In the world of real estate investing, the type of institutional investor that will most likely pique your interest will be a real estate investment trust (REIT). However, before you get started looking into individual REITs, it's important to know more about institutional investors and how they work. Here is a guide to these corporate entities. Read it over so you have a better idea of what to expect when you invest with one of these companies.
What is an institutional investor?
At its core, an institutional investor is a legal entity that invests in various securities markets on behalf of its clients or shareholders. In general, there are a few different forms institutional investors can take, including:
- Credit unions
- Hedge funds
- Mutual funds
- Pension funds
- Venture capital funds
An institutional investor is different from an accredited investor, which is an individual with a high net worth and/or certain professional designations that give them a greater-than-usual amount of investment management experience. In contrast, institutional investors are corporate entities that use managers to invest on behalf of their institutional shareholders.
What's the difference between an individual investor and an institutional investor?
To start, institutional investing is largely seen as a major force behind supply and demand across multiple markets. Put simply, while an individual investor might buy a few shares at a time, institutional investors tend to be more focused on making bulk purchases at a wholesale price, which can contribute to more market volatility compared to direct investment.
In addition, while individual investors can invest in any asset class listed on an exchange, institutional investors have access to those investment opportunities and more. These large financial institutions often have the capital and necessary licensing to access alternative investments, such as private equity funds or sovereign wealth funds.
Finally, institutional investing is often subject to less regulatory oversight than individual investors. This is because the fund managers who handle asset allocation for these companies are often seen as more experienced than the average individual investor.
What are the pros and cons of investing with institutional investors?
Before you can decide whether investing with an institutional investor is right for you, it's important to look at the pros and cons of investing with a corporate entity. To make the decision easier, we've listed the benefits and disadvantages for your consideration below.
The biggest benefit of including institutional investors in your investment strategy is that it affords you the opportunity to generate passive income. Since the day-to-day tasks essential for asset allocation are handled by fund managers, their institutional shareholders can sit back and simply wait to collect returns.
That said, if you're looking to take a more active role in making investment decisions, institutional investors often keep an investment advisor or two on hand who can provide their shareholders with specific investment advice.
However, the biggest downside of investing with an institutional investor is that their assistance doesn't come free. If you decide to go this route, you'll need to ask questions about the various fees they have in place. With that in mind, regardless of the specific fee schedule you may encounter, you should anticipate a portion of your returns will go to paying for their services.
The bottom line
In the end, institutional investment can be a great way to generate passive income and dip your toe into the world of real estate investing. However, before you invest your money with any particular managed fund, do your research. Feel free to use this guide as a first step in the process. Armed with this knowledge, you should have a much better idea of whether institutional investing is a good fit for you.