Know what they are and how to invest in real estate funds many of us have heard of currency mutual funds when you invest in stocks, bonds and so on. However, there are other ways to make money from investing.
You can't just buy an apartment and earn money by renting it. If you are interested in this area and are well versed in it, invest in REIT, i.e. real estate funds.
In essence, a REIT is a company that invests in real estate and receives revenue from it. The system is very similar to equity funds. However, the money is not distributed to start-ups or advanced companies, but to land, apartments, cottage construction, etc.
Thus, a real estate fund can only have money in different currencies, real estate, lease agreements, debt instruments and investment shares, rental fund shares. Fiduciary securities can be bought or sold on stock exchanges.
The main characteristic of a real estate fund is to invest at least 70% of its assets in real estate. In addition, the fund receives the better part of its profits from rentals, mortgage interest or real estate sales and has at least 100 shareholders.
Types of real estate funds
In fact, real estate funds are a business in the corresponding segment. Anyone with access to the exchange and any amount of money has the opportunity to invest in these funds. There are several types of REITs.
- Equity, which includes most of them. These are management companies that buy objects and earn money by renting them. Equity funds differ from developers in that they do not sell objects as soon as they are completed. In this case, they are part of the investment portfolio.
- Mortgage funds include a small part of the funds, about 10%. They cover real estate transactions with mortgages and direct loans. Interest earned on mortgage loans generates income.
- Mixed funds, that is, combining the characteristics of the first and second types, combine the two previous ways of earning. There are few such funds.
- Public OTC real estate funds are registered by a special commission but are not traded on national stock exchanges. They are private REITs, that is, companies exempt from special registration and not traded on the stock exchange. Generally, its securities are only available to institutional investors.
Types of Russian funds
- Development, intended for the development of land or objects, i.e. resale, development, repair, etc.
- Land, specializing in land operations: topography, transfer to another category of use, development, etc.
- Rental, created to profit from the rent of houses, apartments, offices and other residential, commercial and other properties.
- Construction, focused on the construction of new facilities or their purchase in the development phase. They receive money from the resale.
- Combined funds receive income using the instruments of all other types of funds. These include most REITs.
The resources are applied in apartments, hotels, construction of schools and hospitals, offices and other types of real estate. An investor may become the owner of the fund's assets through an exchange-traded fund. In addition, he can buy shares of individual companies, receiving large dividends.
Compare the benefits for yourself: if the average dividend yield on stocks is around 3%, for REITs it is around 6%. This is because real estate funds do not pay income tax and are also required to pay shareholders a large part of their income. So, by adding at least 10% of REIT to your equity portfolio, you can significantly increase your profitability and reduce risk.
Benefits of Real Estate Investment Funds
Liquidity: The entry threshold for REITs is significantly lower when compared to outright property purchases. You can transact on the exchanges daily and quickly.
High yield: dividends bring in an average of 4 to 10 percent per year. This is noticeably more than the interest investors receive from buying shares.
Safety: you diversify your investments, make your portfolio more diversified and secure. If something happens in any of the areas, you will have an airbag.
Beating inflation: As a rule, property prices increase in parallel with the depreciation of the currency. Now, when official inflation in Russia is 8%, this seems unrealistic. However, based on past experience, property prices are adjusting faster than anywhere else.
There are risks, especially for mortgage funds. Interest rates can go up. This will lead to a decrease in the value of mortgage assets, or the borrower will pay off his debt ahead of schedule.
In addition, for Russian investors, dividends from real estate funds are taxed at the rate of 30%. It seems that this can be avoided: filling out the W-8BEN document, created to avoid paying taxes to two countries. After that, a Russian resident pays only 10% in the US, plus only 3% of income tax to Russian tax. It's not that simple! By law, this is possible for mutual funds, but not for REITs, i.e. the tax cannot be avoided.
Can you invest in real estate funds?
Corporations that invest in liquid real estate are called investment funds. Closed-end real estate mutual funds are funds that purchase securities offered by REITs and other public companies. Funds are involved in securing the return of assets, but trusts are involved in paying dividends.
You can earn real estate income by actively researching each developer. Or you can earn passive income by investing in mutual funds. This can be done through REITs: buy assets on the Russian exchange or the New York Stock Exchange. When evaluating funds, consider financial metrics and the dividend factor, use technical analysis.