In the previous article, investments in residential real estate were discussed through the purchase of an apartment and renting it out. Such direct investments provide the owner with direct control over the investment object: managing rent, costs, making decisions on purchase and sale. Also, buying an apartment will provide the greatest profitability, as it eliminates most intermediaries.
However, this method is not without its drawbacks; it requires practical experience in managing residential real estate, as well as knowledge of the housing market. These shortcomings can be eliminated by hiring appropriate specialists in the form of a realtor or real estate agency, but you will have to share profits with them.
Long-term unoccupied conditions and unscrupulous tenants can also lead to a decrease in income from owning an apartment. And a weak housing market can make it difficult to sell or reduce your bottom line.
In this article I will write about the two simplest ways to invest in real estate: real estate funds - Russian mutual funds and foreign REITs.
What is a REIT?
REIT - (Real Estate Investment Trust) - real estate investment trusts.
In the West they came up with such a scheme back in the middle of the last century.
Collective Investment Fund. Money from shareholders (or shareholders) is collected. Each investor is allocated a certain share, in proportion to the invested funds. And all the money is invested in real estate.
The total value of real estate owned by Reits worldwide exceeds $3 trillion.
Simply put, REITs can be thought of as ordinary publicly traded companies. With free circulation of shares on the stock market. That is, this is the same business as Gazprom, Lukoil, Magnit or Pepsi, Disney, Apple. Only in the real estate sector.
Any investor who has access to the stock exchange and has the required (by the way, very modest) amount can buy shares (invest in funds).
In other words, a Reit is “real estate investment for poor people.” People like me, you and hundreds of millions of other investors who do not have the opportunity to purchase entire real estate. Almost anywhere in the world.
Types of REITs
There are 3 main categories of funds, divided by areas of real estate investment.
Rental or equity (Equity REIT). They buy or build real estate for subsequent rental. This is where the main income comes from. Of interest are usually commercial, office, residential and social real estate, hotel and hospitality businesses.
All hassles, expenses, and legal relations with tenants are borne by the management company.
The share of rental funds is the lion's share (more than 90%).
Mortgage REITs, mREITs. They work with mortgages. Income is generated in the form of interest on loans.
Their market share is less than 10%.
Before the 2008 mortgage crisis, banks pulled off some clever schemes. They issued mortgages to everyone, even the unemployed. The real estate market was growing by tens of percent per year. And it was believed that the risks were minimal. Mortgages on houses were wrapped in securities (mortgage bonds). And they resold it further. Leaving yourself a small margin.
Then a large pool of such mortgage papers was again wrapped in another package and resold. The buyers included pension and investment funds.
The annual yield on such securities could reach double digits. There were countless people who wanted to “make money” on reliable investments.
Then, as you know, during the crisis, house prices fell. The unemployed were unable to pay their mortgages. And there was no point. When we bought the house, it cost, for example, $200 thousand. And now his price is red - 80 thousand. The debt to the bank is, say, 180 K. It would have been easier to forget about this matter. Let the bank take the house for debts.
And so on down the chain. Everything started to fall apart. Payments stopped coming on mortgage securities. Investors suffered enormous losses.
As a result, investors are now very cautious about this topic. Hence the low share of such funds.
Hybrid (Hybrid REIT). They can invest in rental real estate and own mortgage securities at the same time. As a species it is practically not found. Share less than 1% of REIT capitalization.
Disadvantages of Vanguard
In essence, Vanguard’s business model is built in such a way that it has no particular disadvantages - all advantages
