Investing in real estate: why real estate funds are not the best choice

Real estate funds are one of the best-known ways to invest in real estate without directly purchasing ownership of the properties. In this form of investment, investors are putting their capital into the hands of professional fund managers for a longer period of time, who then buy and manage real estate. This is a wide range of objects, such as office buildings,shopping malls or residential real estate. The goal is to generate profits through renting, selling or leasing, which will then be distributed to investors. However, the fund companies in particular benefit significantly from this business model, while there are numerous uncertainties for investors. Because of these risks, I would of this form of investmentbasically advise against.

The Risks of Closed Funds: Limited Access and High Risk

Closed real estate funds are burdened with several disadvantages. A key disadvantage is the commitment of capital: No investor can reclaim his money until the end of the term, even if the fund writes losses or changes in the personal financial situation. In this context, the term “closed” means that the fund does not have any flexibility in the capital deductionoffers. It is also unclear where the money invested will go in detail. Often the investment consists of only one property, which means a significant lump risk – if this property loses value or unexpected costs arise, this affects all investors at the same time. Since closed funds are not traded on the stock exchange, they are not subject to public supervision.The sales documents provided are often confusing, the actual costs are hardly transparent, and the commissions are usually very high. For this reason, closed real estate funds used to be included in the product ranges by structural distributors. However, due to the high risks and lack of flexibility, these funds are not very suitable for a stable pension schemebuild up.

Open real estate funds: regulated variant with significant restrictions

Open real estate funds exist exclusively in Germany and basically function on a similar principle to closed funds. The funds collect money from investors to invest in real estate. Unlike closed funds, open funds are listed on the stock exchange, which means stronger regulation and better transparency. Nevertheless, also pointthey have significant weaknesses. Initially, investors were able to return their shares to the fund company at any time, which meant great flexibility. However, after the financial crisis in 2008, in which many investors wanted to sell their shares, this possibility was severely restricted. Today, investors are only allowed to share their shares under certain conditions and usually with clearSell deductions on the stock exchange. In addition, the flexibility in capital commitment is significantly limited, because open-ended real estate funds must be held for at least two years. The costs are similar to those for closed funds, which reduces the return. Due to these restrictions, this form of investment is hardly suitable for long-term asset accumulation.

Why real estate funds are unsuitable for old-age provision

In summary, both closed and open real estate funds are associated with significant disadvantages. The lack of flexibility, high costs and the risk of lumps speak against an investment in these products when it comes to solid old-age provision or long-term asset accumulation. For investors looking for safe and transparent alternatives,Real estate funds therefore only partially recommended. It is advisable to inform yourself comprehensively before an investment and to consider other investment opportunities that involve less risks and greater flexibility.