05 Oct Different between REIT and a Private Real Estate Equity Fund
What is The Difference Between a Real Estate Investment Trust And a Private Real Estate Equity Fund?
If you’ve considered investing in real estate, you may already be aware of Real Estate Investment Trust (REIT) and Real Estate Equity Fund (REIF). These are two ways to enter the lucrative real estate market, however, they’re not the same. You need to know the difference between a REIT and REIF to be able to make the right investment decision.
Investing in a REIT offers great liquidity because 90% of the total investment is returned to the shareholder in the form of dividends on a monthly basis. However, the yearly tax on REITs is around 39.6%.
REITs work quite like stocks and have a high liquidity rate, unlike private real estate equity. The interesting bit is that one can invest as little as $50 in a REIT while the minimum investment threshold for a real estate private equity fund is $100,000.
So, in short, we can say that REITs give you profits quickly but along with taxes while private real estate equity fund gives you huge profits in a few years.
What is a REIT?
REIT refers to a Real Estate Investment Trust. It serves as a holding company for real estate.
When you put your money in a real estate investment trust, you get to enjoy some of their profit in the form of dividends.
- Equity REITs (include had real estate assets)
- Mortgage REITs (include residential and commercial mortgages)
- Hybrid REITs (A mix of equity and mortgage REITs)
A majority of profit comes from rent and interest payments.
Benefits Of Investing In a REIT?
There are many reasons to invest money in a REIT.
- There are little to no barriers to this type of investment. You can invest as low as $50 or as much as $500,000 or even more.
- The yield on a REIT is around 10% per year. This means that an investment of $50,000 can give you $5,000 every year. You also have the option to increase this investment or get multiple REITs to increase your profits.
- You get dividends or profit on a monthly basis
- Buying a REIT is hassle-free, unlike private real estate equity fund, which can often be a pain. You don’t have to personally step into the market and look for properties. You can do it online through apps. Just find a reliable option and you’re good to go.
- There’s no paperwork involved, you don’t have to attend phone calls at 2 AM to handle emergency situations. The ease is unmatched. Everything is taken care of by the company. It’s their responsibility to solve issues, the only thing you’re concerned with is your profit and loss without you having to provide any creative input.
- Selling a REIT is as easy as buying it. You don’t have to post ads, look for a buyer, negotiate prices or pay commission. Log in to your system and sell – with a single button.
- The yield in REITs is higher than stocks due to a different tax system. If a trust pays 90% dividends then it is not required to pay taxes. This results in a higher yield, i.e: more profit.
- You can buy multiple REITs to diversify your portfolio and reduce the risk.
Downsides Of Investing In a REIT
There are a few negatives as well. Let’s have a look at them.
- The profits you get from REITs are taxed because you are receiving the money in the form of dividends. The tax can be up to 39.6% in some cases and is to be paid on a quarterly basis.
- Another downside of the product is that you don’t have any right or control over the property you have invested in. You are not allowed to manage the property, decorate it, remodel it, set a rent as per your will or even live in it. In short, you have zero control over the property. In fact, in some cases, you may not even know where exactly your money is invested.
- The risk is higher because REITs are associated with the stock market, which is highly volatile. You can lose a lot of money in a jiffy if things go downhill. However, the good thing is that it’s easy to find their financial information due to them being publicly traded.
What Is a Private Real Estate Equity Fund?
A private real estate equity fund is a mutual fund where you invest your money into a real estate project.
Your investment is managed by a third-party with experience in handling such transactions. As a result, you don’t have to do any paperwork, look for properties, find buyers. It’s all done on your behalf by your hired expert.
This type of fund is different from a REIT because it involves a huge investment which is meant to run for a long period of time.
Benefits Of Private Real Estate Equity Fund
- The risk factor in private real estate equity funds is lower than in REITs. This is because the money is invested in various real estate projects and not just one. This diversification reduces the risk as profit from one investment can dilute the losses from other.
- While it’s beneficial if you know how the industry works, it’s not exactly necessary since you will not have to take investment related decisions or worry about paperwork. It will be done on your behalf by an expert.
- Real estate equity funds give you a leverage on geographical profits as well. Property prices vary from state to state due to which, as a result, the potential profit also differs from state to state. It’s simple, you may make $50,000 by investing $10,00,000 in Texas, but you may make $60,000 by investing the same amount of money in New York, simply because the prices are increasing at a rapid rate in New York.
- Unlike REITs, they are not tied to the stock market.
- You don’t have to pay huge taxes like you would have to in the case of REITs.
Downsides Of Investing In a Private Real Estate Equity Fund
- Once you decide to invest your money in a private real estate equity fund, you have no control over your money or the property. Everything is managed by the company on your behalf and you get profits when the property is sold.
- The minimum investment cap to participate in a private real estate equity fund is $100,000 for most projects. The huge amount of money required to start an invests deters some investors.
- You have to pay a fee or share of profit to the company as commission.
- It’s not as liquid as a REIT. You can’t earn profits on a monthly basis but have to wait for several years for the property to sell and then you are entitled to a profit.
Which Is The Better Option?
Both options have their ups and downs. A REIT is a good option if you have little amount of money and you want regular income with great liquidity. While they deduct a huge amount of profit, there can be a way out of it:
You can hold the REIT in a 401k or Roth IRA account and enjoy tax exemption.
If you have a huge amount to invest in and have little time to look into deals, properties and paperwork then a private real estate equity fund is your best bet. They provide good results but you may have to wait for years before that happens.
In short, private real estate equity funds are better for a long-term investment.
Why Choose Us As Your Partner?
We have been in the real estate investment business for years and have helped out many investors increase their wealth by suggesting them the best route. There are many ways to earn money in this business, but not all of them may be right for you.
You need professional help to understand the complex real estate market. Housing prices are constantly increasing, it’s a good time to cash in on the opportunity.
Our team consists of skilled individuals who are good at identifying golden opportunities. We do ‘hand holding’ and will walk you towards your gains.