In 2023, the Social Security Administration determined the cost-of-living adjustment (COLA) to be 8.3%, aimed at safeguarding the purchasing power of social security recipients against inflation.

This marked the most significant COLA increase since 1981, highlighting the urgency to protect cash assets amidst rising inflation. Investments serve as a hedge against inflation, preserving the value of money over time.

Real estate investment stands out as an attractive option in the current climate. For those seeking exposure to real estate without the hassles of direct ownership, a real estate investment fund offers a compelling solution.

Background: Mutual Funds Overview A real estate investment fund operates similarly to a mutual fund, pooling capital from multiple investors to invest across various real estate assets. Investors contribute funds, and the fund allocates them across chosen securities. Profits generated from these investments are distributed among investors proportionally.

Advantages of Mutual Funds Mutual funds offer built-in diversification, spreading investments across multiple securities to optimize returns and mitigate risks. Professional management enhances this by selecting a portfolio likely to yield favorable returns. Additionally, sharing transaction costs reduces individual investment expenses.

How Real Estate Investment Funds Operate A real estate fund invests exclusively in real estate assets, either directly or indirectly. These investments may include owning properties for rental income, construction for sale, or renovation and resale. Profits from these activities are distributed among investors.

NexGen Capital Partners, LLC specializes in multifamily, community development, mixed-use, Vacation Rentals, luxury villas and self-storage properties. As both fund manager and developer, we streamline the investment process, allowing investors to receive returns early on.

Types of Real Estate Investment Funds Real estate funds can be open-end or closed-end and actively or passively managed.

Open-End vs. Closed-End Funds Open-end funds offer flexibility, allowing investors to enter or exit at their discretion. Closed-end funds have limited entry opportunities and may require investors to stay until the fund’s lifecycle ends.

Actively Managed vs. Passively Managed Funds Actively managed funds aim to outperform the market by actively buying and selling assets. Passively managed funds mirror asset values for steady, long-term growth.

Real Estate Fund vs. REIT While both real estate funds and real estate investment trusts (REITs) are real estate investments, they operate differently. REITs function more like buying individual securities, while real estate funds operate similarly to mutual funds, pooling investor funds.

Benefits of Investing in a Real Estate Fund Real estate funds offer diversification, potential competitive returns, and a hands-off approach to investing.

Evaluating and Choosing a Real Estate Fund Consider past performance, management team expertise, fee structure, and investment strategy when selecting a real estate fund.

Ready to Invest? Explore real estate investment opportunities with NexGen Capital Partners, LLC by creating your profile today.

Real estate has long been known as one of the best places to invest your money. But let’s face it, not everyone has the time or the desire to deal with buying and managing rental properties. What if  there was a simpler way to invest in real estate?

The good news is that you can always get your foot in the door by adding Real Estate Investment Trusts (REITs) to your investment portfolio. When you invest in a REIT, you’re essentially buying shares in a company that owns or operates income-generating real estate. These investment vehicles, like a stock or an ETF, allow you to get a share of the company’s income.

According to Nareit, the National Association of REITs, nearly 150 million Americans own REITS, or 45% of the population. So what makes them unique? Let’s break down what REITs are, the different types, and the pros and cons you need to know before investing. 

What is a REIT and How Does it Work?

The U.S. Securities and Exchange Commission defines REITS as companies that own and operate income-producing real estate and related assets. This means these companies pool together money from investors to buy properties. These properties can range from apartments to shopping complexes and even warehouses. 

A Real Estate Investment Trust, also called a REIT, is a company that owns, operates, or finances real estate properties that make money. These companies, in return, give shareholders a portion of their earned income through dividends and total returns. According to the SEC, companies qualify as REITs if they distribute at least 90 percent of their taxable income yearly to shareholders.

Everyone from a newbie investor to a retiree can take part in REITS, whether that’s directly purchasing them yourself on the stock market or indirectly through a fund such as your 401(k).

When were REITs Created?

The U.S. Congress created the first REIT in 1960 through the REIT Act. Congress wanted investors of all backgrounds an equal opportunity to invest in “large-scale, diversified portfolios of income-producing real estate.” But now, investors all across the globe flock to REITs as they have the potential for steady dividend income.

How is a REIT Different from Other Corporations?

REITs operate under a unique structure that sets them apart from traditional corporations. There’s a lengthy list of requirements these companies need to satisfy in addition to the 90 percent taxable income rule mentioned above. One example is that these companies must have a board of directors or trustees who manage them. The companies need at least 100 shareholders after the first year they classify as REITs, and nearly three-quarters of their total assets must be real estate and cash.

If you think that’s all to keep a company accountable, there are even more stringent requirements. The one that stands out amongst them all and puts the “real estate” in REITs is that 75 percent of the company’s gross income must be from real estate.

What Types of REITs Can You Invest In?

There are many different types of REITs you can invest in, depending on what you’re familiar with. The most common types you may hear in financial circles are equity REITs, mortgage REITs, and hybrid REITS. Each has different strategies and risk profiles that draw in investors based on their preferences and goals. 

Equity REITs are companies that will own income-generating properties such as commercial offices, shopping centers, and others. Equity REITs bring in revenue from rental income and property appreciation. 

Mortgage REITs, on the other hand, are companies that invest in mortgages and mortgage-backed securities, which are investments similar to bonds. The revenue of these companies comes from interest in these vehicles. 

Hybrid REITs are a mixture of both Equity REITs and mortgage REITs. They own physical properties that produce rental income and invest in real estate securities. 

It’s important to note that it can be publicly traded and offered through a private redemption program. 

What are The Benefits of Investing in a REIT?

There’s no shortage of benefits to investing in a REIT.

• Diversification for Less Risk:  REITs expose investors to diverse real estate assets, reducing overall portfolio risk and volatility. Similar to how a mutual fund has a distributed risk factor since it’s a pool of many different types of stocks, so is a REIT regarding real estate.
• High Dividend Yields: The U.S. Congress mandates that REITs distribute at least 90 percent of their taxable income through dividends. This feature makes REITs attractive to new and old investors alike. 
• Can Buy and Sell Easily: Since many REITs are traded on major stock exchanges, you can buy and sell them quickly during business hours. 
• Well Managed: By investing in a REIT, investors benefit from professional management, reducing the burden of property management responsibilities.
• Returns Can Increase: Property values increase over time, so REITs may experience capital appreciation, enhancing overall returns.

What are the Risks Associated with REITs?

Like the flip side of a coin, several risks are associated with investing in REITs. There are only so many, if any, investments without risk. 

For starters, REITs are sensitive to interest rate changes. Interest rates set by the Federal Reserve can shift borrowing costs. Therefore, REITs can lose money. Since REITs often depend on investor money to create their funds, if investor sentiment changes, then this could impact how much the shareholder will receive that year. But even outside investor sentiment, if you look at broader macroeconomic factors such as interest rates, inflation, and the real estate market cycle, these can all shift the performance of REITs. 

Also, there’s a human element to consider as well. Fund managers aren’t fortune tellers. The quality of a REIT’s success may stem from the management team’s decisions. Also, different sectors of real estate pose additional risks. Lastly, government changes in tax laws and regulations around REITs can also impact what shareholders receive. 

How Can I Reduce My Risk with REITs?

Like any investment, you should analyze the risk factors using a professional’s help. An advisor can walk you through how a REIT’s historical performance, niche, portfolio quality, dividend yields, financial ratios, and the broader macroeconomic environment will affect your success. The right advisor will work in a fiduciary capacity, which means they always seek your best interests. 

Both REITs and direct real estate investments come with risks. Buying a REIT on a stock exchange can give you peace of mind for specific reasons, such as their diversification and how easily you can buy and sell them. However, purchasing your real estate property gives you more control at the expense of higher risks. 

People focused on their financial future and retirement outlook at REITs due to their ability to generate consistent dividends. An investment vehicle’s diversification factor, ability to withstand risk, and how easily it can be bought and sold make it an excellent option for retirement. 

What Should I Know About Taxes and REITs?

Like any other investment, there are tax implications if you purchase a share of REITs. Anytime you sell a security or gain dividends, you must count it as part of your yearly income. Dividends from REITs are no exception. 

Ensure you also check your state laws to see how to treat your REIT dividend income. To avoid paying taxes upfront, you can invest in an IRA or 401(k)s. These vehicles take your pre-tax dollars and support them. A Roth IRA, on the other hand, consists of post-tax income. Therefore, you won’t be penalized as long as your money has been there for five years. 

What Does the Future of REITs Look Like?

You may be an early retiree looking at your investment choices for your golden years or a newbie investor with a newfound interest in the market. Either way, REITs will continue to play a pivotal role in your portfolio. Their edge against traditional stocks makes them enticing in the long run for anyone who desires reliability and diversification in their portfolio. 

• Bullish Investor Sentiment: One key reason investors remain bullish towards REITs is that even in the most challenging economic times, such as the COVID-19 pandemic, these investment vehicles managed to recover. Anytime the economy sours then bounces back, demand for real estate increases. When demand for real estate increases, investor appetite for REITs grows. 
• A Central Asset Class:  Real estate is one of our basic human needs. Everyone needs shelter, workspace, and infrastructure to run our economy. Even though our economy ebbs and flows, humans will always desire real estate. REITs will remain relevant as our population grows and businesses want to expand. More people will mean building more commercial and residential properties. Those who own these properties can generate steady income for their shareholders through dividends.
• Constant Evolution: As technology continues to advance and companies have to build new structures to accommodate these changes, REITs will remain relevant. REITs can invest in these new data centers, logistics facilities, and healthcare properties and in turn, give everyday investors a cut of the pie. 
• Online Business Will Propel Growth: E-commerce has driven demand for logistics and fulfillment centers. The e-commerce market was valued at $13.4 billion last year and is expected to grow at a compound growth rate of 12% through 2030. REITs focusing on industrial properties stand to benefit from the increasing need for last-mile delivery solutions.
• Rise of Technology: Many real estate companies are taking part in the AI revolution. With these technological advances, there will be positive shifts in tenant experience. 
• ESG Investing Will Bolster Growth: Environmental, social, and governance (ESG) will sentiments by the public will help REITs that prioritize sustainability and adopt green practices.
• International Investors: More and more countries are adopting the U.S. REIT model. Nearly 40 countries have REITs. 
• Tax Incentives: Investors can deduct 20 percent of their taxable business income if they own REITs. 
• Inflation Shield: Property values and rents tend to rise along with inflation. Therefore, REITs make an attractive option to protect your disposable income and assets. 

REITs are an investment option for both seasoned and newbie investors alike. Even if you don’t want to purchase your rental property, you can get access to the market through REITs. To navigate this investment vehicle’s intricacies and whether or not it would be a great choice for you, you should consult with a financial advisor or professional. From shifts in technology to macroeconomic factors, your REIT performance depends on various factors. Consider remaining up-to-date on the latest news and developments. 

By strategically integrating REITs into their portfolios with the help of NexGen Capital Partners, investors can harness the potential of real estate to achieve their financial goals and secure their financial future.

The content provided on our platform is intended for informational purposes only and should not be considered personalized financial advice. Any investment decision should be based on your financial goals, risk tolerance, and circumstances. Past performance does not indicate future results, and investing in financial markets carries inherent risks. We do not guarantee the accuracy or completeness of the information presented, and we recommend consulting with a qualified financial advisor before making any investment decisions. Our firm disclaims any liability for financial losses incurred from the use of our platform or reliance on the provided information.

A REIT and a real estate fund are two different financial terms. A real estate fund acts as a mutual fund and can invest in a basket of securities, including REITs. It doesn’t necessarily pay dividends but is similar to a stock; it appreciates. On the other hand, REITs are actual companies that own real estate, generating income.

As per the Securities and Exchange Commission, REITs must pay out 90 percent of their taxable income each year to shareholders through dividends. Investors can purchase REITs similar to buying stocks or ETFs on the stock exchange.

What are REITs?

REITS, according to the Securities and Exchange Commission, are companies that own and operate income-producing real estate and related assets. This means these companies pool together money from investors to buy properties. These properties can range from apartments to shopping complexes and even warehouses.

There are three types of REITs you can invest in. Equity REITs are companies that own these properties firsthand. They get rental income from commercial real estate offices, shopping centers, and more. Mortgage REITs, on the other hand, are companies that invest in mortgages and mortgage-backed securities, which are investments similar to bonds. The revenue of these companies comes from interest in these vehicles.

Last but not least, Hybrid REITs are a mixture of both Equity and mortgage REITs. They own physical properties that produce rental income and invest in real estate securities.

What are Real Estate Funds?

Real estate funds take many forms, from exchange-traded funds to active and closed-managed mutual funds to private real estate funds.

A real estate fund that’s an ETF will trade on a major stock exchange such as the S&P and is made up of shares of REITs and other real estate companies. Anyone can access an ETF through online investing platforms such as Ameritrade or Robinhood, a commission-free stock trading mobile application.

On the other hand, a real estate fund can also take the form of a mutual fund privately managed by a fund manager. These fund managers pick which real estate stocks, REITs, ETFs, and other securities enter the fund. They will crunch numbers and do their technical analysis to work in the best interest of the investors. The larger the fund is, the more other analysts will join the fund manager to maintain the fund.

Real estate funds make money through a couple of different pathways. These include rental income, property appreciation, and capital gains once the securities are sold. Fund managers will distribute the rental income after subtracting their management fees.

Considerations for Investing in REITs vs. Real Estate Funds

Every investor is unique, with their own financial situation, goals, and risk tolerance. It’s essential to consider your individual circumstances when deciding between REITs and real estate funds. Let’s explore some factors you might weigh:

REITs

• Liquidity: REITs, being traded like stocks on the stock exchange, offer liquidity. This means you can quickly buy or sell your securities during trading hours.
• Passive Investment: For those who’d rather invest in a range of properties without the effort of directly managing them, REITs provide an avenue.
• Dividend Investing: If the idea of receiving regular dividends appeals to you, REITs can be an option.
• Accessible Entry Point: With platforms offering fractional shares, one can start investing in REITs with a minimal initial amount.

Real Estate Funds

• Active Participation: Even with fund managers at the helm, real estate funds can allow investors a degree of influence over their portfolios.
• Long-term Investment: These funds typically cater to long-term goals, making them suitable for investors thinking of milestones like retirement.
• Exclusive Opportunities: Real estate funds can offer access to larger-scale properties, which might not be available to the general public.
• Higher Risk Tolerance: As your capital will remain invested for longer durations, you should be comfortable with facing market fluctuations over the years.

Potential Concerns

REITs

• Limited Control: You have no say over the property selections within a particular REIT.
• Market Volatility: REITs can be sensitive to interest rate changes and broader economic factors.
• Tax Implications: Selling REITs might result in a taxable event, which can impact your overall returns.

Real Estate Funds

• Less Liquidity: Unlike REITs, real estate funds can’t be traded easily on stock exchanges, and there might be penalties for early withdrawals.
• Capital Requirements: Some funds might require a substantial initial investment.
• Management Fees: The costs associated with managing the fund can eat into your returns.

Your Next Steps

It’s essential to remember that every investment has its advantages and challenges. Engaging with a trusted financial advisor can provide clarity. They can highlight the perks and pitfalls of each option, tailored to your personal situation. Ultimately, the choice you make should resonate with your financial objectives and comfort level.