REIT Mutual Funds Are Popular For A Reason

REIT mutual funds allow investors to gain access to the real estate market without incurring huge amounts of risk and cash expenditures. The fund manager diversifies portfolio choices among various types of REIT companies that manage real estate. It’s important that investors perform due diligence by reviewing price, income, yield, costs and overall performance before investing any of their money.

The long term investment income derived from these funds is by no means guaranteed. Although investment returns are paid out in the form of dividends to each shareholder, many factors need to be considered such as the quality of the properties maintained by the investment trusts including delinquency rates and economic conditions. For example, during periods of severe recession or rising interest rates, the performance of the real estate market will fluctuate. Nevertheless, real estate offers good diversification for the investor and the dividend returns of these trusts tend to be high in comparison to bonds and common stock. Additionally, annual costs charged to the investors by the funds tend to be low.

Another important factor to consider when investing in REITS is the liquidity factor.  Real estate tends to be very illiquid, especially during times of recession, which can significantly impact the value of commercial real estate properties. During the past several years, the real estate market has been severely damaged by value depreciation, over supply and numerous foreclosures that have devastated the economy.  The funds that purchase REITS are usually open ended which means that all shareholders are able to immediately liquidate their holdings at the net asset value of their particular fund. However, it is important to note that redemptions can be refused under certain circumstances, which I recently discovered when a 401k rollover request was rejected.

The income or dividend factor for these types of investments have made them a popular vehicle for tax deferred plans such as IRA’s, SEP Plans and 401 K’s because the income that is paid out is not taxable until it is withdrawn by the investor. Therefore, it is important to always consider your tax bracket and financial planning needs before investing in these vehicles. The purpose and timing of such investments, especially mutual funds that invest in real estate is an important consideration.

In summary, the REIT fund strategy offers investors a meaningful method of entering the real estate market at investments as low as $2,500 without the problems encountered by direct ownership. It offers low costs, high dividends, professional management, and diversification of investments, liquidity and minimum risk. Investors should definitely consider these funds as an alternative and diversification tool.