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Real Estate Funds

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1. What is it?

Real estate funds, also formed as a condominium, invest their resources in housing and constructions projects and real estate assets of any kind (commercial, residential, etc). These funds acquire realty units and properties ready to be sold or under construction in order to rent or lease them, looking for generating an income and profits. Many funds become stakeholders at shopping malls, hospitals, airports, housing complexes, etc. The choice of properties is large.

Realty purchased should be split into a number of non-redeeming quotas. In other words, they are traded as closed funds, which can have a previously determined expiration date or not. Moreover, they need to distribute at least 95% of their profits. From the fund’s net assets, 75% must be invested in real estate units, with the balance being invested in fixed income assets or quotas from other real state funds. Investing in options or futures is forbidden.

Fund only starts operations once all quotas are sold. If any investor wants to leave or enter the fund, he can trade his quotas or stake at the stock exchange or OTC markets. Thus, there is no redemption for the quotas, just a secondary trading, as though it was a stock note. Remind that the person who owns quotas at funds is not the owner or co-owner for the real estate acquired.

The obvious advantage of real estate funds is to provide a cheap way to invest in properties. If any investor wants to invest in real estate alone, he  needs to buy the respective house or apartments, and then rent or lease them, or gain from the valuation of this property. However, he would have to shell out a large sum of money, often impossible for the small investor. In a real estate fund, one can make it with a small amount of money, as all investor altogether can easily purchase the realty.

Profits are monthly credited to the investor after taxes, emoluments and expenses. There is also those 5% to be deposited as contingency, with no losses to the taxes calculations, on top of the 20% of the income. There is no deadlines for a stay at a real estrate fund.

As any other investment, real estate funds are also exposed to risks. The bigger for this kind of fund is called ‘vacancy’. If a fund acquires a commercial building and the project proves to be a failure, the fund will not assure earnings from renting the units. The same happens when a realty loses value for any particular reason.

So, while investing, profitability might be an important aspects, but should not be the crucial aspect of any decision. One must analyze all properties owned by the fund, their vacancy rates, quality, status and future perspectives for the property and region where it is located, and then make a decision on investing or not.

To know more about real estate funds traded at the stock exchange, please click in the following link:

http://www.bmfbovespa.com.br/Fundos-Listados/FundosListados.aspx?Idioma=pt-br&tipoFundo=imobiliario


2. Taxation

Real estate funds based on rent and leasing contracts with individuals are free of taxes. However, if you make profits from selling quotas, income tax is due at a rate of 20%. So, if you purchased quotas on a fund, and after some time you can sell them with profits, then you need to pay taxes. On the other, for companies the income tax of 20% is valid for any operation with real estate funds.


3. Advantages

  • Tax-free for funds based on rents and leasing contracts with individuals;
  • Monthly profits;
  • Low initial investment;
  • Possibility of investing in really large properties, and a good way of diversifying assets;

4. Disadvantages

  • Real estate funds are not backed by the guaranty fund;
  • Administrator’s fees can compromise profits;
  • Vacancy risks;
  • Low liquidity – as you can only sell quotas in the secondary market, liquidity tends to be low. That can distort the value of the quotas. That means, if you want to get into a real estate fund, will have to buy shares from another investor, and he may want a higher price than it’s worth, and you will have few options if you really want to enter this particular fund, it can not be other vendors.

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