Investing in Real Estate Funds: Everything You Need to Know
Is it better to invest in REITs or buy a property? What is the degree of risk of these funds? check the answers of all your queries.
FIIs have a unique dynamic, so it’s worth understanding how they work.
1. What are FIIs?
FIIs, or real estate funds, are similar to common investment funds, that is, they are a type of collective investment in which different people buy shares. In the real estate investment fund, all funds raised are invested in the real estate sector.
FIIs are a type of investment fund that invests in real estate projects such as shopping malls, hospitals and commercial buildings or related assets such as CRIs .
By purchasing shares of REITs you become one of the “owners” of this property, receiving the rents as profit.
Real estate funds are usually a good option for those who want to live on income without having a physical property. In other words, investing in REITs allows you to “own” part of several properties without having to buy them in full, and receive a percentage on top of that “purchase”.
How do FIIs work?
Construction companies finance their works as a manager, who divides part of the property into fund shares. In this way, each quota owner receives a proportional amount from the rent, which is the fund’s income.
In addition to this income, the investor can earn by selling the shares at a price higher than the purchase price.
2. Types of real estate funds
The three main types of real estate funds are brick, paper and trust funds.
- Brick funds: invest directly in physical properties, such as bank branches, hospitals, commercial properties, etc.
- Paper funds: buy financial securities linked to the real estate sector, such as Real Estate Credit Bills ( LCIs ) and Real Estate Receivables Certificates ( CRS ).
- Funds: these funds buy shares in other real estate investment funds. They are usually good options for those who want to build a portfolio of REITs and do not have so much capital to invest in more expensive real estate funds.
3. REIT Manager
FIIs are managed by a manager, who is responsible for their maintenance. It is he who decides where the money raised will be invested.
The manager or manager analyzes the market, sector, region and property on a daily basis to decide where the fund’s assets will be allocated. This person is also responsible for the changes and composition of the portfolios, in addition to taking administrative and maintenance measures for the buildings.
Therefore, before investing, it is important to research your manager’s fund and background.
4. How much do real estate funds yield?
As FIIs are traded on the Stock Exchange , yield and profitability vary over time. In other words, it is not possible to nail with certainty how much real estate funds yield. FII investors have three ways to profit:
- Share appreciation: FIIs are traded on the Exchange, and the investor acquires shares. Therefore, when investing, the shareholder is exposed to fluctuation, as well as in a company share. In other words, if a person bought a share at R$100 and sold it at R$150, he made a profit of R$50.
- Rent: the rent paid for real estate projects is paid to the funds and transferred to investors in proportion to the number of shares each one has.
- Dissolution of the fund: this is the rarest alternative. It happens when properties are sold, and the amounts are transferred proportionally to the shareholders.
The profits of the REITs are based on the performance of the assets and depend on where the equity is being allocated. Income from the REITs must be distributed every six months, but some funds distribute monthly. This is according to the specific fund you are allocating to.
5. Investing in real estate funds or physical property?
Is it more worth investing in real estate than buying shares in REITs? The answer will not always be the same, but investing in REITs has two advantages: more practicality than buying a property, and the possibility of allocating less money.
Some benefits of FIIs when compared to real estate:
- Practicality: when investing in REITs, you don’t have to worry about property management, such as collection, contracts, taxes, among others. The time and bureaucracy to invest in the fund are also less.
- Diversification: You can buy shares from different funds. So you don’t need to concentrate all your capital on one investment either.
- Security: you can be a “partner” or “partner” in developments where the tenants are large companies. This creates greater security in your investment.
- Minimum value: there are FIIs with minimum investments of around R$100. Buying an investment property, on the other hand, requires a lot more capital.
- Investing in large projects: with FIIs you can have access to high-end properties in important neighbourhoods in the main capitals of the country. Among them are hospitals, universities, famous shopping malls and hotels, for example.
One of the big issues of buying a property to live off rent is liquidity. If you need to get rid of your property, you will depend on market issues and a buyer, which does not always appear quickly.
Another important factor is vacancy. An investor who owns a property runs the risk of the tenant leaving and the property empty. Therefore, you will have to bear the costs involved.
Furthermore, when investing in real estate funds, all administration is done by the manager and administrator. Unlike a property, in which the owner has to pay for possible construction works and late payment of rent.
This does not mean, however, that buying a property to invest is never worthwhile. Depending on the circumstances (such as, for example, the possibility of paying upfront or taking out an advantageous loan, or the expected appreciation of the property), it can be a good option – as well as being a valuable asset if you ever need it.