Real Estate Funds vs. Direct Real Estate Investing: Pros and Cons
August 3, 2023 Mark MacFarlane

Real Estate Funds vs. Direct Real Estate Investing: Pros and Cons

Posted in Home Rental, Investment Property, Real Estate

Real Estate Funds vs. Direct Real Estate Investing: Pros and Cons

Real Estate is Considered a Reliable Investment

Real estate is considered one of the most reliable investments today—and for a good reason. They tend to be stable, giving you a steady cash flow and good return on investments (ROI). And while people may associate real estate with solely buying and owning houses or buildings, also known as direct real estate investing, it has already grown from that.

In recent years, investments in real estate funds have emerged as a potential alternative to ownership of physical properties. It provides a new entry point for people who want to invest in real estate but don’t want to carry all the responsibilities of direct ownership. And in this blog, we’ll learn more about it and compare it to direct real estate investing by looking at their pros and cons. Let’s get you started!

Real Estate Funds

To better grasp the concept of real estate funds, you must first know how mutual funds work. For starters, a mutual fund is a pooled finance used for various kinds of investments, such as stocks, bonds, and money market instruments.

Real estate funds work the same, except that it’s limited to real estate. So, anything from commercial properties to agricultural land and residential complexes, the money is used for them. And just like any other mutual fund, the fund is managed by skilled professionals doing real estate fund administration services, also known as sponsors. They are the ones who carefully analyze how they can grow the capital. They decide whether to invest directly in real estate properties or indirectly through Real Estate Investment Trusts (REIT).

When it comes to returns, they will accumulate through the appreciation in the value of the underlying real estate portfolio. If the value of various real estate properties the fund is used for increases, you can expect significant returns—and vice versa.

Let’s take a closer look at real estate funds’ pros and cons to better understand how they work.


Diversification and Stability

When you invest in real estate funds, know that your investment will not be limited to one property only. It can spread across various types of real estate assets, such as residential, commercial, hospitality, and agricultural properties. This diversification makes for significant returns, especially if most of them become successful.

It’s also the same diversification that lowers the risks of losing all your money, making it a stable investment option. When one property loses its value, there are still some remaining that can help raise the capital of the fund.

Professional Management

Another good thing about real estate funds is that you can get no trouble sleeping because there’s a professional fund manager behind to do all the work for you. They’ll be the ones to handle the paperwork, think of your investment strategy, and do other things to raise your capital.

Inflation Protection

Consumer goods aren’t the only ones with rising prices during inflation—property values and rents also get affected. When the value of your assets increases, it also boosts the growth of your capital, which leads to greater returns.


Lack of Control

Given that real estate funds are managed by sponsors, you have no control over their investment strategies. This means that you may have limited access to some documents and important decisions that revolve around the fund.

Not Good for Short-Term Returns

Whether actively or passively managed, real estate funds typically do not generate short-term income because they tend to focus on long-term capital appreciation over that. So, if you’re the kind of investor who likes something fast, a real estate fund may not be the right choice for your investment.

Impact on Market Conditions

Real estate funds are largely affected by market and/or economic conditions. They fluctuate depending on the market demand in real estate. That is why you get to have significant returns in a good market state and losses in a sluggish scenario. Hence, if you’re a beginner to this, you must learn to understand the real estate market first.

Aerial of a suburban community

Direct Real Estate Investing

Unlike the real estate fund, direct real estate investing gives you full control of buying and managing your assets. This means that you’ll be the one deciding which property to buy and when to buy them, collecting rent, and making all decisions. In this setup, you’ll make money through appreciation, rental income, and earnings from any businesses that depend on real estate.

Let’s get a better overview of its benefits and risks.


Provides Complete Control

As mentioned, direct real estate investing allows you to make all the decisions yourself to make your investment work. From sourcing properties to buying and managing them, the choice is all yours. You can buy a residential house, a commercial building, or any property that you think can give you significant returns in the long run. One tip, though, always do your research and stay updated with the real estate trends to come up with an excellent investment strategy.

Steady Cash Flow

You probably get overwhelmed by the cost of mortgages, taxes, and other expenses by choosing this type of investment. But one way to solve that problem is by having your real estate property rented out. It will provide you with a consistent source of income to cover all the expenses you initially used to obtain the property. With the right market conditions and an eye for investment potential, direct real estate investing can be a great source of positive cash flow.


Similar to real estate funds, the value of properties in direct real estate investing also appreciates over time. This is because of the factors like market conditions, appreciation of comparable properties, and improvements or upgrades to the property. With all these elements going on the bright side, you can get significant gains.


Property Management Risks

Going through this path also means taking all the responsibilities to make your investment successful. This means that you’ll have to spend a significant amount of time and resources to increase the value of your assets. You’re the one responsible for finding and screening tenants, managing repairs and maintenance, and handling legal and regulatory issues. Moreover, you can be held liable if there are any accidents on the property.

Hence, it’s crucial to prepare yourself for whatever will happen if you choose to go down the path of direct real estate investing. If you’re not ready for all these responsibilities, you’ll probably face a lot of problems and overwhelming debts that can cause your downfall.

Financial Risk

Acquiring a physical property requires a large initial capital. This makes most direct real estate investors rely on mortgages, loans, and other types of financing. If ever the market condition worsens or you cannot find tenants, there’s a high chance you’ll be digging yourself into debt and financial ruin.


Another disadvantage of direct real estate investing is the lack of liquidity. If finding tenants is already difficult enough, try to sell the property in a short time. If you need urgent money, you’ll probably need to look for another source.

The Bottom Line

Both real estate funds and direct real estate investments have their good and bad sides. It’s at your discretion to weigh the pros and cons carefully. But whatever you choose, you should always assess first your needs and goals. These are important factors that will help you come up with more profitable investments.

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Real Estate Funds vs. Direct Real Estate Investing | Pros and Cons | OutFactors – Dallas Fort Worth, Texas