Similarities and Difference between REITs and Mutual Funds | Private Capital Investors (2024)

In real estate investing, many strategies and variables are available to investors, but this also confuses people. This results in some bad deals. An experienced investor understands things. He knows how to make the most of the available opportunities and get good results.

However, newbies can be confused when choosing between real estate mutual funds or REITs. For them, the low risks points are easily accessible for investment. Also, both are liquid investment variables, so as a beginner opting for this for sure will be pretty fruitful. At the same time, both of them have got those similarities. But both differ a lot.

There is no shortage of mutual fund options in the market for investors. However, people must understand the nuisance of each of them before making the investment decision. If you are new to the industry, the guide here will provide you with all the insights about the similarities and differences to make a good decision.

REITs – What is it?

The real estate investment trust is a corporation responsible for managing and owning income-producing commercial real estate properties. There are different kinds of REITs. Some of them specialize in product types like senior housing and multifamily.

In contrast, the others are more refined in product type. So they focus on specific geography like the southeast. If someone plans to invest in the REIT, they purchase a company share that owns and manages real estate.

In reality, they are not purchasing actual property or an actual share. It is similar to buying stock in Apple or Berkshire Hathaway. By investing in the stocks, you are investing in the company but not in the specific products.

REITs are a popular way to invest in the CRE industry, especially for those with limited investment funds. REITs have got a low entry barrier. The option works well for anyone who wishes to purchase a single share for less than $100.

A great advantage of the investment is that the shares are highly liquid, so the environment can be bought or sold with a click of a button.

Real estate mutual funds – What is it?

Real estate mutual funds can be passively and actively managed. Those that are managed passively have got a set performance of benchmark index. There can be three types of real estate funds: exchange-traded funds, mutual funds, and private real estate investment funds.

Real estate mutual funds are professionally managed. They are typically made after doing significant research. Real estate mutual fund investors make purchases of the stocks in the form of units. They are the share which is acquired at the price which is pre-set by the net asset value of the fund.

The value is then calculated regularly based on different closing prices of the security that is included in the fund.

Investors consideration

Real estate mutual funds and REITs provide an opportunity to invest in the CRE industry without worrying about large capital investments. Based on the holding diversification, it also provides a certain level of protection against risks.

The performance of the funds is significantly correlated with the REITs’ performances, and both react similarly to the market trends. As a result, the investors can expect to earn great dividends from either. In addition, both investments can be considered good against inflation.

Compared to REITs, real estate mutual funds have an opportunity for an increase in capital gains over medium to long-term holdings. On the other side, the REITs have to distribute about 90% of the revenue to the investors as dividends.

This leaves behind just 10% of the investment. Real estate funds carry high maintenance fees but have the added advantage of in-depth market research and portfolio management.

The difference

There are different points of differentiation between real estate investment funds and REITs. The information mentioned here will help you understand the difference between the two variables.

  • Type of investment

A major difference between the REITs and real estate fund is the investment. In reality, the real estate fund is an approved investment. It is generally a mutual fund that requires money from its investors and uses it for investment in different securities.

The real estate fund is also a sector fund type which means it invests explicitly in protecting a particular sector, real estate. While the investment often makes up the portion of those securities.

In contrast, when a single company owns and operates real estate like hotels, apartment buildings, and office buildings, the best is to purchase the stock. Here the investors become the company’s and its holding’s part owners.

But both REITs and real estate funds come with similar benefits. They allow the investors to add real estate to their portfolios. But there is no work required actually for buying or maintaining the property.

The REITs and the real estate funds make investing more accessible as they can quickly eliminate the considerable upfront cost required for the real estate purchase when doing it on your own.

You will want to choose investment in real estate funds over REIT because it helps create a diversified portfolio. In addition, rather than investing in one place, you will have an option to invest in hundreds using the fund.

On the other side, some people might choose the mutual fund as it allows you to be selective of the fund and company you want to invest in. So it will provide better control.

  • Distributions

REITs and real estate funds are very specific about how the earnings are distributed to the investors. Mutual funds must spread the games at least once a year to the shareholders. The gain can happen when the fund is sold at a profit.

Also, they can consider the burst distribution as dividends. When the companies that the fund’s investment pays for a divide, they can quickly deliver the shareholders directly, which is then passed along to the investors.

In the case of REITs, the distribution can be a bit different. The company qualifying as a REIT must distribute up to 90% taxable income. While some of them even distribute 100% because of the special tax treatment, which provides the advantage of deducting all of the dividends on the taxable income to avoid any corporate taxes.

  • Tax treatment

Regarding tax treatment, both REITs and real estate funds are similar investments. You will be paying taxes on the dividends you receive and the gains. When you say that security is more than you have purchased, the REITs must be passed along the majority of the taxable income to the shareholders as dividends.

The dividends here usually will be ordinary taxable income. So if you choose to sell your stock for more than that, you will have to pay the capital gain taxes. The tax benefit can be availed in a mutual fund through different means. Like the REIT, you will have to pay capital gain taxes under dividends.

However, you may pay the capital gain taxes under securities for the fund you have sold, even if you haven’t purchased your shares personally.

When a mutual fund holder sells the holding for a capital gain, it passes those gains to the investors. Whether you reinvest or pay those gains, you will receive capital gain taxes. It will depend on how long the fund was held for the security.

  • Investment and income requirements

Mutual funds have fund managers who are responsible for deciding where to invest. This is why these funds are known as actively managed. The mutual fund also releases statements informing the investors about the goals and strategies of the fund.

But ultimately, the individual investors cannot have a direct influence on the funds that are to be invested in.

On the other side, REITs are held to some standard toward the investment and the income derived. For example, it is a must for the company to go for 75% investment of its assets in real estate and cash. Also, it needs to derive at least 75% of the income from the industry.

Conclusion

Investing in the CRE industry is complicated, especially when deciding between REITs and mutual funds. If you are confused, opting for professional support will make a significant difference. You can consider contacting to get help.

They have got the experts for the job. They understand the right way of helping the person get good outcomes. Whether it is the requirement for funding or any assistance with industry knowledge, the professional will be there to help you get it all.

As a seasoned expert in real estate investing, I bring a wealth of knowledge and hands-on experience to guide you through the intricacies of various investment strategies. Over the years, I've successfully navigated the complexities of the real estate market, identifying optimal opportunities and achieving positive results. My expertise extends to a diverse range of investment vehicles, allowing me to provide comprehensive insights and practical advice.

Now, let's delve into the concepts mentioned in the provided article:

Real Estate Investment Trusts (REITs):

Definition: REITs are corporations responsible for managing and owning income-producing commercial real estate properties.

Types of REITs:

  1. Product Types: Some specialize in specific product types like senior housing and multifamily.
  2. Geographical Focus: Others concentrate on specific geographic regions, such as the southeast.

Investment Process:

  • Investors purchase shares in the REIT, not the actual properties.
  • Similar to buying stocks, investors become shareholders in the company managing real estate.

Advantages:

  • Low entry barrier, allowing investment for less than $100.
  • Highly liquid shares that can be easily bought or sold.

Real Estate Mutual Funds:

Types of Real Estate Mutual Funds:

  1. Managed Types: Can be passively or actively managed.
  2. Fund Types: Include exchange-traded funds, mutual funds, and private real estate investment funds.

Management Process:

  • Professionally managed after significant research.
  • Investors purchase fund units at a pre-set price based on the net asset value.

Performance and Diversification:

  • Correlated with REITs' performances and react similarly to market trends.
  • Provides diversification and protection against risks based on holding diversification.

Points of Differentiation:

  1. Type of Investment:

    • Real estate funds are mutual funds investing in various securities.
    • REITs involve purchasing shares in a company that owns and manages real estate.
  2. Distributions:

    • Mutual funds must distribute gains at least once a year.
    • REITs must distribute up to 90% taxable income, offering potential tax advantages.
  3. Tax Treatment:

    • Both involve paying taxes on dividends and gains, but with slight differences in capital gain taxes.
  4. Investment and Income Requirements:

    • Mutual funds are actively managed by fund managers, with limited influence for individual investors.
    • REITs have specific standards for asset and income distribution, ensuring a focus on real estate.

Conclusion:

Investing in the commercial real estate industry requires careful consideration, especially when choosing between REITs and mutual funds. The article emphasizes seeking professional support to navigate the complexities effectively. Professionals can provide guidance on funding, industry knowledge, and optimal investment strategies to achieve favorable outcomes.

Similarities and Difference between REITs and Mutual Funds | Private Capital Investors (2024)
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