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2009-07-29 06:18:42
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:
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:
http://www.money-zine.com/Investing/Mutual-Funds/Real-Estate-Mutual-Funds/