Want to invest in real estate, but don’t have a good deal of investment experience or money to buy a rental property? No problem. Real estate investing does not necessarily require property ownership. There are many other real estate investment strategies that allow you to take part in the real estate business without the need to directly own property. One of these strategies is investing in real estate mutual funds.
What are real estate mutual funds? How do they work? Are they a good investment? How can I invest in one? Keep reading to learn the answers to all these questions.
What Are Real Estate Mutual Funds?
A real estate mutual fund is a mutual fund that invests in financial securities (such as stocks and bonds) of real estate companies. Simply put, a real estate fund provides capital to companies to invest in real estate projects. Projects can include investment in residential real estate (e.g. single family homes, townhouses), commercial real estate (e.g. large apartment complexes, office buildings), as well as industrial real estate (e.g. factories, warehouses). Real estate mutual funds can invest either directly in real estate companies, or indirectly through real estate investment trusts (REITs).
How Does a Real Estate Fund Work?
A real estate mutual fund pools money from a number of investors and invests it in securities on their behalf. The investments are managed by a fund manager, who is in charge of the daily operation of the fund. The fund manager chooses which securities to invest in and decides when to buy or sell them according to the objectives set by the fund. The investors only provide capital for the investments.
How do mutual fund investors make money, then? Well, when investors buy into a real estate fund, they basically buy a share in the fund. They mainly make money through share appreciation, meaning they can earn a significant return on investment in the long term, once they sell their share.
Are Real Estate Mutual Funds a Good Investment?
If you are just getting started in real estate, you might be wondering: Are real estate mutual funds a good investment? Or is it better to invest in physical real estate vs mutual funds?
Generally speaking, physical real estate investments are seen as solid additions to any investment portfolio. However, real estate mutual funds specifically provide a number of unique advantages. Here are some of the reasons why you should consider real estate mutual funds over direct ownership of an investment property.
Advantages of Real Estate Mutual Funds
In order to buy an investment property, real estate investors are typically required to put down tens of thousands of dollars, which makes it out of reach for most individuals. With a real estate mutual fund, though, a real estate investor can invest as much money as they want, depending on their budget and financial goals. In many cases, you can buy into a real estate mutual fund with as little as $1,000, giving you the chance to invest in real estate without having to pay extortionate amounts.
Investing in a rental property comes with a lot of hands-on and time-consuming work – such as managing the property, providing landlord services, collecting rent payments, and keeping up with maintenance – which can be a headache for many investors. You could always hire a professional property management company, but that comes with additional costs. Unlike a rental property, a real estate mutual fund allows you to invest in real estate without having to do any of the hands-on work of owning property. All you have to do is provide capital for an investment, and then the fund manager will invest on your behalf.
Professional Investment Management
Investing in a rental property requires a strong knowledge base and a lot of research. You typically need to do an investment property analysis beforehand to determine if the property will be a good investment – a task that can be hard for a beginner real estate investor. Investing in real estate mutual funds, on the other hand, does not require you to have much knowledge in the real estate business. Real estate funds are managed by qualified professionals who are experts at matters related to investing. They know very well how to research the markets, identify the best securities to invest in, and buy and sell them at the right price and time so as to make a good return on investment. As a result, you can rely on their expertise and benefit from the returns.
Perhaps one of the biggest advantages that real estate mutual funds have over physical real estate investments is diversification. Mutual funds invest in a wide range of securities across various markets, reducing the investment risk by diversifying the portfolio. This means that poor performance among one or two securities won’t have much of an impact on the portfolio. On the contrary, physical real estate investments typically only allow the purchase of a single property. The performance of a single income property in a single housing market is prone to fluctuate, resulting in a higher risk.
Investment in a real estate property offers very low liquidity since reselling the property is not very easy and can take a long time: you have to hire a real estate agent, market the property, find a buyer, and go through the whole selling process. On the other hand, real estate funds are an extremely liquid investment. You can get your investment redeemed at any time. Usually, you can sell it in the span of a day. You can then go on and pursue other investments.
Disadvantages of Real Estate Mutual Funds
Despite all these benefits, there are some downsides to real estate mutual funds that should be mentioned.
Lack of Control
When you buy a real estate property, you are the owner and you can do whatever you want with it. And when the time comes to buy a second investment property, you get to decide which property you want to buy. With real estate mutual funds, however, you are literally a passive investor. You have no role in deciding where your money goes and what companies are invested in. Furthermore, you do not own any of the stocks in the companies, nor do you have any voting privileges.
No Passive Income
When you invest in a rental property, you are guaranteed a steady source of income as you will typically collect rent on a monthly basis. You can even find ways to boost your rental income and achieve positive cash flow. And it can all be made passive with the help of a professional manager. With real estate mutual funds, you can make good returns on investment, but it is all on paper; meaning you won’t see any real money until you sell your share. And in most cases, investment in mutual funds requires a horizon of at least 3 to 5 years, which might not be suitable for investors looking to make immediate profits.
The Volatility of the Stock Market
The real estate market is generally steady and enjoys lower volatility. That’s because rental income and property expenses are usually predictable over the short and long run, allowing you to easily predict the performance of your investment properties. Conversely, the stock market is extremely unsteady. Stock values can dramatically rise and fall in the span of a day, as they are subject to fluctuations in the market. This makes real estate mutual funds prone to fluctuate together with the fluctuations of the stock market. This can be very frustrating for an investor, especially when you have no control over the stocks and securities you invest in.
Fewer Tax Benefits
Whether you invest in rental properties or real estate mutual funds, you are going to have to pay capital gains taxes, that’s for sure. However, physical real estate investments come with more tax benefits. If you invest in a rental property, you will be able to deduct most of the expenses you incur from taxes. You will even be able to find tax-free opportunities in many cases. When it comes to real estate mutual funds, you will also be able to get tax exemptions, but you will typically end up limiting your investment options.
How to Invest in Real Estate Mutual Funds
There are four different ways you can invest in real estate mutual funds.
Through a Fund House
The first way you can invest in a real estate fund is directly through the fund house, which is also known as Asset Management Company (AMC) in some places. Look up the fund house you’re interested in and go to the nearest branch office. You will be asked to complete an application form and provide a couple of documents such as your ID and proof of domicile.
Through a Broker
Another way you can invest in real estate mutual funds is through a mutual fund broker. Mutual fund brokers are qualified professionals who will assist you and give you all the information you need to invest in a real estate fund (such as required documents, different investment options, etc.). They will also provide advice and tell you which mutual fund best suits your interests. Note, however, that this comes with a fee that’s usually added to your total investment amount.
Through a Real Estate Fund Website
The most common way to invest in real estate mutual funds is online. Most fund houses have a website that allows you to make investments online. All you have to do is visit the fund house’s website and follow the instructions that are provided there. You usually have to fill out an application form and submit it. Once your application is approved, you can start making investments right away.
Through an App
Another popular (and practical) way to invest in real estate mutual funds is via an app. Many fund houses have developed apps that allow investors to make investments from their mobile devices. To use the app, you just have to download it from the app store, or the play store depending on your device. You then will be able to invest in real estate mutual fund schemes, buy and sell units, and view your account statements.
What Are the Best Real Estate Mutual Funds?
Here are some of the best real estate mutual funds to invest in 2020 according to US News & World Report:
- TIAA-CREF Real Estate Securities Fund
- Cohen & Steers Instl Realty Shares
- DFA Real Estate Securities Portfolio
- Principal Real Estate Securities Fd
- Cohen & Steers Real Estate Securities Fd
- Altegris/AACA Opportunistic Real Estt Fd
- Fidelity® Series Real Estate Income Fund
Investing in a real estate mutual fund can be a great option for you, especially if you are looking to invest in real estate with little to no money. However, be sure to do some research first. Get informed about the fund and see if it fits your investment goals: Who runs the fund? In which companies does the fund invest? Are there any management fees? Is there a minimum investment amount? Also, make sure to check the fund’s track records to see how it has performed over the past years.