Real estate investment trusts (REITs) and real estate mutual funds both offer diversification and an easy, affordable way for individual investors to invest in various segments of the real estate market. They also represent a more liquid vehicle for investment than owning or investing in real estate directly.
There exists a wide variety of REITs and real estate mutual funds. Before considering either type, it’s important to understand the key differences between the two.
Real Estate Mutual Funds
Real estate mutual funds are professionally managed pooled investments that invest in a variety of vehicles, such as stock and bonds. Investors purchase mutual fund shares, or units, which are bought or redeemed at the fund’s current net asset value (NAV). NAVs are calculated once a day and are based on the closing prices of the securities in the fund’s portfolio.Real estate mutual funds typically invest in REIT stocks, real estate related stocks, or a combination of both.
A REIT is a corporation, trust, or association that invests directly in real estate through properties or mortgages. They trade on a stock exchange and are bought and sold like stocks.
REITs pay dividends. They are required by the Internal Revenue Service (IRS) to pay out most of their taxable profits to shareholders via dividends. REIT companies don’t pay corporate income tax.
Things To Consider
REITs and real estate mutual funds give individual investors with limited capital access to either diversified or concentrated real estate investments because they have relatively low investment minimums. When it is diversification they provide, the two types of funds help mitigate risk.
Depending on their investment strategy, real estate mutual funds can be a more diversified investment vehicle than are REITs. This can cut down on transaction costs for those looking for greater diversification concentrated in one or a few funds. They also have the benefit of professional portfolio management and research.
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