil

One of the most common tips when talking about investment is that you have to minimize risks. And to achieve this, you have to diversify by investing in assets of all kinds and from different geographical areas. 

However, how much do you diversify when investing in housing? The answer is simple: nothing. If we invest, for example, €150,000 in the purchase of a flat on the Valencian coast, all our savings will be concentrated on that single asset. Too risky, don’t you think?

Can I Invest in Real Estate Funds?

These real estate funds can invest internationally. You can do them in different types of property. Clearly, you can invest in an office or commercial space, logistics centers, or industrial parks. The main difference between these funds is that they obtain their returns both from the rental of the property and from possible increases in the value of the properties they own.

There are two types of real estate funds:

  • Direct
  • Indirect

Direct

Real estate funds directly acquire commercial real estates such as industrial parks or office blocks. These types of funds receive rental income from different properties. This diversification strategy implies that, if one or more of the properties are unoccupied for a time, it is still possible to generate income from the other properties.

Indirect

Transferable funds invest in shares of companies that operate in the real estate sector. The objective of this real estate fund is the purchase, promotion, and rehabilitation of urban assets, such as offices, flats, commercial premises, shopping centers, or logistics centers, either for rent or as a form of participation in the capital of another SOCIMI.

The most important benefit of mutual funds is that they can be a good source of income for investors while offering a diversifying element. Real estate assets are also often uncorrelated with respect to funds that invest in financial assets.

All in all

We have tried to prepare a comprehensive blog about real estate funds. All aspects of the issue are considered. We explained the real estate fund and tried to clarify what it is and how it works. Furthermore, we explained the difference between real estate funds and REITs. Additionally, we brought the benefits and most lucrative funds, as well.

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