Real estate funds invest primarily in REITs and real estate operating companies; however, some real estate funds invest directly in property. Real estate funds are primarily revalued through appreciation and generally do not provide short-term income to investors in the same way as REITs. Even so, real estate funds can offer a much wider choice of assets (and diversification) than buying individual REITs. Amanda Bellucco-Chatham is an editor, writer and fact-checker with years of experience researching personal finance topics.
Her specialties include general financial planning, career development, lending, retirement, tax preparation and credit. Approximately 24 percent of REITs' investments are in shopping centres and freestanding shops. This represents the largest investment by type in the United States. Whatever mall you frequent, it is likely to be owned by a REIT.
When considering investing in retail real estate, one must first examine the retail sector itself. Is it financially healthy today and what are the prospects for the future? It is important to remember that retail REITs make money from the rents they charge tenants. If retailers have cash flow problems due to low sales, they may delay or even default on those monthly payments, eventually being forced into bankruptcy. At that point, a new tenant has to be found, which is never easy.
Therefore, it is crucial that you invest in REITs with the strongest possible anchor tenants. These include grocery shops and home improvement shops. Once you have made your sector assessment, your focus should turn to the REITs themselves. Like any investment, it is important that they have good earnings, strong balance sheets and as little debt as possible, especially short-term debt.
In a poor economy, retail REITs with large cash positions will have the opportunity to buy good real estate at depressed prices. Better managed companies will take advantage of this. That said, there are long-term concerns for the retail REIT space, as shopping is increasingly moving online, as opposed to the mall model. Space owners have continued to innovate to fill their space with office and other non-retail oriented tenants, but the sub-sector is under pressure.
These are REITs that own and operate multi-family rental apartment buildings as well as manufactured housing. When it comes to investing in this type of REIT, there are several factors to consider before jumping in. For example, the best flat markets tend to be those where housing affordability is low relative to the rest of the country. In places like New York and Los Angeles, the high cost of single-family homes forces more people to rent, which drives up the price that landlords can charge each month.
As a result, the largest residential REITs tend to focus on large urban centres. Generally, when there is a net influx of people into a city, it is because jobs are available and the economy is growing. A declining vacancy rate coupled with rising rents is a sign that demand is improving. As long as the supply of flats in a particular market remains low and demand continues to increase, residential REITs should do well.
As with all companies, those with the strongest balance sheets and the most available capital are typically the best performers. Healthcare REITs will be an interesting sub-sector to watch as Americans age and healthcare costs continue to rise. Healthcare REITs invest in the real estate of hospitals, medical centres, nursing homes and retirement homes. The success of these properties is directly linked to the healthcare system.
Most operators of these facilities rely on occupancy rates, Medicare and Medicaid reimbursements, as well as private payments. As long as healthcare financing is a question mark, so are healthcare REITs. Things to look for in a healthcare REIT include a diversified group of clients, as well as investments in various types of properties. Concentration is good to some extent, but so is risk spreading.
Generally, an increase in demand for healthcare services (which should occur with an ageing population) is good for healthcare real estate. Therefore, in addition to diversification of clients and property types, look for companies with significant healthcare experience, strong balance sheets and high access to low-cost capital. Office REITs invest in office buildings. They receive rental income from tenants who typically have signed long-term leases.
I can think of four issues for anyone interested in investing in an office REIT Try to find REITs that invest in economic strongholds. It is better to own a lot of average buildings in Washington, D.C. Approximately 10 percent of REITs' investments are in mortgages rather than in the real estate itself. The best known, though not necessarily the best, investments are Fannie Mae and Freddie Mac, government-sponsored enterprises that buy mortgages in the secondary market.
But the fact that this type of REIT invests in mortgages rather than equities does not mean that it is risk-free. A rise in interest rates would result in a decline in the book value of mortgage REITs, which would depress the share price. In addition, mortgage REITs raise a considerable amount of their capital through secured and unsecured debt offerings. If interest rates rise, future financing will be more expensive, reducing the value of the loan portfolio.
In a low interest rate environment with the prospect of rising interest rates, most mortgage REITs trade at a discount to net asset value per share. The trick is to find the right one. According to the Securities and Exchange Commission, a REIT must invest at least 75 per cent of its assets in real estate and cash, and derive at least 75 per cent of its gross income from sources such as rent and mortgage interest. REITs have some drawbacks that investors should be aware of, particularly the potential tax liability they may generate.
Most REIT dividends do not meet the IRS definition of qualified dividends, which means that above-average dividends offered by REITs are taxed at a higher rate than most other dividends. REITs do qualify for the 20% deduction, however, most investors will have to pay a large amount of tax on REIT dividends if they hold them in a standard brokerage account. Another potential problem with REITs is their sensitivity to interest rates. Typically, when the Federal Reserve raises interest rates in an attempt to restrain spending, REIT prices fall.
In addition, different types of REITs present property-specific risks. Hotel REITs, for example, tend to perform very poorly in times of economic downturn. Dividends are taxed as ordinary income Risks associated with specific properties Investing in REITs is an excellent way to diversify your portfolio away from traditional stocks and bonds and can be attractive because of strong dividends and long-term capital appreciation. Each type of REIT has its own risks and rewards depending on the state of the economy.
Investing in REITs through a REIT ETF is a great way for shareholders to get involved in this sector without having to personally deal with its complexities. As with any investment, there is always a risk of loss. Publicly traded REITs have a particular risk of losing value when interest rates rise, often sending investment capital into bonds. Investing in certain types of REITs, such as those that invest in hotel properties, is not a great option during an economic downturn.
However, investing in other types of real estate, such as healthcare or retail properties, which have longer lease structures and are therefore much less cyclical, is an excellent way to protect against a recession. A mutual fund is an entity formed to pool investors' money and collectively buy securities such as stocks, bonds or real estate. Thus, a real estate investment trust is a pooled source of capital used to make real estate investments. In its simplest form, a real estate investment trust is a partnership created to raise capital for ongoing real estate investment.
A general partner (GP), hereafter referred to as the sponsor, creates the fund. The sponsor asks investors, known as limited partners (LP), to invest capital in the partnership. These funds, along with money borrowed from banks and other lenders, will be invested in real estate development or acquisition opportunities. Did you know that real estate funds offer many advantages? These funds offer real estate investors the opportunity for greater liquidity, diversification and access to professional management.
In essence, a real estate fund pools investors' money to mutually finance a real estate investment. These funds are typically managed as a limited liability company (or other type of entity) and are designed to achieve certain real estate and financial objectives. Private real estate investment occurs when an external sponsor manages investments in real estate assets. The sponsor will receive a fee and will have incentives to generate a return for the underlying investors.
These are funds that invest in underlying assets that are real estate, either residential or commercial. It is important to note that entities offering securities under Rule 506(b) may only sell to investors with whom they have had a substantial relationship prior to the offering. Most other investment classes have, if not perfect adherence to a rule, at least an established basic orthodoxy as to what should be charged and how it should be structured. Both the Kona Estates Fund I, LLC (TKEF I) and the REITs generate returns through real estate investments.
As a mutual investment entity, real estate funds open the door for investors to invest in various types of properties without applying the same amount of capital as they would as an individual investor. Approximately 145 million Americans live in households that invest in REITs through their 401(k)s, IRAs, pension plans and other mutual funds. These funds also allow investors to passively participate in real estate investments, freeing up their time for other things. This motivates the developer to manage the fund to achieve its profit target and helps keep the interests of investors and the developer aligned.
Moreover, real estate funds create much of their value through appreciation, which makes them attractive to long-term investors. By pooling investors' money, real estate funds also give them the opportunity to explore various types of properties. Real estate investment tr usts (REITs) are a key consideration when constructing any equity or fixed income portfolio. Alternatively, a fund may invest in a range of product types in a single market (e.g., the Los Angeles metropolitan area).
A real estate investment fund is usually headed by a sponsor with years, if not decades, of real estate experience.