Real estate funds and Real Estate Investment Trusts (REITs) are useful financial instruments for real estate investors. While you, as an investor, might find room for both instruments in your investment portfolio, it is important to understand the differences between the two and figure out the investment strategy that works best for you.
1. Real Estate Investment Trusts Trade like Stocks or ETFs
A REIT is a security that trades like a stock or an ETF. Instead of being composed of stocks, though, the REIT is composed of real estate assets, such as homes, hospitals, and commercial properties. There are many kinds of REITs, each focused on a different real estate category or sector. REITs are highly liquid investments (as they are traded like stocks), and they pay their owners regularly in the form of dividends. In short, owning a REIT is similar to owning a property, with the regular payouts as with rent, but without the upkeep and hassle of actually managing the property.
2. Real Estate Funds Are for Long-Term Growth
Real estate funds are mutual funds that invest in real estate assets. Unlike REITs, which give out regular dividends, real estate funds provide value to their owners through appreciation. Therefore, such funds are not usually a good choice for passive income or short-term profit. Real estate funds mostly deal in commercial properties.
3. REITs and Real Estate Funds Have Different Expenses
Like ETFs, a REIT has a low-cost basis, meaning that it usually costs much less than 1% of an account balance to own the REIT for a single year. On the other hand, real estate funds are typically manually managed by human beings and are therefore more expensive. As stock-like securities, REITs have to be purchased by the share, while funds can be purchased in any amount above the minimum that is required by the fund company (if there is any minimum at all).
Real estate funds and REITs can be easy ways to get into real estate without actually buying, selling, or managing properties. If you want to purchase your own real estate, however, consider buying it using Propy’s transaction management platform. The platform can help you save time and money on the perfect unit for your needs.