It is estimated that Americans have increased their savings in recent months over 30%. Beyond saving for unexpected events and emergency funds, they look for investment opportunities within the real estate market as a means to diversify and mitigate potential loss. Real estate investment trusts (REITs) and real estate mutual funds (REMF) are two investment types to explore.
Investments like these are a hot topic with the volatility of the stock market and the fluctuation in employment rates in uncertain times. As with any investment in stocks or funds, investing in a REIT or REMF can be accompanied by risks and potential rewards.
Important Note: Content below is for educational purposes only and should not be considered legal or financial advice. As with any investment, consult a financial advisor prior to any investment opportunities to understand the risks and tax implications.
Real Estate Investment Trust (REIT)
As the name suggests, these trusts hold a portfolio of real estate investments and the organized trust is on the major stock exchanges for trading. These trusts are usually segmented into different real estate markets. Some of the real estate investment trust market segments available for consideration:
- Residential REIT which include Apartment REITs
- Commercial REIT such as a Retail REIT
- Lodging REIT cover Hotel REIT and Resort REITs
- Other REITs might include Healthcare REIT and even Data Centers REIT
REIT Profit Overview
At no time does the investor own the real property within the portfolio, but rather owns share(s) of a company that invests and builds a property portfolio.
The investment fund is obligated to distribute 90% of the taxable profits from the revenue of operating the rental properties in the form of dividends to the shareholders. Dividends are typically paid out four times a year, although some may exercise monthly or other irregular dividends.
Additionally, as with any other stock trading, the share(s) increase and decrease in value as the valuation of the stock moves. The amount of stock held at the time of distribution determines the portion of that distribution. Also, if a REIT stock is sold when the stock price is higher than the purchase price, the investor profits the difference. The reverse is also possible to realize a loss.
Purchasing Real Estate Investment Trust Stock
Most invest in a REIT to benefit from potential dividend profits instead of the potential to profit from the sale of the stock itself. There are other benefits and some considerations to purchasing into a real estate investment trust.
Pros: For many, purchasing real estate directly or through a limited partnership or investment group can be costly and time-consuming. REITs provide a low barrier to entry into real estate investing with a small financial investment per share compared to other real estate investments.
Time commitment is minimal and no property management nor maintenance experience is required.
Real estate investment trusts, just as any stock, are liquid assets meaning shares are easy to cash out at any time.
Cons: Although some real estate investment trusts segments are holding strong such as Health REITs and Residential REITs, according to Barron’s many real estate stocks have lost a third of their value in 2020. As with all stock investments, the inherent risk is taking a chance on the unknown.
In today’s uncertain times the health and longevity of a market segment are difficult to forecast. In that, investing in the stock market has no guarantees of profit.
Note that many continue to hold on to their REIT investments during times of uncertainty to wait out the current wave until the market rebounds. For instance, Warren Buffet appears to be holding a REIT in his portfolio throughout this season of change.
What is a Real Estate Mutual Fund?
A mutual fund is a professionally managed portfolio where the pooled investments allow for increased purchasing power into the fund. A real estate mutual fund (REMF) is comprised of REITs and other real estate-related stocks and bonds.
Breaking that down further, a REIT is an individual trading company that owes properties whereas a REMF is comprised of a portfolio of many of those stock traded companies.
REIT and REMF Similarities
Both real estate investment trusts and real estate mutual funds are traded on the stock exchange. A real estate mutual fund also pays out dividends to the funds’ shareholders. Similarly, REMFs are fairly liquid as shares in the mutual fund are easy to buy and sell.
Investing in real property requires financing, among other considerations. Whereas investing in a REIT and/or REMF allows for a quick and less expensive entry into real estate investing without the burden of purchasing, managing, or maintaining properties. Neither gives the investor the power to leverage the equity of the properties within the trust nor fund.
Differences between a REIT and REMF
A real estate investment trust decides which companies to include in their trust portfolio and are managed together and investors buy shares to bet on the profitability of that trust.
A real estate mutual fund is professionally managed to include those trusts and other real estate investments together as a consolidated fund. Unlike a trust where the investor decides to invest in a particular stock, a fund manager does that research and puts together the portfolio.
In addition to receiving dividends, a REMF investor may also receive value as the capital appreciates within the portfolio.
A mutual fund is considered a little less risky per the diversification within the portfolio.
Final Thoughts on REIT and REMF Investments
Whether wealth management, retirement, or investment planning, it’s important to consider and evaluate the risk, time commitment, cash flow, long-term personal and professional goals, and tax implications before making any investment. Due diligence should include education on the types of investments as well as consulting financial advisors such as a certified public accountant (CPA).
Real estate investment opportunities abound from a real estate investment trust (REIT) to house flipping to becoming a private landlord. The different avenues allow anyone from a novice looking to gain experience in the market to the seasoned investor to take advantage of opportunities that present themselves during times of change.