Investing in a real estate investment fund allows an investor to diversify their portfolio: Jamell Tousant’s analysis

Jamell Tousant

May 17, 2022

Investing in a real estate investment fund allows an investor to diversify their portfolio

Investing in a real estate investment fund allows an investor to diversify their portfolio

Real estate investment funds with aggregate capital from various sources. Then, the fund leverages the equity investment with bank debt. For example, a fund of $50,000 may solicit investments from thirty individuals, all contributing the same amount of money. After the fund reaches $1.5 million, it has the means to invest in $6 million in real estate. This gives investors greater diversification of risk and return while enjoying greater liquidity and pass-through tax treatment.

Jamell Tousant thinks that another benefit of investing in real estate is its low correlation to other asset classes, making it an excellent diversifier. Because commercial real estate is often illiquid, investors can invest in real estate investment funds to protect themselves against market declines. Many investors have found this exposure to be very beneficial. Here are three reasons why you should invest in a real estate investment fund. Let’s examine these benefits.

It allows for pass-through taxation

The new Tax Cuts and Jobs Act make it easier for individuals and businesses to invest in real estate by allowing them to claim a pass-through tax deduction. Previously, this type of deduction was limited to passive income earned by a business, which was offset by passive losses. The Tax Cuts and Jobs Act allow businesses to claim a pass-through deduction of up to 20% of their taxable income, which significantly lowers their effective income tax rate.

A pass-through business is a separate entity from its owners. Unlike a traditional corporation, the profits generated by the fund go to the fund owners rather than the federal government. However, this is not the case for long-term capital gains, as these are not considered part of business profits. In addition, dividends from the fund are also excluded from this deduction. Pass-through businesses may have a lower tax rate than a traditional business, depending on the tax rates they face.

It offers high returns

There are several ways to invest in real estate. Jamell Tousant reminds that a mutual fund can help you diversify your portfolio. You can invest in mutual funds that are composed of many REITs. Mutual funds are a great way to invest in REITs without doing a lot of legwork. Mutual funds are also available through brokerages and can be a great way to get started with REITs. They are often low-cost and offer immediate diversification.

Most real estate investment funds to provide a broad exposure to the real estate market, investing in several different REITs or property types. Diversification minimizes risk but lowers returns. Moreover, real estate funds typically have lower entry levels and lower investment thresholds than individual properties. If you are interested in real estate but do not have a lot of money to invest, a mutual fund may be a great way to start investing.

It is highly illiquid

Unlike stocks and bonds, illiquid investments such as real estate have a long time lag between purchase and sale. In addition, real estate transactions are mostly private and, therefore, require a significant amount of time and effort. Additionally, access to capital in this industry is limited. That means it may be difficult to sell or exit the fund at the desired time. Regardless of these concerns, Realto’s first transaction on the secondary market took place in December 2017, Jamell Tousant points out. This was in the form of Class B restricted shares of Phillips Edison & Company, a grocery anchored shopping center operator.

As of last month, the UK’s upheaval claimed another high-profile casualty. Shares in a major property portfolio suspended. The company cited Brexit-related political uncertainty and structural shifts in the retail industry as reasons. The incident heightened the focus on open-ended property funds. While traditional open-ended property funds offer daily liquidity, they invest in highly illiquid property assets. This created a flaw that surfaced in the market during the uncertainty surrounding Brexit.