Real estate investing can be a phenomenal way to go beyond stocks and bonds, but it can be difficult to know where to begin. One option that is growing in popularity is income funds. In this article, we’ll define income funds, explore what they are, discuss the different types of real estate income funds, and highlight some of the most common ways to access income funds in 2023. We’ll also answer some common questions about income funds and provide insights from industry leaders.
Income Funds Defined
Income funds are investment vehicles that pool capital from multiple investors to purchase real estate assets. The primary goal of this is to generate regular income streams for investors through rental income, interest payments, or dividends. These funds typically focus on income-producing properties, such as commercial buildings, multifamily housing, and industrial warehouses.
What Are Real Estate Income Funds?
Real estate income funds are a type of investment fund that invests in real estate assets. They provide a way for investors to diversify their real estate holdings without the high costs and time commitments of direct property ownership. Real estate income funds may offer different investment strategies, such as value-add or core-plus, to generate returns. These funds typically require a lower minimum investment compared to direct property ownership and offer more liquidity options.
Real estate income funds may offer an alternative to bond market funds or to dividend stocks. Income-focused investors may be interested in real estate income funds to supplement a 60/40 portfolio.
Different Types of Income Funds
There are several different types of income funds, each with its own investment strategy and risk profile. Some common types include:
- Publicly Traded REITs: These are real estate investment trusts that are traded on public stock exchanges. They provide liquidity and diversification but may be subject to market volatility.
- Private REITs: These are similar to publicly traded REITs but are not traded on stock exchanges. They may offer higher returns but also carry higher risk due to the lack of liquidity. Many private REITs also carry higher fees on average.
- Debt Funds: These funds invest in debt securities, such as mortgage-backed securities, to generate income. They may offer lower returns but are less risky than equity funds. EquityMultiple’s Ascent Income Fund is one example.
- Equity Funds: These funds invest in equity securities, such as stocks, to generate income. They may offer higher returns but also carry higher risk.
“Private credit investments in commercial real estate are attractive to investors because they provide a regular stream of income with lower volatility than traditional equity investments.”
— Richard MacCrea, Head of Global Real Estate Debt at Barings
The Best Income Funds of 2023
Choosing the best income fund depends on your investment goals and risk tolerance. All investments entail risk, and diversifying across income funds may serve you best. Here are some of the most well-known income funds in 2023.
- Nuveen Real Estate Income Fund (JRS): This fund invests in a diversified portfolio of commercial real estate properties and has a focus on generating high current income. It has a current yield of 7.35% and has generated a 5-year average annual return of 11.51%.
- Blackstone Real Estate Income Fund (BREIT): This fund invests in a diversified portfolio of income-producing real estate assets, including multifamily, industrial, and office properties. It has a current yield of 6.68% and has generated a 3-year average annual return of 14.87%.
- Ares Real Estate Income Fund (ARIF): This fund invests in a diversified portfolio of real estate debt and equity securities, with a focus on generating high current income. It has a current yield of 6.54% and has generated a 3-year average annual return of 10.41%.
EquityMultiple provides various income-focused investment opportunities that may complement mainstream income funds. Investors may be able to achieve fund-like diversification through passive real estate investment across EquityMultiple’s individual investments. Each investment carries a relatively low minimum so investors can disperse capital widely. As of 2023, EquityMultiple is also working to offer investors private income fund options. Stay tuned, and sign up for a free account to stay apprised of new investment opportunities.
Income Funds for 2024
The Ascent Income Fund offers an income-focused vehicle predicated on private real estate debt. Given the rise in rates and relatively low supply of debt capital in private real estate capital markets, Ascent could provide a timely investment thesis.
Income Fund FAQs
What kind of returns can I expect from an income fund?
The returns you can expect from an income fund depend on the type of fund and its investment strategy. Generally, income funds aim to generate regular income streams for investors through rental income, interest payments, or dividends. Returns may also come from capital appreciation if the underlying real estate assets increase in value.Returns may be guaranteed, obligated per the covenants of the fund, or discretionary, depending on the structure. Generally speaking, debt funds will provide more stable and guaranteed income than funds focused on equity positions, though upside may be more limited.
What kind of liquidity do income funds offer?
The liquidity of income funds varies depending on the structure and underlying assets within the fund. Public REITs offer a high degree of liquidity, but may be more volatile. Private income funds are generally less liquid, but may offer varying degrees of redemption options. Be sure to understand the redemption options and consider relative to your liquidity requirements before investing.
What other types of real estate could complement my income fund investments?
If you are attracted to the stability and “low beta” of fund investing, core or core plus real estate may be a good fit for your portfolio as well. Private equity core plus real estate can offer some upside, alongside relative stability, to supplement cashflow from an income fund.
How do I access income funds?
Public REITs are other publicly traded income funds that may be available via roboadvisors or your preferred broker. EquityMultiple offers streamlined access to income funds and other income-focused, private-market real estate. Create a free account to learn more.
1 Source: Forbes, March 17, 2020: https://www.forbes.com/sites/forbesbusinesscouncil/2022/03/17/the-pros-and-cons-of-investing-in-different-types-of-real-estate/?sh=3dd556db45f4