Interval Funds vs REITs: Structures, Risks, and Investment Takeaways

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Key Takeaways

• Interval funds offer periodic liquidity via scheduled repurchase offers and are appropriate for investors who can withstand restricted capital access and aim for exposure to illiquid or alternative real estate assets. Check repurchase frequency and redemption limits before investing.
• REITs provide more daily liquidity when publicly traded and consistent income through mandated dividend payments, benefiting investors seeking simpler trading and regular cash flow.
• Interval funds rely on fair-value appraisals that can trail market prices and introduce stale pricing risk. Publicly traded REITs provide real-time market pricing. Check valuation methods and reporting frequency to see through pricing.
• Management styles vary significantly with interval funds generally employing active, discretionary strategies in alternative assets, and most REITs pursuing sector-specific or index-based strategies. Fit your preferred degree of manager discretion and diversification to your objectives.
• Cost and tax treatments are significantly different. Interval funds and nontraded REITs can have higher fees and complicated tax items, whereas public REIT dividends are mostly taxed as ordinary income. Contrast after-tax returns and utilize tax-advantaged accounts if possible.
• Align choice with personal objectives, matching liquidity needs, investment horizon, risk tolerance, and portfolio diversification goals to the vehicle’s structure. Review fund documents and professionals to verify.

Interval funds vs REITs are two ways to invest in real estate and income assets.

Interval funds provide occasional liquidity and professionally managed diversification.

REITs are exchange-traded or private and concentrate on property income and appreciation.

Both have fee variations, tax treatments and liquidity characteristics that investors care about.

The feature article contrasts structure, risk, returns and when each can fit different objectives.

Investment Structures

Interval funds and REITs structure capital, assets, and investor interests in distinct legal and operational ways. Both seek real estate exposure, but their methods of accepting funds, acquiring property, reporting value, and providing liquidity differ. The following subsections explain how each of these structures works, the rules that govern them, typical assets, and what they require from their investors.

Interval Funds

Interval funds are closed-end funds providing limited, periodic liquidity in the form of repurchase offers at specified intervals. Shares are typically sold daily at the prevailing NAV, but there are repurchase windows every 3, 6, or 12 months. The fund will repurchase only a limited portion of outstanding shares, typically between 5% and 25%.

Redemptions can be restricted further for disability or death. Liquidity is limited and optional. Repurchase offers are the way to give cash to shareholders, not ongoing trading on an exchange. This structure allows managers to maintain illiquid positions and yet not violate mutual fund rules that cap illiquid holdings to approximately 15% of assets.

Interval funds have the ability to invest in private equity real estate, direct property interests, loans and other alternative assets that typically aren’t found in mutual funds. A lot of the alternatives they deploy are available only to accredited investors—those with net worth north of USD 1 million or annual income north of USD 200,000—via private placements that allow for more complex securities while remaining private.

Worth has to be fair and transparent. Interval funds generate NAV estimates representing illiquid holdings as part of their valuation processes, and trustees or boards usually review valuation policies. Management and administrative fees may be high. Management fees can range from 1.5% to 2.45% with administrative expenses up to approximately 3%, and repurchase or redemption fees are sometimes around 2% of proceeds.

REITs

REITs are firms that own, operate, or finance income-generating real estate. They provide income on a regular basis, passing through rental or interest income to shareholders. REITs must meet various tests regarding the types of their assets and income, and must distribute at least 90% of taxable income as dividends to shareholders so that they are taxed as pass-through entities.

We have equity REITs that own properties, mortgage REITs that hold mortgages or MBS, and hybrid REITs. Each has distinct risk-return profiles. Equity REITs tie to property operations, mortgage REITs connect to interest-rate spreads, and hybrids mix both. Many REITs trade on public exchanges, so they have daily liquidity and market pricing.

Nontraded or private REITs exist and act more like interval funds or DPPs, often with multi-year life spans and limited secondary market liquidity. Types of underlying assets commonly held include:

• Commercial office and retail properties
• Industrial and logistics warehouses
• Residential apartments and multifamily buildings
• Mortgages and mortgage-backed securities
• Specialized assets: healthcare, data centers, hotels, and storage

Minimum investments and eligibility vary. Publicly traded REITs have no minimum beyond a share purchase. Nontraded REITs and certain interval funds might establish increased minimums and seek accredited investors.

The Critical Differences

Interval funds and REITs have a real estate focus in common, although they differ notably in structure, liquidity, valuation, management, diversification, and transparency. Following are numbered key differences, a comparison chart, and deep-dives that illustrate how they impact portfolio construction and investor fit.

1. Setup, marketability, strategy.
2. Interval funds are closed-end vehicles that invest primarily in private real estate, such as through positions in underlying private REITs or private funds. They provide periodic repurchase offers, typically on a quarterly basis.
3. Publicly traded REITs are exchange-listed equity securities that offer daily liquidity and price discovery. Nontraded and private REITs are more like interval funds with periodic redemptions.
4. Interval funds focus on active portfolio management and widespread access to alternative assets. Numerous public REITs pursue index-like, sector-specific tactics.
5. This structure directly influences NAV behavior, liquidity risk, and the comparability of performance reporting.
6. Comparison table: redemption policies, asset types, investor access.

3. Effect on diversification and risk.
4. Interval funds can access illiquidity outside traditional private risk-return exposures, such as secondary interests, niche lending, and royalties.
5. Public REITs provide sector-specific diversification within listed real estate—office, retail, industrial, self-storage—and enable rebalancing through liquid markets.
6. The lack of liquidity in interval and private REITs means investors can’t sell their investment when the market is going down, which limits forced selling and limits tactical moves.
7. Public REITs have shown material volatility. Major indices recorded 11 drawdowns of 10% or more from 2000 to 2022, which affects short-term portfolio risk.

1. Liquidity

They provide predictable, periodic liquidity via scheduled repurchase offers, generally quarterly, trading off steady access with market timing constraints. Public REITs offer daily liquidity, meaning investors can purchase or liquidate shares on any trading day.

Interval funds’ limited liquidity can limit flexibility when there is a sudden market drop. You can’t escape quickly, and neither can nontraded and private REITs. Align your own liquidity requirements with each vehicle’s redemption rhythm.

2. Valuation

Interval funds use fair-value estimates and third-party appraisals for private holdings. Valuations are not daily and can lag market moves. Public REITs have market determined prices with current price discovery.

Interval funds’ stale pricing can disguise near-term losses or gains, thereby changing reported performance. Valuation assumptions therefore inform NAV and investor decisions.

3. Management

Interval funds frequently employ active strategies and manager discretion when allocating among private REITs and sectors. Managers may seek out niche growth segments.

Most public REITs are passive or index-based rules, but some are active. Management style drives costs, turnover, and returns.

4. Diversification

Interval funds can diversify across private real estate, debt, and alternative sectors, at times with high weights in growth segments. REITs diversify exposure among established property categories.

Whoa — a concise piece of advice, for a change!

5. Transparency

Interval funds do provide NAVs and annual reports, but reporting is less frequent than daily public REIT disclosures. Nontraded vehicles can report even less.

Read prospectuses and annual reports to get a sense of transparency.

Risk Analysis

Interval funds and REITs both subject investors to overlapping and unique risks associated with real estate markets, liquidity, valuation approaches, fees, and governance. Here’s a narrowed lens on the key risk buckets and how they manifest differently for interval funds as opposed to REITs, with actionable items investors should observe in fund materials and public filings.

Stale Pricing

Stale pricing is the delay between when underlying assets are repriced and the market price. Interval funds typically contain private or thinly traded properties, so their valuations might be based on appraisals or models instead of daily market marks. This can cause NAVs that don’t capture sudden price moves.

When NAVs lag market conditions, redemptions can be made based on stale values. If a lot of investors redeem after prices drop, then those who remain could incur losses that the early redeemers dodged. That’s wealth transference risk.

See how frequently the fund refreshes valuations, whether it engages external appraisers, and the approaches for estimating between-appraisal values.

Practical step: Check the fund prospectus for valuation frequency, appraisal policies, and any manager discretion clauses that affect reported NAV.

Market Volatility

Interval funds have thinner liquidity buffers and can hold leverage or concentrated real estate types, which can protect but risk investors. Short redemption windows amortize price swings by averting fire sales, but they imply investors bear the entire market move until the subsequent liquidity window.

Exchange-traded REITs trade daily and reflect real-time investor sentiment, so they exhibit immediate price volatility. This opens the door to rapid ingress and egress but intensifies short-term gyrations detached from asset-level cash flow.

Real estate cycles impact rents, occupancy, and cap rates. A downturn can depress income and valuation for both vehicles. Interval funds may report slower loss recognition while traded REITs price them immediately.

Align your holding period and psychological tolerance with the product’s volatility profile.

Redemption Limits

Interval funds, which typically cap redemptions at a percentage of NAV each quarter, limit access to capital when liquidity is tight. Nontraded REITs might employ similar quarterly tenders or periodic offers, resulting in similar limitations.

Big redemption requests can strain an illiquid fund, compelling asset sales at fire sale prices or freezing redemptions, damaging returns and investor access. Fee structures and manager experience count here too.

High fees diminish net returns, and inexperienced sponsors amplify operational risk. Regulatory changes and tax rules can change distributions and liquidity options as well.

Timing: Organize your risk horizon around probable hold ups and scrutinize tender conditions. Consider stress scenarios such as prolonged market downturns, sudden policy shifts, or sponsor failure.

Cost and Taxation

Interval funds and REITs differ materially on costs and tax treatment, and those differences can shift net returns after fees and taxes. Here’s a concise comparison of typical fees below, then some discussion of fee structure and taxation to assist investors in comparing after-tax results and liquidity tradeoffs.

| Administrative expenses | Up to 3% may be included in total expense | Usually low | Annual fee equivalents | frequently near or above 4% pre loads | REIT mutual funds/ETFs often less than 1% | | Redemption fee | Up to 2% of proceeds during periodic liquidity windows | Typically none for ETFs; selling cost via spread | Sales charges or load | Can be as high as 6% front-end | Uncommon for ETFs; some CEFs might have loads | Minimum investment | $10,000 to $30,000 | Low for ETFs; single share |

Fee Structures

Usual interval fund fees are management fees (1.5%–2.45%), administrative expenses (up to 3%), custody and audit costs, sometimes performance fees. Combined annual costs can run close to or north of 4% even prior to any sales loads.

Nontraded REITs and certain interval funds can charge upfront sales loads of up to 6 percent, plus ongoing fees, which drag down capital to invest and dampen compounding.

Publicly-traded REITs and REIT ETFs typically report significantly lower expense ratios. Many REIT mutual funds and ETFs have expense ratios below 1%, mitigating the drag on returns.

Check the fund prospectus for fee tables, subadvisory fees and how performance fees are computed. Seek out administrative line items, acquisition fees and possible redemption penalties. These specifics frequently dictate if a greater gross return translates into an after-fee return that is competitive.

Tax Implications

REIT dividends are typically taxed as ordinary income, usually at the investor’s marginal rate, which can significantly reduce after-tax yield for taxable accounts. Most REIT payments aren’t taxed at lower rates like qualified dividends.

Interval funds can produce a mix: capital gains distributions, interest income, and return of capital. Capital gains can be taxed at preferential long-term rates if held for more than a year, whereas interest income is subject to ordinary rates. Return of capital reduces your cost basis and you won’t owe tax until you sell.

Timing matters. Large capital gains distributions can create a tax bill even when liquidity is limited.

Interval funds that elect RIC status must meet RIC distribution and asset tests. RICs must distribute 90% of taxable income annually and pass the 50% and 25% quarterly diversification and look-through rules. This impacts what gets paid out and when.

Use tax-advantaged accounts like IRAs to shelter ordinary-income-heavy distributions. Think about after-tax return scenarios when comparing vehicles, run projections with your marginal tax rate, and factor in potential state and international tax withholding.

Economic Sensitivity

Economic sensitivity refers to the degree to which changes in the macroeconomy impact asset values, income streams, and investor returns. For real estate vehicles, interest rates, inflation, market cycles, and local economic conditions can all shape valuations, cap rates, and timing of cash flows. We below compare how interval funds and REITs react to those forces and what to consider when deciding allocations.

Interest Rates

Higher interest rates increase cap rates and reduce valuations and that tends to drag down REIT valuations. Listed REITs have direct competition from higher-yielding fixed incomes. Investors can outflow from equities into bonds when yields rise, putting pressure on REIT share prices.

Mortgage REITs are especially sensitive. Their net interest margin, which is the spread between borrowing costs and loan yields, shrinks when short-term funding costs rise, hurting earnings quickly.

Interval funds that own variable-rate loans or floating-rate debt may be less sensitive to rate hikes as coupon income resets higher with rates. That can blunt near-term NAV declines, but it means income may rise while capital gains stay muffled.

Other interval funds hold significant percentages in illiquid assets priced by third-party appraisers. Their mark-to-market lag may display an apparently stable NAV even as underlying cap rates shift, which can obscure impending downside. Higher reported NAVs today may appear appealing in a stressed market, but that stability can be paid for with muted future returns if valuations need to subsequently reset.

When selecting vehicles, review the interest-rate mix: fixed versus floating-rate debt, leverage levels, and duration of assets and liabilities. Verify if valuations are based on appraisals or market values. Recent commentary observes that it is close to impossible to compare performance across structures without normalizing for these differences, since economic sensitivity and valuation methods vary significantly.

Market Cycles

Various property sectors are impacted by the cycle in a diverse manner. Industrial and logistics tend to be resilient in expansions and retail and office may lag in downturns. Sector allocation within REIT portfolios matters. A diversified REIT or interval fund with exposure to resilient sectors will usually fare better through a downturn than one concentrated in cyclical assets.

Interval funds’ illiquidity can postpone recoveries or losses from being recognized. Appraised values may lag market turns, keeping NAVs steady in the near term. That lag can help investors avoid panic selling, but it can mask underperformance until appraisals catch up.

Look at historical performance numbers by sector and by vehicle type to help gauge economic sensitivity. Look at several cycles, not just the most recent years.

Factor in local economies. While investments in specifically distressed areas, like Qualified Opportunity Zones, are tax-incented, they’re more sensitive to local unemployment, tenant demand, and public policy.

Watch your macro indicators, such as GDP growth, unemployment, inflation, and central bank policy, to time allocation shifts and set realistic return expectations.

Investor Suitability

Investor suitability here refers to who should think about interval funds versus REITs and why each suits different objectives, risk tolerances, and time horizons. Each vehicle offers real estate and alternative exposure but addresses distinct needs around liquidity, income, and complexity.

Interval funds, for example, tend to be suitable for investors looking for access to alternatives with minimums often much lower than many private offerings. These funds may take non-accredited investors when registered under the Securities Act of 1933, but some are restricted to accredited buyers. Interval funds can have up to 95% illiquid holdings and leverage capped at 33% of gross asset value.

That structure can produce more consistent income and possibly less volatility over extended periods, but it generates significant liquidity risk. Investors must be able to stomach limited share repurchase windows and the possibility that dividends or buybacks are lowered if assets cannot be quickly sold. Great users are those with a longer horizon, seeking consistent yield, and have expertise or counsel in alternative strategies.

For instance, a mid-career professional looking to diversify away from public equities and able to lock capital for a few years might find an interval fund handy. Sophistication matters. The complexity of holdings and fee structures means these funds are better for investors who can read fund documents or work with an adviser.

REITs fit investors who require greater liquidity and more frequent income. Listed REITs are traded on exchanges and investors can purchase or liquidate shares on a daily basis, which makes them convenient for portfolio rebalancing or shorter time horizons. Public REITs typically distribute regular dividends from rental income or operating profits, appealing to income-oriented investors.

They have more transparent pricing and simpler structures than many interval funds and are generally easier to value. For example, a retiree who needs monthly cash flow and wants the ability to access principal on short notice would favor REITs. Listed REITs may exhibit greater short-term volatility associated with equity markets and interest rate moves, so risk tolerance should account for that.

Matching goals, risk tolerance and horizon is crucial. For long-term yield and less correlation to public markets, if the investor can tolerate repurchase restrictions and complicated terms, interval funds have a place. If the requirement is liquidity, transparent pricing and regular cash flow distributions with less structural complexity, REITs fit better.

Use either or both within broader financial planning and diversification. Small allocations to interval funds for alternative exposure, combined with liquid REIT positions for tradability and income, can balance access, return, and risk.

Conclusion

Interval funds vs reits Interval funds allow investors to own a share of a diversified property portfolio and redeem on predetermined dates. REITs trade on markets and allow investors to sell any day. Interval funds typically own illiquid assets and seek stable income. REITs offer price transparency and short-term liquidity but can fluctuate with market sentiment.

For a patient investor seeking less volatility and private transactions, an interval fund can be appropriate. For a trader or someone who prefers daily liquidity and transparent pricing, a REIT is more suitable. Contrast fees, payout regulations, and tax treatment. Look at recent performance and read fund documents. Choose based on horizon, liquidity requirements, and risk tolerance.

Consider consulting a licensed advisor to align a selection with your strategy.

Frequently Asked Questions

What is the main difference between interval funds and REITs?

Interval funds are closed-end funds that periodically offer to repurchase shares. REITs are corporations that own or finance income-producing real estate. Interval funds can include REIT holdings. REITs directly concentrate on property income and appreciation.

Which is more liquid: interval funds or REITs?

Publicly traded REITs tend to be more liquid, trading daily. Interval funds have limited liquidity and repurchase shares only at intervals, typically quarterly. This minimizes short-term liquidity.

How do risks differ between interval funds and REITs?

Interval funds may own different types of assets, which reduces single-asset risk but introduces manager and valuation risk. REITs encounter property, tenant, and market-cycle risks. Both are sensitive to interest rates and the economy.

How do costs and fees compare?

Interval funds tend to charge higher management and administrative fees in part because they’re actively managed and their valuations are more complicated. Public REITs generally have lower ongoing expense ratios, but transaction fees are incurred when you buy or sell shares.

What are the tax differences I should know?

REITs generally distribute a significant portion of income as dividends, which are frequently taxed as ordinary income unless contained within tax-favored accounts. The interval fund taxes are based on its underlying holdings and distributions. Capital gains, interest, or dividends are taxed differently.

Which is better for income-focused investors?

All can offer income. REITs typically distribute dividends on a consistent basis from rental income. Interval funds can provide stable income through diversified income-generating assets, but are less liquid. Decide based on income requirements and acceptance of illiquid redemption.

Who is a suitable investor for each structure?

Interval funds are appropriate for investors who want exposure to illiquid or specialized assets and who are willing to embrace the associated limited liquidity. REITs suit investors seeking liquid exposure to real estate income and price transparency. Consider your time horizon, your risk tolerance, and your tax situation.