Real estate funds are more suitable investments than real estate, but most prefer the worst; understand – 03/12/2023 – From Grain to Grain

Unlike investment in direct real estate, most real estate funds meet the two minimum criteria to be part of a portfolio in search of financial independence. I comment on the reasons and why most investors still prefer to buy a more expensive property with a worse return prospect.

In general, investment in FIIs has a number of advantages over direct real estate.

They have greater liquidity, diversification, exemption from income tax on dividends, lower transaction costs, greater return predictability, better return and risk ratio, among others.

In fact, anyone who understands the FII product hardly prefers investing in real estate directly.

The exception to this rule is the purchase of property at auction or by experienced professionals who end up finding inattentive sellers. But even in these cases, the risks involved or estimation errors are greater.

However, some particularities of FIIs are difficult for most to understand, making their investment neglected in relation to direct real estate.

The biggest disadvantage of FIIs for ordinary investors is the mark-to-market.

This pricing process does not come naturally to most people. Comparison with investment in real estate is difficult, as this same process does not occur in directly owned properties, given the way they are negotiated.

Individuals are used to having an idea of ​​the price of their property and since there is no auction market as a stock exchange for them, this price is stable in their minds. The idea of ​​price comes either from the acquisition cost or from some business in a similar undertaking.

Also, there is a certain price resistance in direct real estate that does not occur in FII investment. Both are financial investments. However, individuals treat them differently.

It is very difficult for an investor to accept selling a property below its purchase price or the last deal in a similar undertaking. This decision takes place even though the last negotiation took place in a completely different economic and interest scenario. Therefore, their prices seem resistant to declines. In fact, it’s not that they don’t fall, but investors stop selling with falling prices.

However, when they see the prices of an FII falling, investors get scared and soon want to sell.

That is, investors behave rationally when investing in real estate directly, but they do not have the same long-term investment perspective and rationality when investing in a FII.

The earnings receipt process is different between the two. Again, there is an experience in the real estate market that is not shared in FIIs.

When a rent is received, the property owner does not consider any effect on the price of the asset. However, there is a structural consequence that in FIIs it cannot escape.

I will explain in a separate article the asset price and dividend dynamics. At this point, I’ll restrict myself to reporting what happens.

When a dividend is paid, the price of an FII is reduced by this payment. For example, consider that an FII closes the day with a price of R$100. At the end of this trading session, a dividend of R$1.5 is declared. The next day, you have this FII before the opening with a price of R$98.5 and a provision for receipt of R$1.5. The sum of the dividend and the price equals the same amount of money you had the day before.

This dynamic, combined with an unfavorable situation for real estate investment, confuses the investor.

To make matters worse, FIIs have an additional complication.

Not all FIIs are the same. Initially, we can separate them into two basic types: paper FIIs and brick FIIs. There are additional segregations, but they turn out to be variations of these two types. These two types can be further subdivided into more classes.

Although this is a positive feature for FIIs, its complexity makes the investment more difficult to understand. But this does not mean that applying directly to real estate is much easier.

Wrongly, most individuals consider real estate as a simple and uniform investment. Almost like a savings account where it doesn’t matter which bank you apply to, you’ll earn the same.

In the next chapters, I explain the differences between the types of FIIs, which ones are best in each scenario and how to think about a portfolio.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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Book: The Journey to Financial Independence

summary

Introduction
Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence

Part 1 Construction of the plan
Chapter 1 The first step in building the blueprint for financial independence
Chapter 2 How do you define the rate of return in your plan for independence?
Chapter 3 Find out what equity you need to achieve your financial independence
Chapter 4 On your journey to independence, don’t overlook the importance of this factor
Chapter 5 Understand the two ways I applied to increase my saving capacity
Chapter 6 If You Double This Factor, Your Equity Can Multiply Much More
Chapter 7 Connecting the dots to build your plan

Part 2 Assembling the portfolio to lead you to financial independence
Chapter 8 Before making any investment, define these two factors
Fixed Income
Chapter 9 You should not build an income portfolio if you want to reach equity to live on income
Chapter 10 Avoid these two common fixed income investor mistakes
Chapter 11 In fixed income, does it pay to invest in private credit in relation to public credit?
Chapter 12 Discover how to win the private fixed income premium, but with low risk
Chapter 13 This is the simplest way to plan your financial independence with fixed income
Chapter 14 With our interest rates, find out if it pays to invest in dollars
Variable income
Chapter 15 Taking a risk can accelerate your journey to financial independence
Chapter 16 What is multimarket funds and how did they come about?
Chapter 17 Understand how to select hedge funds
Chapter 18 Is Real Estate an Appropriate Investment for Achieving Financial Independence?
Chapter 19 Real estate funds are better investments than real estate, but most prefer the worst; understand
…
Chapter 24 Shares
Chapter 25 Alternative Investments
Chapter 26 When should I trade a risky investment that is not performing?
Investment funds and Private Pension

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