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Real Estate Mutual Funds

Last updated 4th Oct 2022

Real estate mutual funds provide investors with one of the easiest ways to get started in this market. These specialized funds oftentimes allow investors to participate with as little as $1,000. Real estate funds also offer the investor the advantages of a mutual fund, which includes a portfolio with lower overall risk, as well as professional management of the investments.

Real Estate Investing

Anyone that owns a home is already participating in the real estate marketplace. Many of these same individuals are even using a leveraged position; it's called having a mortgage. Unfortunately, these same investors often overlook an opportunity to enjoy the rich benefits found in the real estate mutual fund sector.

Three Ways to Invest in Real Estate

With that introduction, let's step back for a moment to briefly review the three ways everyone can invest in real estate:

  • Owning Properties: this strategy involves the investor selecting, and purchasing, individual real estate properties. There are many experts that can help investors to get started in this area. This particular strategy is beyond the scope of this publication, other than an introduction to the topic of flipping homes.
  • Real Estate Investment Trusts: companies established as trusts that invest in real estate, mortgages, or a combination of each. Real estate investment trusts are often referred to as REITs.
  • Mutual Funds: includes funds composed of real estate companies, businesses supplying services to the real estate market, as well as real estate investment trusts.

We're going to first take a closer look at real estate investment trusts and mutual funds. Later on, we'll finish this article with a list of some of the best performing 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, which make the investment decisions on behalf of the trust.

real estate mutual funds
REITs offer the investor several advantages such as diversification, liquidity, and professional property management services. We've talked about this topic in more depth in our article on Real Estate Investments.

The earnings growth for these trusts can come from several sources. For example, an increase in occupancy rates for hotels or commercial office space. 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.

Federal Income Taxes

The structure of a REIT was originally designed to provide individuals interested in investing in real estate with the same benefits that mutual funds provide to those interested in stocks. REITs can be both publicly or privately held companies. 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; under certain conditions, they may even 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 gain rather than regular income.

The requirement to distribute earnings can have a negative effect on individuals seeking to maximize the growth on their investment. However, improvements in the underlying holdings such as leases, properties, or changes in interest rates continue to fuel the market's demand for real estate.

Mutual Fund Returns

According to Morningstar's rating system, the mutual funds in this specialty area enjoyed tremendous growth in the past ten years, with an average annual return of over 8.68% as of September 2019. This is quite remarkable, given the downturn that occurred in 2007 through 2009. In fact, most analysts agree that real estate mutual funds play an important role in a long-term investment portfolio.

Typically, the managers of these funds tend to focus their investing strategy on real estate investment trusts and real estate companies. This latter category would include large builders of 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 that 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 dramatically negative effect on new home sales.

Top Performing Real Estate Mutual Funds in 2019

As promised, we are going to close out this article by looking at several of the top performing real estate mutual funds in 2019. All of these funds performed very well, but just remember that reward does not come without risk. Each of these funds beat their category average in the last three and five years:

Cohen & Steers Real Estate Securities (CSDIX)

  • Assets: $6.6 billion
  • Category: Real Estate
  • Specialty: None
  • Top Three Holdings: Crown Castle International Corp, American Tower Corp, and Welltower Inc
  • Load: None
  • Minimum Investment: $100,000
  • Expense Ratio: 0.87%
  • 5-Year Average Return: 11.39%

Cohen & Steers Real Estate Securities A (CSEIX)

  • Assets: $6.6 billion
  • Category: Real Estate
  • Specialty: None
  • Top Three Holdings: Crown Castle International Corp, American Tower Corp, and Welltower Inc
  • Load: 4.50% (Front Load)
  • Minimum Investment: $0
  • Expense Ratio: 1.14%
  • 5-Year Average Return: 14.24%

Altegris / AACA Opportunistic Real Estate A (RAAIX)

  • Assets: $385.9 million
  • Category: Real Estate
  • Specialty: None
  • Top Three Holdings: Switch Inc Class A, American Tower Corp, and GDS Holdings Ltd ADR
  • Load: None
  • Minimum Investment: $1,000,000
  • Expense Ratio: 1.42%
  • 5-Year Average Return: 11.25%

About the Author - Real Estate Mutual Funds

Moneyzine Editor

Moneyzine Editor