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How Real Estate Funds and REITs Compare

By: Andrew Lucas, Director of Capital Markets
How Real Estate Funds and REITs Compare - featured image

Two Choices

Those who are interested in adding real estate to their portfolios without directly purchasing property themselves have several options. Two of the most common avenues are real estate investment trusts (REITs) and real estate funds.

While both options can help investors achieve their goals, there are differences between them. Through understanding the basics of how each structure works, investors can determine what they are most comfortable with.

REITs, which are formed as regular C corporations, are subject to more regulation than real estate funds, which are typically set up as partnerships or limited liability companies. For example, REITs are required to make regular disclosures to the U.S. Securities and Exchange Commission (SEC).

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More Freedom

REIT investments are also typically publicly traded. Like stock, the price of closed-end REIT shares varies depending upon what investors are willing to pay at any given time throughout the day. With an open-ended REIT, shares are created when investors buy them, and these shares are then added to the fund’s investment pool.

On the other hand, real estate funds have a bit more freedom and variance in these respects. They are not required to disclose all operating results, although they typically provide reports to stakeholders. Real estate funds are usually structured as partnerships or limited liability companies. For example, investing in Trion’s Fund II technically means purchasing shares of the Trion Multifamily Opportunity Fund II, LLC. Further, the price of our fund is static at $1,000 a share.

Liquidity

Many investors are attracted to REITs because they are a highly liquid and flexible form of real estate investment. REITs pay out dividends to investors via taxable income generated by either rent or mortgage loans, depending on the type of REIT. They also tend to have lower barriers to entry than private funds, with the price of a share sometimes as low as $500.

That said, real estate funds can offer greater control, potential tax benefits, and a lower correlation to other financial assets. Private fund sponsors can be more discerning and pursue assets within as wide or narrow a scope as they prefer, or that take longer to acquire or require significant value-add renovations, as they are not obligated to pay out investors within a certain timeframe. While this can introduce more risk, funds present the potential to deliver exponentially higher returns than a REIT.

Major differentiating factors between those who invest in real estate funds and those who invest in REITs are their risk tolerance and the level of control they prefer over their investments.

Knowing how each factor comes into play with the two fund types, as well as the risks and the benefits of each type of fund, is essential to making the right real estate investment choice.

Andrew Lucas, Director of Capital Markets
Posted By Andrew Lucas, Director of Capital Markets

Andrew sources new investors and manages relationships with current Trion investors. Trion is a private equity investment company which acquires opportunistic real estate investments that need moderate to heavy rehabilitation on a mid to long term investment horizon.

The company maximizes investor returns by increasing net operating income throughout the holding period through a hands-on management style of heavy renovation and aggressive lease-up.

Since its inception in 2005, Trion has acquired hundreds of millions of dollars in real estate and has generated internal rates of return in excess of 30%.