Real Estate Investment Funds: What They Are and How to Invest in Them

Through real estate investment funds, savers participate in the purchase of real estate and obtain benefits derived from their leasing

Brick and mortar are more alive than ever. More and more people are betting on real estate assets to multiply their wealth, as can be seen in the emergence of real estate investment funds and the rise of platforms like Airbnb, which allow homeowners to profit from their property by renting it out to individuals.

The data leaves no room for doubt. In 2022, real estate investment in Spain exceeded 15.4 billion euros and set a new record, as detailed in this report by BNP Paribas. A figure that translates to a 35% growth compared to the previous year. But what is the reason for this popularity?

Real estate assets, all those that cannot be transported because they have a fixed location, are considered one of the safest assets. While stock prices fluctuate constantly, it is highly unlikely that a home or a commercial property will depreciate over time, unless it is located in an area that loses its appeal.

Additionally, when leased to families or businesses, they represent a regular and secure source of income. Every month, the landlord will receive the agreed-upon amount in the contract by both parties. And this fixed rent provides a valuable guarantee of peace of mind for the owner, as their profits will not be subject to market fluctuations.

However, to rent out a space, it is essential to own it. And not all people have the economic capacity to acquire a commercial space or a house. For this reason, vehicles such as real estate investment funds have emerged.

What are real estate investment funds?

Real estate investment funds make all the advantages of this sector accessible to savers with less purchasing power who cannot afford to buy a property.

These types of funds operate like a conventional investment fund, but introduce a radical difference. Instead of injecting capital into companies or government bonds, they pool investors' shares to acquire commercial spaces, apartments, or buildings, in order to obtain profits derived from leasing to third parties, whether individuals or organizations.

All the profits generated with these real estate assets are distributed among the fund participants proportionally, based on the original amount they invested. This way, anyone can make money in the real estate sector without the need for a large initial investment.

However, real estate investment funds are not the most advisable option for savers whose investment strategies prioritize quick profits. Generally, these mechanisms work in the long term, as many months or years may pass before the initial investment is finally amortized.

These are known as direct funds. But there is another type of real estate investment fund: indirect ones. Those that, instead of acquiring real estate for leasing, direct their investment to companies belonging to the real estate sector, such as real estate agencies or REITs (Real Estate Investment Trusts), dedicated to buying and rehabilitating spaces for future leasing.

When it comes to indirect real estate investment funds, the investment is not made directly in the real estate asset, but in the organization responsible for its management, which is publicly traded. This alternative presents a lower level of risk, as it does not rely solely on a single building.

Advantages and disadvantages of these funds

Are real estate investment funds a good or bad option? There is no single answer: it all depends on the profile and needs of each investor. But there are a series of benefits and drawbacks that can tilt the balance towards one extreme or the other.

Let's start with the advantages. This type of funds has opened the doors of the real estate market to all kinds of actors, who can acquire a small percentage of the real estate or invest in real estate agencies. In the past, less affluent investors could not afford to participate in this sector.

Similarly, it does not tie savers to a specific space: it is possible to withdraw the investment at any time desired. In contrast, property owners would have to sell the property if they want to prioritize other assets, a longer and more complex process.

On the other hand, they do not have to worry about whether the tenant pays the installments on time, as this is the responsibility of the agency, which assumes the risk of default. And finally, it is a very useful mechanism for diversifying the investment portfolio, since it is possible to participate in different real estate investment funds, as well as complement them with other products.

But all that glitters is not gold. What about the disadvantages? To begin with, although selling shares is easier than selling a house, there are times when there are not always buyers willing to acquire them, so there could be a greater liquidity risk, preventing investors from redeeming the money.

In addition, this game is only for patient players and those with foresight, as it can take several years or even decades before profits begin to arrive. For this reason, it is not always an advisable mechanism for people who do not have a financial cushion and who, consequently, may need urgent liquidity.

Other important points about real estate investment funds

Many times, savers choose to contract these products through banks, which offer them among their range of services. This slightly increases the commissions to be paid, but also simplifies the process, as not everyone has the knowledge and preparation to act without intermediaries. Although it is true that you can go directly to the fund management company, it is more difficult to access them, and they do not always offer their products to end customers.

At the same time, it is important to take a look at the legislation. The regulations establish that at least 70% of the fund's investment must be allocated to completed real estate, under construction, or off-plan, as well as to administrative concessions or rights over real estate.

The law also sets a liquidity level of over 10% and determines that no property can represent more than 35% of the total assets at the time of acquisition. And, finally, it warns that real estate cannot be used for activities other than leasing.

Regarding the taxation of profits, the mechanics of real estate investment funds are identical to those of other funds. Once the profits are reimbursed, they are taxed according to the brackets established by the authorities: up to €6,000 (19%), from €6,000 to €50,000 (21%), and above €50,000 (23%).

Profits that, as we have seen before, can take years to flourish. But that, at the same time, can be very generous, as evidenced by the unstoppable growth of the sector.