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Real estate funds: know what they are, how they work and if they are worth it!

The real estate sector is one of the most traditional for investors in Brazil and around the world. After all, there are always people interested in renting and buying real estate. And there are always people investing in the construction, renovation and sale of projects.

Something that many don’t know is that investing in real estate doesn’t just have to be done in its physical form. In the financial market, there are options for those who want to take more risks and profit from ventures without becoming the direct owner of them.

This is the case, for example, with real estate funds. Do you know how these funds work? And your risks? Do you know if they are advantageous in relation to the direct purchase of real estate? Find all these answers in this post!

What are real estate funds?

Those who are not familiar with the financial market may find it difficult to understand what investment funds are. To make things easier, we can think of a residential condominium: there is a group of residents who hire the administration of a manager, right?

Investment funds are a collective modality that works in a similar way. They are also similar to a consortium, in which several consortium members are together and have their capital managed by the administrator.

In practice, investing in funds means buying the shares (which correspond to parts of its capital) and starting to participate in their profits or losses. Investment choices are made by fund managers.

There are different types of investment funds. The particularity of real estate funds (FIIs) is that they focus on the real estate sector. Therefore, the manager’s decisions aim to obtain gains from operations carried out in this market, specifically.

To become an FII shareholder, you must open an account with a stockbroker or investment bank and have access to the Stock Exchange, as this is where shares are traded, as well as other investments, such as shares.

There are different REITs for the investor to choose from. Overall, it’s important to evaluate the fund’s management, portfolio and rules to decide if it looks interesting — and also to compare the options against each other.

What are the types of FIIs?

One of the characteristics of real estate funds is that they have some subtypes. This is an expected reality since investment in physical real estate is also quite diverse, isn’t it?

Those who invest directly in real estate can, for example, acquire new developments for rent, build houses or commercial buildings, renovate and sell assets, among other options. In the financial market, there are also some alternatives to choose from.

Learn about the types of FIIs below:

Brick Backgrounds

Brick funds are the easiest to understand as they are the closest to direct investment in real estate. In practice, the fund’s management owns several properties and can make them available for rent or sale.

The purpose of brick funds is, in fact, to trade physical ventures. Depending on each fund, it can be focused on building or buying, and it can also be aimed more at renting or selling assets.

The profit of shareholders of funds of this type comes from sharing the gains obtained from sales and rents. Some examples of properties traded by brick funds are:

  • commercial buildings;
  • Malls;
  • Hospitals;
  • Bank agencies;
  • Industrial warehouses;
  • Residential condominiums.

Paper backgrounds

Paper backgrounds work differently. Although they are still focused on the real estate sector, they do not operate with the real estate itself, but with financial securities related to the sector.

This is mainly due to investments in two fixed-income assets: the Real Estate Credit Bill (LCI) and the Real Estate Receivables Certificate (CRI). In this case, the investment happens only through electronic transactions.

The fund contributes the available money and then receives it back at a certain interest rate. At the end of the day, the money is used for investments in the real estate market, but the process does not directly involve the investor.

Funds of Funds

Finally, another type of FII is the fund of funds. He basically invests in other real estate funds. So, they can have shares of several FIIs of bricks or papers, for example. Its shareholders receive part of the profit obtained with them or suffer any losses.

What are the advantages of investing in FII?

Is it worth investing in real estate funds? If you’ve had trouble understanding exactly how they work, don’t worry. The first contact with the possibilities of the financial market can be complex.

However, it is necessary to carefully evaluate the possible advantages of investing in REITs. One of them is the possibility of investing in real estate with less money, buying a small number of shares.

Despite this, it is clear that your earnings from investing little money will be the same as those obtained by the owner of a real estate property, isn’t it? The shareholders’ profits are proportional to the shares they own. So, if the costs of the FIIs are lower, the gains will also be greatly reduced.

Another point considered positive when talking about real estate funds is liquidity, which refers to the speed and ease with which you can turn an asset into cash. As we know, selling a property takes some time.

FII shares are traded on the stock exchange, which means you can put them up for sale whenever you want and trade, usually faster. It must be said, however, that there are many chances of a loss on the sale if the shares are undervalued in relation to the purchase price.

What are the disadvantages?

Now that you know what real estate funds are and their main advantages, let’s know some disadvantages and some risks of making this type of investment. Analyzing them is always very important, especially for those who have doubts about investing in real estate or real estate funds.

Check out the disadvantages of FIIs:

Are traded on the stock exchange

If you needed more effort to understand how FIIs work, you noticed their first disadvantage: they are traded on the stock exchange. It is an environment unknown to many Brazilians.

A small part of the Brazilian population invests on the stock exchange, and a smaller part still makes a profit. That’s because knowing and learning to operate in this market requires a lot of study, knowledge and experience.

So, many people stop being interested in FIIs because of distrust of a new and unknown trading environment. In addition, the stock market also involves greater risks, as it is related to fluctuations in the economy.

There is no ownership of the property

Another disadvantage of FIIs for those interested in traditional real estate investments is the fact that there is no direct ownership of any property. The shareholder is only the owner of the fund’s shares, and not of any property that is part of the portfolio.

The equity is all assigned to the fund. Even if there are problems related to bankruptcy, there is a risk of the shareholder having a loss and leaving with nothing. This is a factor of great insecurity for those who are used to the idea of ​​having real estate in their name.

Investing directly and owning an asset brings more stability. After all, it’s your business and you can count on it for any problems you might face at some point.

Who decides the investments is not you

As shown, each investment fund is managed by professionals. Although we use the example of the condominium and the trustee, there is a difference: the shareholders do not participate in meetings or assemblies to make decisions.

All fund-related choices are made by the management team. Thus, before acquiring the shares, the investor needs to make sure that he is willing to submit to the decisions taken by the manager.

It represents yet another disadvantage of FIIs, as there is no decision-making power in relation to investments. When you own the property, the final choices about buying, selling and renting are yours and there is autonomy in what to do.

Real estate funds have rates

The management work of the FIIs is remunerated by the shareholders. Thus, a part of the profit obtained by the fund must go to the payment of the so-called management fee. Also, there may be other fees.

For example, many funds charge a performance-related fee. When the manager achieves results above a certain index used as a standard, he receives an extra value from the shareholders.

It is also worth keeping an eye on charges related to the brokerage firm or the investment bank, as the purchase and sale of shares may involve different fees.

Focuses on corporate real estate

If you are interested in investing in residential property, you will probably have difficulty finding REITs. That’s because most of them tend to focus on corporate ventures.

In many cases, these are large businesses, such as shopping malls, hospitals, warehouses, among others. It is rare to find real estate funds that invest in residential properties. So, they don’t suit those who have goals in this sector.

Real estate funds absorb financial market risks

Finally, a disadvantage that must be mentioned is related to the risks existing in the financial market. As we said, the Stock Exchange undergoes frequent fluctuations, according to the economy and the supply and demand of assets.

FII shares are traded on the stock exchange constantly. Therefore, if there is a devaluation of them, there is the risk of facing large losses in investments. In relation to the properties that make up the fund, there are also natural risks in the sector, such as vacancy in rentals, for example.

FIIs or property investment: which is the best option?

Now that you know more about these funds, what is your opinion about them? Do you believe that your profile is more suitable for direct investment in real estate or for being a shareholder in real estate funds?

The choice depends on a careful analysis of your interests and the characteristics of each option. But, in general, investment in real estate stands out for not having the disadvantages mentioned in relation to FIIs. And, of course, for offering numerous advantages.

See some positive characteristics of direct investments in physical properties:

Stability

Without a doubt, one of the biggest advantages of owning a property is stability. You are not exposed to the risks of the stock exchange, nor do you run the risk of seeing your money depreciate because of them.

The property is yours; it is in your name and you are responsible for making the decisions related to it. Even financial crises can be milder when you own property. While assets on the Stock Exchange suffer a fall, the property remains stable.

Lots of good opportunities

The real estate sector is very diverse and full of possibilities for investors. It is possible to make different choices according to the advantages in each region. For example, investing in kitnets in university towns or in inns in tourist places.

An opportunity for greater earnings is to purchase real estate on the plant. They can be sold with appreciation even before delivery of the project. Investing in land and construction is another way to increase your profit margin.

Profitability

Another advantage of physical properties is the profitability offered by them. In many cases, they are used to earn a lifetime income and can even provide retirement and financial independence.

It is possible to obtain passive income through rents, organizing your financial life according to the receipt of income. And it is also feasible to have higher returns in good buy and sell negotiations.

Heritage preservation

Investing in real estate is composing your equity and that of your family. In addition, it preserves your investment, since the amount invested is converted into an asset that remains in your name until an eventual sale is made.

Thus, the initial value does not tend to run the risk of loss (unlike what happens on the stock exchange). And you have the facility to have assets that can be used even to live or to help a family member in case of need in the future.

While the heritage is preserved, it also relies on the frequent appreciation. Therefore, you can see your assets becoming even more valuable over the years.

Conclusion 

Now you know what real estate funds are and how they work. By comparing them with the investment in physical real estate, you can see what is most attractive for you. This makes it easier to decide.

It is also worth mentioning that, in recent years, there has been a greater offer of real estate credit, promoting an upswing in the sector. Thus, the feasibility of investments in the area increased. So, how about enjoying it?

When in doubt about where to invest, bet on what you know. Invest in the acquisition of apartments that attract investors, that you know works and make money!

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