REITs vs. Real Estate Mutual Funds: Which Is The Better Option?

REITs vs. Real Estate Mutual Funds: Which Is The Better Option?

By Megha

After the financial crisis of 2008, the real estate market rose like never before. Today, real estate investment is one of the most profitable tools for growing your money manifolds & generating wealth. Various investors are looking forward to tapping into this diverse stock market sector and enjoy access to the real estate world. But the considerable investment deters them from doing so. There are two investment options: real estate investment trusts (REITs) and real estate mutual funds. Both of these investment options are designed for investors who want to diversify their investments in the Real estate without burdening themselves with the hassle of direct investment. These real estate investment vehicles are bankable options as they have excellent liquidity and higher real estate stock prices and returns. However, choosing the one that suits you the best and making an informed decision is of utmost importance. 


As per Statista research, it is projected that the Real Estate sector in the U.S. will experience a tremendous annual growth of 3.37% by the year 2024. This sector will undoubtedly undergo prodigious growth in the foreseeable future, and the investors will benefit from high real estate stock prices.


Taking this into consideration, in this article, we are going to explore both the investment options and pick the one that will offer excellent real estate stock prices. This article is a quick overview of both of these investment options. You can either choose one among REITs and Real Estate Mutual Fund or can even start investing proportionately in both. Keep in mind — “Choosing between REITs or mutual funds is not an either/or question. You have to put both against each other and make a decision that fits in your investment requirements.”


What is a REIT?


REIT or Real Estate Investment Trust is a company, trust, or association that works primarily in owning profitable real estate assets and is further traded like stocks. There are two types of REIT’s namely Equity and Mortgage REITs. Like mutual funds, REITs also accumulate funds from different investors to purchase commercial shares at real estate stock prices and then earn income from it. It is one of the best investment options to enjoy earning from real estate without buying, financing, or managing the property on your own. The REIT portfolio usually contains apartments, data centers, healthcare centers, office buildings, retail shops, warehouses, hotels, and timberland. 


What is a Real Estate Mutual Fund?


Real Estate Mutual Funds are the sectoral funds that provide the investor’s exposure to REITs without actually doing the research and making the individual selection on your own. In a nutshell, this type of investment pools money from different investors and then purchases a diversified portfolio of REITs. However, the Real Estate Mutual Funds are not traded on stock exchanges, resulting in constant fluctuations of fund prices even when the stock market is functioning. If you don’t want to get into analytics and research, you must invest in real estate mutual funds without an iota of doubt.


Key Differences Between REIT and Real Estate mutual fund


- REITs directly invest in revenue-generating properties and are traded like stocks. At the same time, Real Estate mutual funds are investments in the securities or stocks of real estate companies. 


- REITs are traded just like other stocks on major stock exchanges. On the other hand, Real Estate Mutual funds can be bought and sold directly through the website or online brokers.


- Investors in REITs make money through the dividend they get from the taxable income, as 90% of it is distributed among the shareholders. In Real Estate Mutual Funds, investors enjoy the income through the value appreciation of the fund.


- REITs can be traded for the short term as they are highly liquid. However, Real Estate Mutual funds are for mid-term to long-term horizons as they are non-liquid assets. 


- REITs are investments in one kind of commercial real estate which offers a narrow portfolio. On the contrary, Real Estate Mutual Funds provide a diversified portfolio that helps to enjoy better real estate stock prices and returns. 


- Real Estate Mutual Funds are prone to higher expense ratios because of which the investors have to pay ongoing fees for enjoying active management of the funds by specialists. However, this is not the case with REITs, as it has a relatively low expense ratio. 


How To Decide The Better Investing Option For You?


Millions of investors in the market are looking for exposure to the booming real estate market. But the absence of knowledge and capital is stopping them from enjoying the higher real estate stock prices. For such investors, there are endless opportunities via REITs and Real Estate Mutual Funds. With these options, an investor can participate in the real estate market without compromising portfolio diversity and spending a massive amount. Now the question arises: Where to invest — REITs or Real Estate Mutual Funds? To solve this dilemma, you have to consider the following factors. They are the primary criteria for making sensible use of your money and enjoying impressive real estate stock prices.


1. Objective Of Investment: First thing first, you need to have clarity about your investment objectives. If you know the purpose, you can quickly figure out where to invest your valuable money. Ask yourself the drive, and you will have a clear idea of the best option for you.


2. Availability of Capital: Capital is another critical factor that determines the best investment opportunity. To invest in the real estate market via REITs and Real Estate Mutual Funds, you don’t need capital in lakhs or crores. However, the capital in REITs is usually higher as compared to mutual funds. To invest, check the current real estate stock prices and pick the investment option falling in line. 


3. Your Liquidity Aspect: When we talk about investment, we need to pay special attention to the liquidity aspect. You need to know the turndown time you expect from your investment and then pick the best deal. In Real Estate, REITs are highly liquid and can be converted into cash swiftly. In contrast, Real Estate Mutual Funds have mandated turndown time.


4. The audacity of Risk: Real Estate stock prices are highly sensitive, which makes it essential to know the audacity of risk before investing. You must be aware of the risk you are willing to take with your investment. In the case of REITs, there’s very little to shield because of a narrow portfolio. Hence, investment in REITs is a great option for high-risk bearing investors. 


The Bottom Line


Both REITs and Real Estate Mutual Funds are outstanding investment options. However, the final decision will wholly depend upon your requirements, expectations, and the funds you have amassed for investment. We don’t have a rulebook to offer (probably no one has) — but the idea is, before making a decision, you’ll need to assess every aspect. Whether you want to go with REITs or Real Estate Mutual Funds, it has to be congruent with your needs. Regardless of the type of investment, getting higher real estate stock prices & returns is of utmost importance for any investor. Just be mindful, intelligent & make an informed decision— you’ll win the race for sure!