Paper and Brick REITs: Understand Their Differences and Income

Introduction

Investing in Real Estate Investment Funds (FIIs) has become a quite popular option among investors seeking diversification and passive income. However, within this universe, there are different types of FIIs, with the most well-known being paper FIIs and brick FIIs. Let's explore together the main differences between them and how each can impact your income.

What are paper REITs?

Paper REITs focus on financial assets related to the real estate market. Here are some key characteristics:

• Receivables: They mainly operate in the purchase of real estate receivables, such as real estate credit letters (LCIs) and real estate receivables certificates (CRIs).
• Fixed income: The income generated by these funds is, for the most part, predictable, as it comes from contracts with well-defined maturities.
• Lower volatility: In general, the fluctuation of the share value tends to be less intense compared to brick-and-mortar REITs, due to the nature of the assets that make up the portfolio.

A simple example: imagine a fund that holds various CRIs linked to rental contracts for commercial properties. When tenants pay their rent, this fund receives the income, which is passed on to the shareholders in the form of dividends.

What are brick-and-mortar REITs?

On the other hand, brick-and-mortar REITs are those that invest directly in physical properties. Here are some characteristics:

• Real estate properties: These funds buy, manage, and in some cases, develop properties such as shopping malls, office buildings, and logistics warehouses.
• Equity income: Revenue comes from the rent of these properties, which can vary according to the market, potentially resulting in an increase or decrease in the value of the dividends paid.
• Asset appreciation: In addition to the income derived from rents, there is also the possibility of appreciation of the property itself over time, which can benefit the investor if the fund decides to sell any asset.

Imagine a fund that owns a shopping center. The rents paid by the stores vary from month to month, depending on the number of customers and the sales made, which directly impacts the income for the shareholders.

Comparing Income and Risks

The big difference between these two types of REITs is the way their income is generated and the volatility that each can offer. Here are some comparisons that may help:

• Expected income: In paper REITs, the income is, in essence, more predictable. In brick-and-mortar REITs, rents can fluctuate, leading to variable income.
• Vacancy risk: In a brick-and-mortar REIT, if a property becomes vacant, it can negatively impact the distributed dividends. In the case of paper REITs, vacancy is not an issue, as they are receivables from established contracts.
• Diversification: Many paper REITs can be more easily diversified, as they can have a variety of receivables from different issuers, while brick-and-mortar REITs are limited by the number of properties and tenants.

Which one to choose for my portfolio?

Now, you may be wondering which of these types of REITs is more suitable for your portfolio. Here are some points to consider:

1. Financial goals: If you're seeking a more stable and predictable income, paper REITs might be a good choice. For those willing to take more risk in exchange for the potential for greater long-term gains, brick REITs could be interesting.
2. Risk tolerance: Assess your willingness to cope with potential declines in dividends due to vacancies or market instability.
3. Investment horizon: Consider the duration you intend to keep your money invested. Brick REITs might perform better in the long run, while paper REITs may be more suitable for short to medium-term goals.

Conclusion

Understanding the differences between paper and brick REITs can help you make more informed decisions on your investment journey. Instead of choosing just one type, it might be wise to think about a combination that meets your income goals and your risk appetite. This way, you can potentially balance your portfolio and take advantage of what each type of fund has to offer. Study the available funds and consider your investment strategy to find the best approach for you.