Boost Your Portfolio with Some Real Estate

Make use of real estate mutual funds and REITs to diversify your portfolio.

Real estate has recently experienced consistent growth as it has solidified its place in institutional and individual investors’ capital asset allocation matrices.

Institutions seeking effective asset management are gradually shifting to specialized real estate funds of funds due to the capital-intensive nature of real estate investing, its need for active management, and the rise in global real estate prospects.

The same is now true for retail investors, who can gain from having access to a considerably wider variety of real estate mutual funds than in the past, enabling effective capital allocation and diversification.

Real estate offers advantages and disadvantages, just like any other financial field. For the majority of investment portfolios, it should be taken into account, with real estate investment trusts (REITs) and real estate mutual funds being considered as perhaps the best ways to satisfy that allocation.


Investing directly

This tactic involves picking out specific properties and buying them outright as investments. These frequently consist of rental income-producing assets that also benefit from market value gains.

Control is a key benefit of this tactic. Direct property ownership enables strategy creation and execution as well as direct control over return. However, direct investment makes it exceedingly challenging to put together a real estate portfolio that is well-diversified. It also entails becoming a landlord, with all the associated expenses, dangers, and management difficulties.

The real estate allocation for the majority of retail investors is too small to enable the acquisition of sufficient properties for true diversification. Additionally, it raises exposure to property-related hazards and the local real estate market.


Many retail investors who haven’t thought about including real estate in their investment portfolios don’t know that simply owning a home, they may already be investing in real estate. In addition to already having exposure to real estate, most of them are also accepting additional financial risks by holding a mortgage. Most of the time, this exposure has been advantageous, assisting people in accumulating the funds needed for retirement.


Real Estate Investment Trusts (REITs)

The private and public equity stock of businesses that are set up as trusts and make investments in real estate, mortgages, or other real estate collateralized assets is represented by REIT shares. Real estate properties are often owned and managed by REITs. These could include apartment complexes, shopping centers with supermarkets as anchors, small-town shops and strip malls, malls, office buildings, and hotels.

A board of directors oversees REIT operations and decides the trust’s investment strategy. If they give out 90% of their taxable profits as dividends to shareholders, REITs pay little to no federal income tax.

Despite the fact that the tax benefit boosts after-tax cash flows, REITs’ incapacity to hold onto capital can seriously impede growth and long-term appreciation. In addition to the tax benefit, REITs offer many of the same benefits and drawbacks as stocks.

The strategic direction, investment, and real estate decisions made by REIT managers help investors with management-related concerns. The biggest drawbacks of REITs for individual investors are how challenging it is to invest with small amounts of money and how much expertise and analysis is needed to choose them and predict their success.

Compared to real estate investments, REIT investments have a far stronger link to the entire stock market, which causes some to undervalue their diversification benefits. In comparison to direct real estate, the REIT market has experienced more volatility. This is because REIT stock values are driven by macroeconomic forces, whereas direct real estate is more affected by local real estate markets and evaluated using the appraisal process, which tends to smooth investment returns.

Real Estate Mutual Funds

Using experienced portfolio managers and thorough research, real estate mutual funds themselves invest mostly in REITs and real estate operating businesses. They give you the chance to get diversified real estate exposure with a manageable investment. They offer investors a far wider range of assets than can be obtained by purchasing REIT stocks alone, depending on their strategy and diversification goals, and they also give investors the option of readily switching from one fund to another.

Due to the relative simplicity of buying and selling assets on a structured and controlled exchange, as opposed to direct investment, which is difficult and expensive, flexibility is also advantageous to the mutual fund investor. To enhance return, more speculative investors can strategically overweight a particular property or area exposure.

Should I invest a certain percentage of my portfolio to real estate?

The majority of experts concur that for many investors, owning some real estate (direct or indirect) is a good idea. Your risk tolerance, time horizon, liquidity requirements, and other real estate holdings are a few examples of the variables that will affect how much of your finances you allocate to real estate. If you currently own a home, for instance, real estate may actually make up a sizable portion of your total worth. Additionally, if you work in a sector that is related to real estate, the real estate market already affects your income and job prospects. Advisors often advise allocating 5% to 20% of a portfolio to real estate (with differences in opinion on whether to include your home equity)


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