13. Real Estate Mutual Funds


Similarly to REITs and REIT ETFs, real estate mutual funds are yet another passive investment opportunity for someone looking to get started with little up-front and on-going obligation.

Overview

  • Up-Front Investment: Can be as low as $500.
  • On-Going Investment: None, unless you choose to continue adding more money to your portfolio.
  • Return on investment: Sell when you want at the current exchange price. You will earn a % dividend paid monthly.
  • Best for: Anyone looking for a passive and flexible investment strategy.

What Is It?

By definition, a mutual fund is a fund investing into by multiple shareholders through a professional account manager. Mutual funds are very common for 401k and other types of retirement savings. Like REITs and REIT ETFs, if you invest in a mutual fund, you’ll enjoy monthly dividends.

A real estate mutual fund will typically invest in REITs and/or real estate-related stocks.

With relatively low investment minimums, a real estate mutual fund will give you access to a real estate investment without having to put down a large sum of money or commit a lot of time. A real estate mutual fund, depending on its investment strategy, may be able to offer you more diversification than REITs. The right real estate mutual fund can help you save on transaction costs if you’re seeking this diversification. You’ll also benefit from professional research and management of your portfolio.

Of course, you'll have to pay for your portfolio to be managed. Like REITs, a real estate mutual fund should be seen as a medium to long-term investment, which will allow you to benefit from dividend income and the potential of capital appreciation.

Remember: If you put in $1,000 and see a 5% return the first year, that means you would earn $50 for the year--that’s not really a big deal, but your $1,000 is still there to keep growing in value the longer you leave it on the market.

If you buy in at $1,000/share but the price doubles in the next decade, you essentially have $2,000 (if you choose to sell) along with the dividends you’ve earned in the meantime. Real estate mutual funds are another way to earn higher rates compared to a typical savings account.


The Pros

Get in with a lower investment and enjoy the flexibility to sell your shares if you need to. You can treat this as a sit-it-and-forget-it long-term investment strategy thanks to your managed portfolio, which will give you peace of mind. Begin benefitting from dividends in no time and know that your investment is growing overtime.

When compared to REITs, you can get higher levels of diversification while saving on transaction fees and benefitting from the in-depth research the person managing your portfolio will carry out.


The Cons

With real estate mutual funds, you will have to pay a professional to manage your portfolio (usually a percentage fee). Additionally, like REITs and REIT ETFs, if you choose to pull your money out before it has time to appreciate, you should expect to lose some of it through brokerage fees and perhaps even short-term dips in value. Intend to keep your money in the account for the long haul.


Summary

A real estate mutual fund is a great way to get into the real estate market with little money down. You’ll benefit from a professionally managed portfolio that will give you peace of mind while also knowing that your money is being wisely diversified amongst many different real estate vehicles.