Both real estate funds and real estate investment trusts (REITs) are used when diversifying a long-term investment portfolio. A real estate fund is a type of mutual fund that primarily focuses on investing in securities offered by public real estate companies. The majority of real estate funds are invested in commercial and corporate properties, although they also may include investments in raw land, apartments complexes and agricultural space. This type of fund can invest in properties directly or indirectly through REITs.
A REIT is a corporation, trust or association that owns or finances income-producing real estate. Their mode of operation is similar to that of a mutual fund where investors combine their capital to buy a share of commercial real estate and then earn income from their shares. REITs taxable income is paid out as dividends to their shareholders, who then pay income tax on the dividends.
There are three main types or REITs, equity REITs, mortgage REITs and hybrid REITs. Equity REITs own, operate and trade hard real estate assets. Mortgage REITs trade commercial and residential mortgages. Hybrid REITs are a combination of equity and mortgage REITs. The majority of revenue associated with equity REITs comes from real estate property rent, while the revenue associated with mortgage REITs is generated from interest through mortgage loans.
