Is It Worth Investing in Real Estate Funds or Physical Properties?
Is it worth investing in real estate funds? This is a common question among investors who are looking at the options available in the real estate market.
On the one hand, we have real estate funds, which offer a practical and affordable alternative for those who wish to earn with the sector, but without the need to buy a physical property.
On the other side, there is investment in physical properties, which involves the purchase of properties for rent or resale, a traditional option that continues to attract many investors due to its potential for valuation and generation of passive income.
In this article, we will explore the main advantages and disadvantages of each type of investment, to help you decide which one is best for your investor profile.
What Are Real Estate Funds?
Before exploring is it worth investing in real estate funds, it's important to understand what these funds are.
Real estate funds (FIIs) are collective investments in real estate, where investors buy shares in a fund that invests in a portfolio of real estate or real estate assets, such as shopping malls, offices, logistics warehouses, among others.
The main advantage of FIIs is that the investor does not have to worry about managing the property, as occurs with the purchase of a physical property.
How Do Real Estate Funds Work?
Real estate funds work in a similar way to other investment funds, but in the case of FIIs, the focus is on the real estate market. The fund raises funds from investors to acquire, manage, or develop real estate properties.
These properties can be rented to generate passive income, which is distributed among the shareholders, generally on a monthly or quarterly basis.
- Portfolio diversification: By investing in FIIs, you acquire a fraction of several properties, which provides automatic diversification.
- Liquidity: FIIs are traded on the Stock Exchange, which guarantees greater liquidity compared to physical properties, which may take longer to sell.
What Are Physical Properties?
Investing in physical real estate involves the purchase of tangible properties, such as houses, apartments, stores, or commercial buildings, with the objective of generating profit through rent or through the valuation of the property over time.
This type of investment requires more investor involvement, whether in property management, in choosing tenants, or in renovations and maintenance. However, the possession of the physical property also offers the security of having a tangible asset.
How Does Physical Property Work?
When you purchase a physical property, you can obtain returns in two main ways:
- Rent: You buy the property for the purpose of renting it out, generating a regular passive income.
- Valuation: You buy a property with the expectation that its value will increase over time, and then you resell it for a higher price, generating a profit.
Physical properties require a larger initial investment and greater involvement, but can offer substantial returns, depending on location and real estate market conditions.
Comparing Real Estate and Physical Real Estate Funds
Now that we understand the functioning of real estate funds and physical properties, let's analyze whether it is worth investing in real estate funds or whether the purchase of physical properties is still the best option for those looking for a way to make their capital profitable.
1. Profitability
- Real Estate Funds: Real estate funds can offer constant returns, especially if the fund invests in properties with long-term rental contracts. The profitability of FIIs comes mainly from the distribution of the rents generated by the properties that make up the fund, in addition to the valuation of the shares.
- Physical Properties: The profitability of physical properties comes from two sources: the rent and the valuation of the property. However, rental profitability may vary depending on location, demand, and rental value, while valuation may be slower depending on local real estate market conditions.
2. Liquidity
- Real Estate Funds: The main advantage of FIIs compared to physical properties is liquidity. Since shares of FIIs are traded on the Stock Exchange, you can buy and sell quickly, which facilitates the investment entry and exit process.
- Physical Properties: The liquidity of physical properties is limited. Selling a property can take months, depending on the market and location. In addition, the sales process may be more bureaucratic and involve costs with documentation, fees, and taxes.
3. Maintenance and Management Costs
- Real Estate Funds: Property management and maintenance costs are the responsibility of the fund, meaning you don't have to worry about repairs, tenant management, or any other operational aspect. This makes investing more passive and convenient.
- Physical Properties: Physical properties require constant management. You have to deal with tenants, maintenance, repairs, property taxes, insurance, and other costs. In addition, it may be necessary to hire a property management company, which involves additional costs.
4. Diversification
- Real Estate Funds: Investing in FIIs offers automatic diversification, as you acquire a fraction of several properties. This reduces risk, since the fund's profitability does not depend on a single property.
- Physical Real Estate: To diversify your physical real estate portfolio, it is necessary to purchase several properties in different locations, which requires a much larger initial investment. Diversification, in this case, can be a challenge for investors with a tighter budget.
5. Accessibility
- Real Estate Funds: Investing in FIIs is more affordable, as you can start with lower amounts. The minimum investment cost can be much lower than the amount needed to purchase a physical property, making it ideal for beginning investors or those with limited capital.
- Physical Real Estate: The purchase of a physical property requires a larger initial investment, including down payment, writing fees, taxes, and financing costs, if applicable. In addition, the buying process can be more bureaucratic and time-consuming.
6. Risks
- Real Estate Funds: Although FIIs offer diversification, they are still subject to risks, such as the vacancy of real estate, the default of tenants, and fluctuations in the financial market. The profitability of FIIs may be affected by these factors, although less intensely than an individual physical property.
- Physical Properties: The risk of physical properties is directly related to the location, tenant management, and state of conservation of the property. In addition, maintenance costs can be high, and vacancy of real estate can reduce your profitability. On the other hand, the possession of the physical property offers more control over the investment, which can be an advantage for those seeking a more direct involvement.
When to Choose Real Estate Funds?
It is worth investing in real estate funds for those looking for a more practical, accessible and more liquid form of investment. They are ideal for investors who do not want to be directly involved in property management and who seek diversification and a source of passive income without major complications.
If you have a smaller capital and want to start investing in the real estate sector quickly, FIIs can be an excellent choice.
When to Choose Physical Properties?
Investing in physical real estate may be the best option for those who seek full control over the investment and are willing to deal with property management.
In addition, it may be more advantageous for those who have the objective of valuing the property over time, as is the case of properties in areas of great growth or revitalization.
If you have more capital available and want to obtain a more direct return, without depending on the market fluctuations of FIIs, physical properties are a great alternative.
