REITs vs Real Estate Mutual Funds: Which Should You Invest In?
Written by
James Holbach
Edited by
T. Woods
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Real estate’s status as one of the most sought-after asset classes has endured for decades. Despite consistently underperforming the stock market, many experts and gurus point to it as the best thing to invest in. To be fair, there are benefits to owning real estate beyond just the income and appreciation it offers, particularly when it comes to reducing your tax liability. There is also just something alluring about owning property that seeing a number next to a stock ticker on your computer can’t quite match.
The main problem with investing in real estate historically has been the significant up-front capital investment required. Even if you finance a property, you’re going to need to put up a down payment, often 20% or more if it’s not your primary home. The good news is that modern financial markets have developed a number of ways to make real estate accessible to the average retail investor.
What is a REIT?
Real Estate Investment Trusts, or REITs, are companies engaged in owning and financing income-producing properties across a wide range of property types. These companies have to meet a number of requirements in order to be called a REIT. Most are traded on public stock exchanges, making them easy to invest in. The key feature of a REIT is that they are required to pay out 90% of the income they generate to shareholders in the form of a dividend.
Real Estate Funds
Pooled investment vehicles like mutual funds and ETFs also offer investors a way to access real estate. Unlike REITs, which are single companies, a real estate fund is typically invested in multiple companies, including REITs. Some mutual funds have minimum investments, while ETFs trade freely on public exchanges.
Which is Better?
There’s no single answer to the question of whether you should invest in a REIT or a fund. In fact, investing in a real estate fund will almost always give you exposure to multiple REITs, so they aren’t mutually exclusive. In general, because a fund is diversified, it should be less risky than investing in one or a few REITs. However, because many REITs specialize in a particular sector of property, they may be attractive to investors looking for exposure to a specific type of real estate. What’s best for you will depend on your own goals and financial situation.
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