Imagining investing in real estate is like having the choice of how one would savour a concert. Earlier, people directly invested in a particular program (akin to purchasing property) and enjoyed the show and perhaps the success of the concert. However, the opportunities to be involved with the concert movement have become more diverse; subscribing to a music streaming service or purchasing shares in a concert promotion firm. These new ways include REITs and Real Estate Mutual Funds, both of which give investors access to real estate but provide different ‘backstage passes’ in terms of how they function.
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What are REITs?
REITs are similar to buying shares in a concert investment company that owns different concert premises. Originating from Congress in 1960, REITs enable anyone to join together with their money and invest on commercial estates for profitability without owning the property at all. Like the concert company earns from ticket sales and concession sales, REITs earn from rent and management of their properties. An investor has limited control and responsibility over the particular properties, yet he gets his cut of the profits, such as dividends.
Types of REITs
1. Equity REITs: These are similar to owning stakes in the places where concerts are held. Some invest in property and act as landlords, charging rents for the property and specializing in various kinds of property such as residential, commercial, industrial, or health properties.
2. Mortgage REITs (mREITs): These are similar to financing a tour. Rather than owning these venues, they fund these via offering loans and charging interest from mortgaging as opposed to charging rent.
3. Hybrid REITs: It can be quite insightful to consider both owning some venues and financing some tours at the same time. Hybrid REITs engage themselves in both the operations; they invest in properties and also offer mortgages.
Characteristics of REITs
- Dividend Yields: Just like the profits that accrue from concerts are split with investors, REITs are mandated by the law to distribute no less than 90% of their income as dividends and this makes them ideal for those in search of steady income.
- Liquidity: Purchasing and trading in REITs is a bit like trading tickets to shows on a popular stock exchange if it is preferred over directly selling a piece of property.
- Tax Considerations: Unlike other types of corporations that are taxed, REITs do not have to pay if they distribute at least 90 per cent of their taxable earnings, which resembles a tax-efficient partnership to some extent.
What are Real Estate Mutual Funds?
Real Estate Mutual Funds works as though one is subscribing to a music streaming service, which comprises numerous artists and genres. These funds involve investing in real estate related stocks and REITs using pooled money from several investors. So here, you are getting the exposure to the overall music industry or the real estate market without directly investing in a particular venue or property.
Types of Real Estate Mutual Funds
1. Equity Funds: These are like streaming playlists with popular music hits; they buy the biggest real estate companies and REITs, which give a wide market coverage.
2. Sector-Specific Funds: For example, if you like certain types of music, these funds concentrate on particular genres of real estate, making it easy for investors to choose their type, whether commercial or residential.
3. International/Global Real Estate Funds: Similar to global music playlists, these funds are focused on investing in properties globally, providing geographic distribution.
Characteristics of Real Estate Mutual Funds
- Diversification: Instead of putting all one’s eggs in one basket, these funds invest in various real estate companies and REITs thus diversifying the risk similar to the playlist scenario.
- Professional Management: The funds are managed by professional fund managers who are comparable to DJs, as they select the investment options in consideration of market research and analysis.
- Fees: Similarly to the purchase of access to a paid TV channel, investors pay management fees which include the expenses for professional supervision and running of the fund.
Both REITs and Real Estate Mutual Funds offer ways to benefit from the booming real estate concert, with different levels of involvement and investment strategies. Understanding these options can help you choose the right ticket to the show, aligning with your financial goals and risk appetite.
Difference Between REITs vs. Real Estate Mutual Funds
| Basis | REITs | Real Estate Mutual Funds |
| Definition | Owners of income-generating properties, businesses that invest in such properties or those that provide financing for property investments | A portfolio of funds created to invest in real estate such as in REITs and shares in any companies dealing with the real estate business. |
| Investment Type | Purchasing of real estate properties/properties forming part of mortgages. | Investing through mutual funds of REITs and other securities related to real estate. |
| Income | Normally earn their revenues from rental income and capital gains from the sales of properties. | It focuses on dividends by REITs together with gains from the sale of other securities. |
| Liquidity | More liquid; marketed like any other public float on the major stock exchange markets. | Somewhat less so; it depends on the mutual fund policy; the open-end mutual funds are more liquid. |
| Dividend Payout | On the other hand the company is legally bound to distribute not less than 90% of its taxable income to its shareholders. | Has no provision to declare dividend to the shareholders but it can distribute income as per the fund |
Wrapping Up
Think of buying property as choosing between participating in a movie club or receiving movie streaming services. In the case of REITs, you are directly purchasing the stock of the movie club and so, you are technically purchasing the cinema itself. It receives its income from ticket sales (rents) and popcorn (property operations) without it having to deal with it directly. It is a more stable, dividend-oriented solution and, of course, ownership of a part of the real property.
Real Estate Mutual Funds, on the other hand, is like opting for Netflix where you have access to movies from a variety of production companies. You can access many real estate assets and you get real-estate-related investments such as REITs which are all dealt with by professionals. This approach brings diversification which minimizes the risk that comes with investing in a single asset as it is similar to watching a variety of films rather than just one genre. Both offer opportunities to invest in real estate, though, the amount of direct engagement with the market or diversity of the portfolio the investor chooses depends on their preferences.
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Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme related document carefully before investing.
