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Types of real estate funds

A real estate fund represents an investment in real estate of various kinds, such as commercial, industrial or residential real estate. The bulk of such an investment fund consists of investments in real estate. With the real estate funds, one differentiates between different forms of investment. There are open and closed real estate funds, as well as the so-called REITs (Real Estate Investment Trust), real estate companies with listed shares.

Open real estate fund

In principle, every investor can invest here. Even small investors can participate here. However, the investors’ money is not invested exclusively in real estate, otherwise, a short-term purchase or sale of fund units would not be possible. Rather, it also invests in interest-bearing securities and other investments. The proportion of this so-called liquidity reserve is limited to 5 to 49 percent of the fund.

Real estate funds have the advantage that surpluses are distributed to investors. These surpluses come, for example, from rental income, in real estate a very reliable source of income. However, real estate funds can also lose value if, for example, the real estate market collapses. Nevertheless, they are commonly considered a safe and profitable form of investment.

Closed real estate funds

In contrast to open-ended real estate funds, a closed-end fund is usually only used to finance a single project in closed-end real estate funds and specific real estate. Once the required capital is reached, the fund is closed, which means that as a rule shares can neither be acquired nor sold. The goal of such an investment is usually through annual distributions, not only to cover the original investment but to surpass. However, closed-end funds are not protected by the Deposit Guarantee Fund. This means that in the worst case, it can lead to a total loss of the investment. In addition, there is usually a minimum deposit, which makes this form of investment for small investors less attractive.

Editorial Tip

When you talk about real estate funds, you usually talk about the open funds, because they also represent a lucrative investment opportunity for private investors. Closed-end funds, in particular, should only be chosen if the topic and the fund have been dealt with intensively since there is no hedging of the assets here.

Invest in real estate funds

Besides these two forms, there are still stock corporations with listed shares. These real estate investment trusts (REITs) are traded directly on the stock exchange, unlike real estate funds. It is true that in Germany the introduction of the REITs was already decided in 2007. They could not prevail so far.

As an investment firm, real estate funds offer comparatively high security compared to other investment funds, with attractive returns. In the past, they were even considered lossless. However, in 2006 the first real estate fund went bankrupt. In this respect, it is also evident here that there is always a certain basic risk with corresponding potential returns.