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Even when I began investing years ago, I didn’t think real estate was an accessible asset class for me. I figured I would need $100,000 lying around to even touch real estate, and I certainly didn’t have that.
The good news is that real estate investment options have come a long way. If you thought that real estate just wasn’t an option based on your finances, rejoice! You don’t need accreditation, a huge upfront investment, or millions of dollars in net worth to invest in real estate.
Real estate investment trusts (REITs) and real estate mutual funds are making real estate more accessible. Both options allow you to invest in real estate without becoming a house flipper or a landlord, which is pretty sweet. It’s no wonder why 48% of Minority Mindset readers invest in real estate!
That’s the good news. The bad news is that investors like me often aren’t sure which option is the best: REITs vs real estate mutual funds.
The key differences between REITs vs real estate mutual funds include:
- Trading windows
- Dividend payments
- Costs and fees
- Time horizon
If you’ve decided that it’s time to invest in real estate, you need to figure out where to put your money. What type of investment works best for real estate investing? Should you invest in REITs or real estate mutual funds? Or maybe both?
I know it’s hard untangling the web that is real estate investing. To help you get started, let’s discuss the key differences between REITs and real estate mutual funds—and which option is best for you.
REITs VS Real Estate Mutual Funds
In general, real estate is considered a relatively safe investment. More often than not, investors use real estate to increase their wealth in the long term (which is great for decreasing your risk profile).
While you should never put all of your eggs in one basket, real estate is a great way to diversify your investments. This means you can take advantage of real estate booms, but you won’t feel too much of a hurt if there’s a bust in the market. And there’s a lot of comfort in knowing your money is in a tangible asset, too.
There are so many ways you can invest in real estate, but two of the most popular options are REITs and real estate mutual funds. Let’s dig into how these two types of real estate investments stack up against each other.
What Are REITs?
Real estate investment trusts (REITs) are a type of investment that’s structured as a trust. They’re similar to mutual funds, except instead of buying a basket of equity investments, real estate investment trusts own a portfolio of real estate properties. These properties are paid for and managed by the trust, which then distributes profits to shareholders of the trust.
The neat thing about REITs is that they work similarly to stock, so buying a REIT is like purchasing shares in a company Google, for example. With REITs, you buy a share and own a sliver of the buildings owned by the REIT.
Real estate investment trusts are similar to mutual funds, except instead of buying a basket of equity investments, real estate investment trusts own a portfolio of real estate properties.
With REITs, you’re technically putting your money into the hands of one company. That does come with more risk, but it’s good if you want more control over where you put your money. Unlike a real estate mutual fund, REITs give you more control over what you invest in, but it does require more hands-on research.
Every REIT is different, but it isn’t unusual for them to specialize in a certain type of real estate, like:
- Commercial spaces
- Office buildings
- Storage facilities
Investors will sometimes choose REITs over real estate mutual funds because they’re required to follow rules that can benefit you as an investor. For example, REITs are required to:
- Distribute at least 90% of their revenue back to shareholders in the form of dividends
- Have 75% of their assets in real estate
- Source at least 75% of their income from real estate
So, how do you make money with REITs? Real estate investment trusts are usually equity funds, which means they invest in a diverse portfolio of real estate assets and manage them in a cost-effective way to maximize profits. REITs make their money through income-producing property in the form of rent, or by lending money to property owners in the form of mortgage interest.
This type of real estate investment trades like an ETF or a stock, paying out dividends either monthly or quarterly. The downside is that you do have to pay taxes on these dividends, so keep that in mind for tax season!
REITs tend to be a shorter-term real estate investment, so many pros consider them to be an alternative investment. But even so, if you want more control and like the prospect of making money sooner rather than later, REITs can be a great option.
Curious about investing in REITs? Fundrise and M1 Finance are popular options. Actually, 86% of Minority Mindset readers who invest in real estate go with Fundrise, so check it out if you want to learn more about REITs.
What Are Real Estate Mutual Funds?
Real estate mutual funds are a type of mutual fund that invests in real estate, just like equity mutual funds invest in stocks or bond mutual funds invest in bonds.
Put simply, this is a type of mutual fund that invests in a slew of different real estate deals. It’s a type of pooled investment where many investors can pay into the fund, which gives you exposure to hundreds of different real estate investment options—all in one fund. Pretty nice, right?
Unlike a REIT, real estate mutual funds give you access to a group of different investments in one place. Actually, real estate mutual funds usually give you access to multiple REITs, which is nice if you don’t want to research REITs separately. These funds usually invest in property management companies or REITs, but it’s not unheard of for them to invest directly into properties, too.
Real estate mutual funds can be either actively or passively managed. But keep in mind that, if you pay for an actively-managed fund, you’ll likely pay higher fees because it involves hands-on management from an investing pro.
So, how do you make money with a real estate mutual fund?
These funds grow in value when the value of property increases, or appreciates. Since it takes time for property to grow in value, real estate mutual funds aren’t a good option if you want to make money in the short term. But even then, real estate mutual funds distribute net gains to investors once a year. That means you can expect to receive dividends once a year, which you need to pay taxes on (sorry).
Real estate mutual funds require a professional touch, so you don’t have as much control here as you do with REITs. Since there could be hundreds of different assets in one fund, you don’t have as much oversight or control here.
The good news is that real estate mutual funds diversify where you put your money. They give you access to a wider range of investments, which is great if you’re risk-averse. If you go with a managed mutual fund, you’ll probably pay higher fees, but you can save a lot of hassle by letting the pros take the wheel.
REITs VS Real Estate Mutual Funds – How It Affects Long Term Investors
To be honest, I’m not a fan of short-term investment strategies. You usually lose money in the long run and it’s more stressful, anyway.
So, if you’re a long-term investor (which I recommend), which option is better: REITs vs real estate mutual funds?
Well, it’s helpful to remember that these are two totally different types of investments. REITs are equity funds, while real estate mutual funds are debt funds.
REITs do tend to be less volatile than mutual fund investments because they’re less likely to be affected by short-term market fluctuations. But you have to remember that they’re designed to be short-term, dividend-focused investments.
That’s why real estate mutual funds tend to be a more popular option for long-term investors. With real estate mutual funds, you can put your real estate investments on autopilot, cashing them in at a later date to (hopefully) boost your wealth.
Which Is Better? – REITs VS Real Estate Mutual Funds
Both REITs and real estate mutual funds allow you to invest in real estate without upfront costs or hands-on property management. So if you want a more passive way to make money on real estate, either option will work for you.
Both investments generate dividends and you have to pay taxes on that. Regardless of where you put your money, make sure you set aside enough money to cover your tax bill.
With that said, here’s a breakdown of the biggest differences between REITs vs real estate mutual funds.
|Differences||REITs||Real Estate Mutual Funds|
|Control||Operate similarly to ETFs or Stocks.||More diverse but you have less control.|
|Ownership||Own the properties themselves.||Do not own or manage the property themselves.|
|Trading||Can purchase on an exchange - prices change throughout the day.||Update prices once per day.|
|Payments||90% of income is paid to shareholders via monthly or quarterly dividends.||These generate dividends on an annual basis.|
|Costs||More cost effective by design.||Pricier especially if managed by a real estate investing pro.|
|Time||Income is generated in a shorter term through dividends.||Generates dividends annually and better for long term growth.|
|Liquidity||Operate on an exchange where you can cash out your shares.||Due to limits and restrictions, this is a less liquid option.|
So, which investment is better?
It’s hard to say because every investor is different. Both real estate investment trusts and real estate mutual funds provide a safe and stable source of income through rent and mortgages, as well as the potential for significant capital appreciation.
REITs are better if:
- You want money quickly
- You want more control over what you buy
- You want to pay fewer fees
Real estate mutual funds are better if:
- You want a professional to help you grow your money.
- You’re okay with investing for the long term.
- You want to diversify your portfolio and reduce risk.
It’s important to consider your specific investment goals, your financial situation, and your investment horizon before making a final decision.
Curious about real estate investments? Fundrise makes it super affordable to get started! See how its crowdsourcing approach allows just about anyone to invest in real estate.