REIT vs. Real Estate Fund: What’s the Difference? (2024)

FAQs

REIT vs. Real Estate Fund: What’s the Difference? ›

A REIT is traded like a stock and can own a variety of types of commercial real estate, such as medical clinics, retail shopping centers, office and apartment buildings, hotels, warehouses, and more. A real estate fund is typically a mutual fund that invests in public real estate companies (which can include REITs).

Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.

A main difference between investment trusts and other funds, such as unit trusts and OEICs, is that they're closed-ended, in that there's a limited number of shares in existence. When investors want to buy into a unit trust or OEIC, the manager makes it possible by creating new units and then invests this new money.

REITs may be a better choice for investors who prefer a simpler approach. With a REIT, investors can quickly and easily purchase shares with their choice of initial investment. Because the REIT manages the property, investors are not burdened with the everyday stress of vacancies, tenants, management or repairs.

REITs, established by Congress in 1960, create financial statements, follow specific tax laws, and must provide 90% of their profits as dividends each year. REIGs, meanwhile, can have any business structure, though the most common are partnerships and corporations.

In most cases, REITs utilize a combination of debt and equity to purchase a property. As such, they are more sensitive than other asset classes to changes in interest rates., particularly those that use variable rate debt. When interest rates rise, REITs share prices can be prone to volatility.

Unlike mutual funds, investment trusts can take on gearing, or borrowing additional money for investments, which unit trusts are not allowed to do. That means they can take bigger risks, meaning potentially bigger rewards or potentially bigger losses.

Trust funds serve several purposes, such as ensuring assets are protected, distributed properly, and transferred smoothly. Most trusts are living trusts — trusts that are created and enacted during the grantor's lifetime — that designate how assets should be managed and distributed when the grantor dies.

Equity REITs are funds that own physical properties and earn money from renting them to individuals or businesses. The income they earn is paid out to shareholders in the form of dividends.

What is the difference between a fund and a REIT? ›

Whereas REITs pay dividends to investors, real estate funds aim to generate value through the appreciation of the securities they own. REITs are fundamentally a current-income strategy, as they are required to pay out at least 90% of taxable income each year as dividends to shareholders.

The FTSE Nareit All REITs index, which tracks the performance of all publicly traded REITs in the U.S., had an average annual total return (dividends included) of 3.58% during the five-year period that ended in August 2023. For the 10-year period between 2013 and 2022, the index averaged 7.48% per year.

More than 80 million Americans own REITs through their retirement savings and other funds. Well-managed REITs may contribute to a diversified portfolio and can deliver stable dividends with attractive tax benefits. However, REITs can drop in value and cause investor losses if they are not managed well.

Yes, but the process is complex and involves several steps. While some real estate professionals may argue that it's not possible to use a 1031 exchange to invest in a REIT since they involve different forms of property ownership, it can be done with the right strategy.

The beneficial owners of a REIT are called unitholders and they acquire their beneficial interests by purchasing units in the trust, often on a publicly-traded stock exchange. A REIT is created by a trust declaration which gives the trustees discretion to deal with the trust's real property.

Lesson #1: The Dividend Should Be An Afterthought

It may sound counter-intuitive, but lower-yielding REITs have actually been far more rewarding than higher-yielding REITs in most cases. That's because REITs are total return investments, and growth and appreciation are even more important than the dividend yield.

If the REIT fails this ownership test for more than 30 days (31 days if the year has 366 days) in a taxable year of 12 months, it can lose REIT status and cannot elect to be treated as a REIT for five years (IRCазза856(a)-(b)). The test is pro-rated for taxable years shorter than 12 months.

REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.

For purposes of the REIT income tests, a non-qualified hedge will produce income that is included in the denominator, but not the numerator. This is generally referred to as “bad” REIT income because it reduces the fraction and makes it more difficult to meet the tests.