What is a real estate fund – benefits and more?

“Real estate funds are pooled finances from multiple investors, which are used to buy, hold and eventually sell certain types of real estate. These funds are managed by skilled, third-party professional managers, known as sponsors. The sponsors seek out and acquire properties dictated by the funds' purpose and mission”

Some real estate funds invest directly in real tangible assets by owning commercial and corporate properties, hotels, apartment complexes and even farms. Other real estate funds invest in real estate indirectly by owning shares of REITs, which are corporations, trusts or associations that invest directly in income producing real estate and are traded like a stock.

Benefits of a Real Estate Fund:

• By purchasing a real estate fund, you are really purchasing a future income stream derived from property that offers several benefits, including potentially higher returns, stability, inflation hedging, expertise and diversification. Here are some of the primary reasons to consider investing in a real estate fund.
• When compared to purchasing property outright, investing in a real estate fund requires a relatively small amount of capital. This can allow you to get involved with the income and long-term growth potential of real estate without putting a large sum at risk. It also allows you to capture the economies of scale.
• Real estate funds can potentially offer investors a much broader asset selection than can be achieved with stocks or even REITs. Typically, the capital raised by funds is used to purchase multiple assets in multiple geographic regions. This provides protection versus a single property in a single location, thereby spreading the risk across possibly hundreds of units in many different locations.
• Management expertise. Sometimes called vertical integration, novice real estate investors (or those who just want to avoid the hassles of actual ownership) can take advantage of another’s experience and knowledge. The best funds will have teams of people with expert knowledge to handle all aspects of real estate ownership. From doing due diligence on deals, architectural and design to construction experience through to property management. These funds remove the day to day difficulties that are commonly associated with property ownership.

• There are tax benefits with owning real estate funds. As a passive investor earning income from real estate there are pass through depreciation opportunities. Alternatively, the purchase of real estate funds can be managed through an IRA and this too can confer tremendous tax advantages.
• A hedge against volatility. When the stock market becomes volatile – like we see during the COVID-19 scare – real estate funds can act as a stabilizer. Often real estate returns and performance are not concerned with the direction of the stock market. After all, no matter what is happening in the broader market tenants still need to pay their rent.
• A hedge against inflation. When inflation rises everything costs more and often this can negatively impact stocks since their inputs to production cost more. But with income from real estate you are protected against inflation because the rent you charge increases right along with inflation.

• Performance. Real estate funds provide stable income to investors that can match or even surpass traditional stocks. “The T. Rowe Price Real Estate Fund (TRREX), for instance, notched a 10-year return of 12.69% as of October 31, 2019. VGSIX boasted a 10-year return of 13.39% through the close of November 2019. The average 10-year return for the S&P 500 is 13.60%, suggesting that real estate funds are capable of holding their own against stocks.” . https://smartasset.com/investing/real-estate-fund

Summary:

Real estate funds provide an opportunity for many investors to come together and gain exposure to the benefits of owning property with a relatively small outlay of capital. With economies of scale, diversification away from the traditional stock market and protections against inflation and volatility these funds can actually increase your security. Performance is not sacrificed either as income from day-to-day operations and asset appreciation over time are included. And they can alleviate the hassles that often come with property ownership by taking advantage of the management expertise offered through the fund.