Real estate can be a valuable addition to many investment portfolios. It provides much-needed diversity in a fairly stable way, and real estate investments are available in markets all over the world. However, purchasing real estate outright is simply not practical for many investors, as the challenges of actually owning a property may outweigh the benefits of the investment.
This is where real estate mutual funds come in. Mutual funds are shares of a company that invests in real estate, making purchases with the money collected from investors. It is a method of crowdfunding realty that allows investors to share in the profits without actually committing to owning a property.
Ways to invest in real estate
The most clear-cut method of investing in real estate is direct investment, in which an individual owns and maintains a property even if they do not live there or use it personally. Since this isn’t feasible for a lot of investors, there are also a number of different ways to share properties or invest in real estate in general rather than in specific properties.
These include real estate mutual funds and investment trusts, another form of mutual fund in which investments are kept in trusts. These allow new investors an entry point to the real estate investment market. Some may move on to make other real estate investments, while others may stick to mutual funds and other types of shared investments.
Benefits of mutual funds
Real estate mutual funds are a great way of getting into the retail market, especially if you are an inexperienced investor. Since mutual funds are held by companies that specialize in real estate investment, there is no pressure placed on the individual investor to pick a good property.
All investment properties are chosen by experts at the real estate firm. Furthermore, investors can put a relatively small amount of money in mutual funds, limiting risk and money lost on a bad deal. Finally, trading mutual funds is easy. They can usually be bought or sold in a single day.
Disadvantages of mutual funds
Many of the advantages of mutual funds can also be disadvantages when cast in a different light. For example, those who prefer a more hands-on approach to investing may not appreciate that they have no say in the property being bought with the money from their funds.
Mutual funds do not function as company stock, and investors do not have voting rights or the permission to know about the inner workings of the company. Furthermore, the tax advantages of real estate mutual funds are more limited than other types of investment.
For those interested in diversifying their portfolio with real estate, mutual funds provide one easy method of getting a foot in the door of the industry.
