Investing in commercial real estate offers a range of options, one of which is real estate mutual funds. Real estate mutual funds are especially irresistible to investors who want to make passive income from real estate but do not want to be involved in day-to-day management or shoulder the responsibility of direct ownership.
This article covers all you need to know about real estate mutual funds, including their many benefits, tips on how to successfully invest in them, and who can invest in them.
What are Real Estate Mutual Funds?
A real estate mutual fund is a type of investment that consists of securities, most commonly, stock of companies that buy real estate with money raised from investors.
Real estate mutual funds usually concentrate their investments in real estate investment trusts (REITS) and real estate corporations.
They are a good alternative to buying investment property if you want to limit your investment, level of risk, and management involvement.
Notably, they are one of the many types of real estate investment funds.
Benefits of Real Estate Mutual Funds
Real estate mutual funds can help you diversify your current investment portfolio while also providing you with an extra source of income. Other benefits of real estate mutual funds are highlighted below:
Absence of Physical Ownership
Real estate mutual funds allow you to invest in real estate without physically owning the real estate.
Investing in real estate mutual funds is similar to purchasing real estate investment trusts; they take far less time and effort than direct ownership and rental of property.
By investing in real estate mutual funds, you can own a stake in real estate without having to deal with tenant troubles.
Low Capital/Cost Required
Real estate mutual funds allow investors to get broad real estate exposure with a little amount of capital.
Furthermore, because they have low expense ratios, you can keep more of your profits.
Additionally, they provide you with a great deal of flexibility because you can invest based on your financial goals and the amount of capital you have available.
Regardless of whether a real estate mutual fund is actively or passively managed, you can rest assured that a fund manager is in charge of the investment fund.
For the record, a fund manager has immense experience and knowledge on how funds can be properly invested and how best to manage real estate investments.
Absence of Volatility
Real estate mutual funds can act as a portfolio stabilizer when the stock market becomes erratic.
This is because real estate performance and returns are not always determined by the direction in which stock prices move.
These mutual funds can perform well even when stock prices are down.
While stocks and bonds are the obvious go-to investments for a portfolio, real estate mutual funds add a new level of diversification.
This is because real estate mutual funds have a low correlation to stocks in general. Hence, you can spread your risk by investing in them.
Additionally, mutual funds can be highly diversified as well. They can be invested in real estate in several locations and across a variety of property types.
Real estate investment provides limited liquidity because reselling a property may be difficult.
Contrastingly, investing in real estate mutual funds can help you earn higher returns when the market is up, and you can liquidate your funds whenever you want.
Tips for Investing in Real Estate Mutual Funds
There are hundreds of real estate mutual funds in the United States, with many of them investing heavily in stock exchange-listed Equity and Mortgage REITs.
Below are two must-know tips that can help you successfully invest in some of them:
If you are convinced about real estate mutual funds and you opt to invest in them, the first thing you need to do is research.
Mostly, investors in real estate mutual funds use online stock screeners to look for the best types, research funds’ track records. Ensure that you find out about how they have performed over short, mid, and long-term periods.
Furthermore, your research should also cover the prospectus of the real estate mutual funds you are investing in. The prospectus of real estate mutual funds entails:
- The managers of the funds
- The capital of the funds
- The level of risk of the funds
- The funds’ goals
- The minimum investment amount of the funds
It is noteworthy that you pay attention to the expense ratio of funds. Remember that the smaller your expense ratio is, the more profits you can make.
Finally, before investing, consider the fund’s age and the track record of the fund manager.
Consult with a Financial Advisor/Real Estate Accountant
Before investing in any funds, you should consider talking to your real estate accountant or consulting with a financial advisor to get insights into the funds and how they can improve your real estate finance.
An advisor can not only help you assess if real estate is a vital missing component in your portfolio, but they can also recommend the finest funds for your real estate finance.
Who can Invest in Real Estate Mutual Funds?
Small investors who cannot invest in real estate directly can benefit the most from real estate mutual funds.
Thus, small investors can gain indirectly from real estate with smaller capitals and be rewarded with better returns because these funds are managed by professionals and experts.
It should be noted that the overall returns on real estate investment funds are affected by factors such as:
- Real estate market conditions
- Interest rates
- The supply and demand for residential and commercial spaces
No investment is risk-free, but the more you understand how funds are structured, the more likely you are to protect your hard-earned capital.