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WHAT ARE REAL ESTATE FUNDS AND HOW DO THEY WORK?
Real estate funds are investment vehicles that generate capital from several investors to invest in real assets. They enable investors to gain exposure to the real estate market without having to invest directly in physical properties. Here’s what investors should know beforehand.
Investing in Real Estate Funds: Pros and Cons
- Diversification. These funds make it easy to access a diversified property portfolio. This reduces the risk compared to investing in individual properties or crypto funds.
- Professional asset management. Funds are managed by experts who have experience in property valuation, leasing, and maintenance. Thales Capital experts can help achieve better returns than individual investors achieve on their own.
- Liquidity. Unlike investing directly in real estate, such funds can be bought or sold easier on stock exchanges or through investment platforms.
- Income growth. These funds can generate consistent income streams from rental revenues or capital appreciation, making them attractive for long-term investors.
- Management fees. Investors may incur management fees impacting final returns. It’s important to consider whether these fees are justified by the performance and expertise of the fund managers.
- Limited control. When investing in these funds, you relinquish control over the specific properties held within the portfolio, relying on the fund manager’s decisions instead.
- Leverage risk. Some real estate funds use leverage to enhance returns. While this can lead to higher returns during favorable conditions, it can magnify losses during market downturns.
However, by selecting diversified funds from trusted firms, investors can avoid these problems.
Real Estate Fund Types and Investment Strategies
One of the most widely known examples of these funds is Real Estate Investment Trusts (REITs). They own and operate houses, offices, malls, and other similar assets. People can invest in REITs by buying shares on stock exchanges. REITs generate revenue from rental income and capital appreciation of the properties they own. They are required by law to distribute about 90% of their taxable revenue to stakeholders as dividends.
Private equity real estate funds are another fund in this category. These investment funds are typically offered to accredited investors with greater net worth. They contribute to value-add assets that require significant renovations or repositioning to increase their value. These properties are often sold after the value has been increased, generating a profit for the fund and its investors.
Real estate mutual funds are also chosen by investors who want to enter the real estate market. These funds invest in a portfolio of publicly traded property organizations. Mutual funds allow investors to access a varied asset portfolio with lower minimum investment conditions than private equity real estate funds.
Real Estate Fund Performance and Risks
When evaluating a real estate fund’s performance, consider several factors. One key metric is the fund’s total return which encompasses capital gains and dividends paid out to investors. Investors should examine the fund’s expense ratio and real estate management fees because these can lead to a decrease in earnings after some time.
Another important consideration is the fund’s underlying holdings. Different REITs focus on certain assets, like commercial or residential properties. Investors should consider their personal risk tolerance and property investment purposes when selecting alternative investment funds with specific property holdings.