Investors have numerous options for owning real estate. Direct investment is one, and various forms of shared ownership offer others. In addition, real estate funds may be public or private and can be formed as corporate entities or investment trusts. In either example, the fund is often created for an indeterminate period but may have a specific lifespan in some cases.
What Is a Closed-end Fund?
In the example of a private real estate investment fund designed for a limited lifespan, the goal is likely to be a return based on asset sales rather than rental income. Predictably, the fund would seek to buy assets and improve them before disposing of them for a profit. The improvements could include physical, administrative, and financial.
Suppose a closed-end fund acquired an apartment complex in disrepair. The fund could improve the market value in several ways:
- Improve the property itself by upgrading the units, adding amenities, and making needed repairs.
- Improve the financial outlook by refinancing the mortgage or other attractive maneuvers.
- Improve the property's desirability by enhancing the administration with more professional management, including an online payment portal, concierge service for the residents, and more responsive attention to requests.
Those changes could potentially raise the property's value, allowing the fund to sell it and return the proceeds to the investors. However, investors in closed-end real estate funds should be aware of the risks involved since the outcome isn't guaranteed, and the initial cash flow may be negative. The success or failure of the project may rely not only on general economic conditions but also on the successful execution of the fund manager's strategy.
A closed-end fund is not likely to be liquid during the stated life, and even if the goals are achieved, and the fund is performing at better-than-anticipated success indicators, it will end when the time is reached.
Are There Closed-end REITS?
A REIT (Real Estate Investment Trust) can also have a limited lifespan, and in that case, would be referred to as a finite life REIT, but like closed-end real estate funds, these are not common. REITs can be privately or publicly traded and are typically highly liquid since investors can buy and sell them on public exchanges or robust private markets. With a typical open-ended REIT, the trustee is responsible for buying and selling decisions, and 90% of taxable income must be distributed to the shareholders. If a REIT has a finite life, the intention would likely be to pursue capital gains in addition to the income from rent. Those gains would also need to be distributed to the shareholders on a defined schedule.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.
FAQs
Closed-End Fund
What are the basics of closed-end funds? ›
A closed-end fund raises cash for investment by selling a fixed number of shares during an initial public offering (IPO), and the manager invests the cash in accordance with the fund's investment objectives and policies.
What is the downside to closed-end funds? ›
Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee a fund's investment objective will be achieved.
What is a closed-end real estate fund? ›
Closed-end funds use pooled money to invest in real estate. They have a predetermined life that is set by the manager at the fund's beginning during the capital raise period.
What is the truth about closed-end funds? ›
A closed-end fund is a type of mutual fund that issues a fixed number of shares through one initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund.
Can you make money with closed-end funds? ›
Depending on a closed-end fund's underlying holdings, its distributions can include interest income, dividends, capital gains or a combination of these types of payments. In some cases, distributions also include a return of principal, sometimes referred to as a return of capital.
Why would anybody want to invest in a closed-end fund? ›
A closed-end fund manager does not have to hold excess cash to meet redemptions. Because there is no need to raise cash quickly to meet unexpected redemptions, the capital is considered to be more stable than in open-end funds. It is a stable capital base.
What are the highest paying closed-end funds? ›
Summary
| Name | Symbol | Weighting |
|---|
| The New America High Income Fund, Inc. | HYB | 5.97% |
| PGIM High Yield Bond Fund, Inc. | ISD | 5.95% |
| PGIM Global High Yield Fund Inc. | GHY | 5.93% |
| BlackRock Corporate High Yield Fund, Inc. | HYT | 5.75% |
13 more rowsKey Takeaways. Closed-end funds operate more like ETFs, in that they trade throughout the day on a stock exchange. Closed-end funds have the ability to use leverage, which can lead to greater risk but also greater rewards.
What happens when you sell a closed-end fund? ›
Similar to a stock, when an investor wishes to purchase or sell shares of a closed-end fund, another investor must be located who wishes to sell or buy these shares. A closed-end fund issues a fixed number of shares at its initial public offering that generally remains constant.
We only recommend purchasing a closed-end fund when the market price is at a discount to net asset value. In general, most closed-end funds trade at a discount at any given time.
How long do closed-end funds last? ›
For many years, all closed-end funds (CEFs) were structured as perpetual funds, meaning they have no “maturity” or termination date.
What is the disadvantage of closed ended funds? ›
Cons of closed-end funds
A closed-end fund's liquidity depends on investor supply and demand, so it can be less liquid than an open-end fund. These funds are also subject to increased volatility because shares can trade above or below their NAV. Another potential drawback is that many closed-end funds use leverage.
What is the minimum investment for a closed-end fund? ›
No investment minimums Closed-end funds do not have minimum investment requirements, if purchased on the secondary market.
What are the fees for closed-end funds? ›
The fee is determined by the fund manager and generally varies between 0.05% to 5.00% of total sales during the IPO. The total amount of the Success Fee is shared by select members of the closed-end fund's selling syndicate.
What are some of the basic functions of close ended funds? ›
Closed ended funds calls for lumpsum investment and do not offer a withdrawal option until maturity. Thus, investors with an investible amount and an investment horizon in line with the maturity date of the fund scheme could opt for closed ended mutual funds.
What are examples of closed-end funds? ›
For example, a closed-end fund may invest in securities of very small companies, municipal bonds that are not widely traded, or securities traded in countries that do not have fully developed securities markets.
What is the term structure of a closed-end fund? ›
A term fund has a specified termination date at which time the fund's portfolio is liquidated. Investors who own shares when the fund terminates receive a cash payment equal to the NAV per share at that time. This NAV may be higher or lower than what the investor originally paid.
