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One way the average investor can start to invest in the real estate market is
via real estate mutual funds. That's because many of these specialized mutual
funds allow investors to gain entry into this market with as little as $2,500.
Real estate funds also offer the investor all the advantages of a typical
mutual fund such as lower overall risk and professional portfolio management.
Real Estate Investing
Anyone that owns a home is already investing in real estate and many of them
are even using a leveraged position - it's called having a mortgage. But for
most individuals, their investment strategy when it comes to real estate stops
with their home. Unfortunately, these same investors may be overlooking an
opportunity to enjoy the rich benefits of the real estate mutual fund sector.
Three Ways to Invest in Real Estate
Additional Resources
But let's step back for a second and briefly review the three ways we're able
to invest in real estate:
purchasing individual real estate properties themselves. There are many experts
that can help investors to get started in this area, and frankly this
particular strategy is beyond the scope of this publication other than a
introduction to the topic of flipping homes.
in real estate, mortgages, or a combination of each. Real estate investment
trusts are often referred to as REITs.
supplying services to the real estate market and real estate investment trusts.
Let's take a closer look at real estate investment trusts and real estate
mutual funds. Later on we'll finish up this article with a list of some of the
best performing real estate mutual funds on the market.
Real Estate Investment Trusts
Real Estate Investment Trusts, or REITS, typically own and operate real estate
properties. These may include multifamily dwellings, shopping centers and
malls, commercial office space, and even hotels. Real estate investment trusts
are run by a board of directors that make the investment decisions on behalf of
the trust.
REITs offer the investor several advantages such as diversification, liquidity,
and professional property management services. We've talked about this topic in
a little more depth in our article on Real Estate Investment.
The earnings growth for these trusts can come from several sources. For
example, an increase in occupancy rates for hotels or commercial office space
owned by the trust. The trust can grow earnings by investing in additional
properties or by running existing properties more efficiently. They can also
invest additional capital into existing properties to improve their appearance
and marketability.
REITs and Federal Income Taxes
The structure of a REIT was originally designed to provide to individuals
interested in investing in real estate with the same benefits that mutual funds
provide to those interested in investing in stocks. REITs can be both publicly
or privately held companies. And non-private (public) REITs can be listed on
stock exchanges just like shares of common stock.
REITs themselves usually pay little or no federal income tax. But they are
subject to a number of requirements set forth by the Internal Revenue Service.
In particular, there is a requirement to annually distribute at least 90% of
the REIT's taxable income in the form of dividends to its shareholders.
Many REITs distribute all of their current earnings - and in some instances,
they often distribute more than current earnings. If a REIT distributes more
than its taxable income, the excess distribution is considered "return of
capital." This kind of distribution is taxed as a capital transaction, rather
than regular income.
The requirement to distribute earnings can have a negative affect on investors
seeking to maximize the growth on their investment with REITs. However,
improvements in the REIT's underlying holdings such as leases, properties, or
changes in interest rates continue to fuel the market's demand for real estate
investment trusts.
Real Estate Mutual Fund Returns
The final alternative for individuals seeking to move some money into the real
estate market is to invest in real estate mutual funds. According to
Morningstar's rating system, the mutual funds in this specialty area have
enjoyed tremendous growth in the past five years - an average annual return of
nearly 11% as of September 2008.
In fact, some analysts believe that this long-term success means this run may
be near an end. However, these same analysts agree that real estate mutual
funds can still play an important role in a long-term investment portfolio.
Real estate mutual funds tend to focus their investing strategy on real estate
investment trusts and real estate companies. Typically, this latter category
would include large builders of real estate properties. The returns of these
mutual funds will usually be influenced by economic factors such as the
matching of supply and demand for commercial office space as well as interest
rates.
In the same way interest rates affect the local real estate market; rising
interest rates usually result in decreased demand for real estate and flat or
declining housing prices. This is true because an increase in interest rates
means home buyers will qualify for smaller mortgages. On a larger scale, rising
interest rates can have a pretty dramatic effect on new home sales.
Top Performing Real Estate Mutual Funds in 2008
As promised, we are going to close out this publication by looking at several
of the top performing real estate mutual funds in 2008. These funds had pretty
stellar performance, but just remember that reward does not come without risk.
That being said, here is our list of some of the best performing real estate
mutual funds as of late September 2008. Each of these funds beat their category
average in the last three and five years:
fund requires an initial investment of only $2,500. Top holdings include Arch
Coal, Inc., Peabody Energy Corporation, and Consol Energy, Inc. The fund has
approximately $2.3 billion in assets and the average return over the last five
years is 29.27%.
fund, this no-load mutual fund requires no minimum investment. Top holdings
include Simon Property Group, Inc., ProLogis Trust, and Boston Properties, Inc.
The fund has approximately $921 million in assets and the average return over
the last five years is 16.7%.
fund, this no-load has no requirement for a minimum investment. Top holdings
include Simon Property Group, Inc., Equity Residential, and AvalonBay
Communities, Inc. The fund has approximately $2.0 billion in assets and the
average return over the last five years is 16.46%.
http://www.money-zine.com/Investing/Mutual-Funds/Real-Estate-Mutual-Funds/