Real estate fund Vs. direct investment

Real estate fund Vs. direct investment

Until recently, the ability to invest in a real estate asset was relatively simple – buying an apartment or house by means of equity or through financing. This was a one-time, long-term event with a relatively low level of liquidity and steady income stream to cover the financing. In order to accomplish it, a relatively high initial equity and a good standing with the bank were needed, in order to obtain eligibility for financing under reasonable conditions. These requirements limited investors whose equity had not been sufficient to purchase an asset, thereby preventing them from investing in real estate.

A new solution – real estate investment funds

Several years ago, real estate funds began to operate in Israel – these companies were modeled after similar companies in the United States – where these entities have been operating since the 1960s. REIT real estate funds allowed the investors to perform investments in real estate with lower initial sums and financing.

What is a real estate fund or a REIT fund?

REIT funds are public companies, traded on the stock exchange and regulated through legislation. These companies grew up in the United States in the early 1960s to give investors an opportunity to enter the real estate market, effectively allowing investors to pool their investment money into substantial capital used by the fund to invest in real estate assets. Just like in a mutual fund, investors purchase units and enjoy the profitability of the fund’s activity. REIT funds invest their money in income-producing real estate – office buildings, commercial centers, rental housing complexes, industrial buildings, hospitals, etc. The funds manage the properties and collect the rent from tenants.

REITs enjoy tax exemptions on their operations provided that they return most of their revenue as a dividend to their investors. This is the main difference between a mutual fund or an investment in shares and these funds – the income from the fund’s activity is returned to investors as a dividend rather than as a capital gain. Therefore, REIT funds are more similar to bonds in this sense.

Advantages of investing in a real estate fund that may be of interest to investors:

  • A Possibility to invest in the real estate market with relatively low amount of money
  • High level of liquidity and rapid realization of the investment through the sale of the Fund’s units in the open market
  • Possibility to invest in real estate in a variety of international markets. Buying units in a REIT fund allows the investor an opportunity to join a diverse range of real estate activities – in the local market or in a number of international markets – from buying a mall in Poland to purchasing buildings for rent in Florida.
  • Ability to invest in real estate without the need to invest time and effort in managing the property and handling maintenance, collection and tenants.
  • Increase portfolio diversity – The purchase of units in a real estate fund allows diversification of investments in addition to shares, commodities and bonds.
  • Specialized investment, long-term REIT funds invest in diverse real estate assets in specific markets and often develop specialization and efficiency in utilizing resources, throughout the life of the asset, while improving yield and profitability from the existing assets.
  • Reducing risk through diversification. Joining the REIT fund enables diversification of real estate investments between different markets and assets, thus spreading the risk rather than linking to a single physical asset in a single market.

What types of real estate funds exist in the market?

  • Equity REIT – Most of the funds are actual owners of yielding assets and are engaged in asset management. 90% of the profits return to investors in the form of a dividend.
  • REIT Mortgages – These are funds that specialize in managing mortgages of assets. The funds provide financing for real estate owners by means of mortgages or other means of financing. These funds are based on interest income on loans, which are more sensitive to the market situation and their risk level is different.
  • Hybrid REIT funds – funds that combine ownership of income-producing properties with financing to property owners.
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