Do you have real estate investment on your mind but are unsure if it's the appropriate choice for you? There are numerous choices when it comes to investing. Bonds, Stocks, mutual funds, and other options are available for investment. But the Real estate is a choice that is frequently disregarded. For many reasons, real estate can be a great investment choice.
Research claims that compared to the same period in the previous financial year, 2021, private equity real estate investment in India increased by 87%.
What does a Real Estate Investment Fund mean?
Real estate funds, a specific type of mutual fund, invest primarily in assets provided by publicly traded real estate corporations. Like mutual funds, you can manage real estate funds actively or passively. Passively managed funds follow the performance of a benchmark index.
How many Types of Real Estate Investment Funds are there?
There are three major types of real estate investment funds:
Real Estate Mutual funds
Mutual funds are professionally managed investment vehicles, whether or not they are real estate-focused. These organizations combine investor funds to engage in various real estate options, such as REITs, businesses involved in the real estate industry, and direct ownership of properties.
Real Estate Exchange-traded funds (ETFs)
ETFs are passively managed investment vehicles, whether real estate-focused or not. With the help of these funds, investors can obtain returns comparable to the market (minus expenses). The public can trade real estate ETFs on significant stock market exchanges.
Real estate private equity funds
These actively managed funds target high-net-worth individuals and institutional investors. Because of this, most private real estate funds are not accessible to retail investors but are accredited and institutional investors only.
How to start investing in a real estate investment fund?
Investing in a real estate investment fund involves several steps:
1. Understand and research potential real estate investment funds: Identify potential funds and compare the performance, fees, and strategies of multiple funds to find the best fit.
2. Evaluate fund documents and assess financial requirements: Thorough review of all the agreements and proper understanding of all the associated costs and lock-in periods.
3. Conduct due diligence: Review financial statements and performance reports.
4. Consult with professional advisors: Discuss the investment with your financial advisor to ensure it fits your overall portfolio strategy.
5. Invest: Complete the subscription paperwork and transfer funds to the investment account.
6. Monitor your investment: Review the performance reports and stay informed through fund updates.
What are the top reasons for investing in a real estate fund?
The top 8 reasons for investing in a real estate fund are as follows:
1. Diversification
Investors who frequently have the majority of their portfolios in stocks and bonds can benefit from diversification by adding real estate as a separate asset class to their portfolio. Short-term stock market fluctuations can be tumultuous, but they don't always accurately mirror the performance of real estate funds. With population expansion and the general status of the economy, real estate demand tends to rise with time.
2. Equity
Your tenants practically buy the property for you when you use leverage wisely. Rental income lowers your loan balance each month and builds equity. Your tenant pays the mortgage when you use a mortgage to purchase a rental property, increasing your monthly net worth. Imagine it as an automatic-growing savings account.
3. Variety
Investors can access a broad selection of real estate funds concentrating on various geographic regions, property kinds, and risk/reward ratios. Investors can now personalize their portfolios without needing to purchase specific assets outright.
4. Preferred Returns
Real estate investment fund returns are typically utilized to give investors a profit and a return on capital before the fund sponsor makes a profit. These returns encourage the sponsor to manage the fund to meet its profit goal and work to maintain alignment between the sponsor's interests and the investors.
5. Reduces the Risk of Inflation
When there is inflation in an economy, rents and the price of real estate both rise. In turn, this causes the value of a real estate fund's units to rise. As a result, these products offer excellent inflation protection.
6. Tax Efficiency
Investors can gradually increase their wealth due to real estate's particular tax advantages. Additionally, self-employment tax is not applied to rental income, and real estate investors are eligible for tax breaks from the government.
7. Flexibility
You'd be surprised to learn that investing in real estate doesn't require much cash due to the growth of crowdfunding websites, which enable you to participate in real estate that generates revenue with a group of other investors. You can use crowdsourcing to build a broad real estate portfolio by investing in numerous REITs and individual projects.
8. Steady Cash Flow
Cash flow, or the money still available after all the expenses have been paid, can be a reliable source of monthly income from rental properties. Once your parcel is operational, cash flow generates ongoing, largely passive monthly income, freeing you to focus on expanding your business, spending time with family, or making further real estate investments.
Leverage
Using a financial instrument to increase the return on your investments is known as leverage. For example, debt or a down payment on a mortgage allows you to purchase the home you wish to invest in. As your asset is physical, it can be used as collateral or financial security if you run into financial trouble.
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Final Thoughts
Real estate funds give investors broad exposure to the real estate market for a small initial investment. These funds also allow investors to invest in real estate passively, freeing up time for other activities. Because of this, real estate funds may be an excellent choice for people just getting started in real estate investing.
