In this article, we will explore the differences between these two asset types.
This category of property investment is broken down into three main types:
- Equity REIT
- Mortgage REIT
- Hybrid REIT
As the names imply, an equity REIT invests in and owns properties, while a mortgage REIT invests in mortgages. A hybrid REIT combines the two. Regardless of their structure, REITs can invest in both residential and commercial properties.
To qualify as a REIT, the corporation must have at least 100 shareholders, be managed by a board of directors, and pay at least 90% of its taxable income in the form of dividends annually.
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Real Estate Mutual Funds
Real estate mutual funds offer many of the same benefits as REITs but are said to provide more diversification benefits and lower transaction costs. Since they are managed professionally, real estate mutual funds benefit from the knowledge and research of an entire firm.
Unlike REITs, mutual funds don’t trade like stocks. You can purchase them directly through investment companies or brokerages. Examples of leading real estate mutual funds include Vanguard Real Estate Index Fund (VGSIX), DFA Real Estate Securities Portfolio (DFREX), and Fidelity Real Estate Investment Fund (FRIFX).
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Risks to Consider
Use the Mutual Funds Screener to find the funds that meet your investment criteria.
Some investors take solace in the fact that the Federal Reserve is lowering interest rates again. Banks are already passing on the savings to their customers, and this has partly come in the form of lower mortgage rates. All is well, right?
Not quite. The Fed being forced to cut interest rates after a decade of ultra-loose monetary policy should raise alarm bells about the health of the U.S. economy. The interplay between monetary policy and the U.S. economy is a risk that investors should consider before investing in property – whether directly or indirectly through REITs and real estate mutual funds.
The Bottom Line
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