What Is a Real Estate Investment Fund?

What is a real estate investment fund?

An investment fund is an entity formed to pool investor money and collectively purchase securities such as stocks, bonds, or real estate. A real estate investment fund is a combined source of capital used to make real estate investments.

Real estate investment funds share some similarities with real estate investment trusts (REITs); they're both pooled sources of capital used to invest in real estate. However, there are some key differences between them, including the fact that REITs are corporations that must distribute 90% of their taxable income to shareholders to maintain their tax-advantaged status with the IRS. Real estate funds don't have to comply with those rules, so many earn returns for their investors via capital appreciation instead of just dividend payments. Meanwhile, most real estate investment funds tend to be much more diversified than REITs, which typically focus on a single property type (e.g., residential REITs and retail REITs).

What are the types of real estate investment funds?

There are three main types of real estate funds available to investors:

1. Real estate mutual funds: Mutual funds (real estate-focused or otherwise) are professionally managed investment vehicles. These entities invest money pooled from investors into a diversified portfolio of real estate opportunities, including REITs, real-estate-related companies, and real estate properties. Most real estate mutual funds are open to all investors as long as they meet the minimum investment requirement. Investors can purchase most mutual funds through a financial advisor, though some are available via online brokerages.
2. Real estate exchange-traded funds (ETFs): These funds (real estate-focused or otherwise) are passively-managed investment vehicles. They track an underlying index enabling investors to earn market-matching returns (minus expenses). Real estate ETFs are open to the public and trade on major stock market exchanges.
3. Real estate private equity funds: Private equity funds are actively managed and target institutional investors and high-net-worth clients, so most private equity real estate funds are only available to institutional and accredited investors, not the general investing public.

What are the benefits of investing in a real estate fund?

There are many advantages to using funds to invest in real estate. A few notable ones are:

1. Diversification: Most real estate investment funds offer investors broad exposure to the real estate sector. They typically own many property types or invest in several different REITs. Diversification helps reduce risk, although it can also lower an investor's return potential.
2. Lower initial investment threshold: Most real estate funds have relatively low initial investment thresholds (usually less than $10,000 for a mutual fund and not much more than $100 for most real estate ETFs). That provides investors with a much lower entry point than if they bought individual properties.
3. Passive investing: Real estate enables investors to generate passive income as tenants pay rent, but being a landlord requires active management. On the other hand, real estate funds are much more hands-off investments since others handle the active management of the properties.