REITs vs Real Estate Crowdfunding – Where Should You Invest?
The Real Estate market is one of the largest investment avenues that provides investors with a plethora of assets ranging from residential properties, senior living homes, co-living, real estate mutual funds, REITs and crowdfunding. Among these, REITs (Real Estate Investment Trusts) and Real Estate Crowdfunding are two popular real estate investment instruments today. Most investors these days are looking to invest in the realty market without the hassle of managing and incurring maintenance expenses on the property that they have invested in. Both these types of real estate investments are based on the concept where the assets are managed by someone else, but individuals may invest and reap benefits.
REITs and real estate crowdfunding are two somewhat different ways to invest in real estate, despite the fact that they both enable investors to put their money into commercial assets. So how do investors know which one is better for them?
Here is a REIT vs Real Estate Crowdfunding comparison that entails the basic concept of both these investment instruments and the pros and cons of each.
The term “real estate investment trust” or REITs refers to a company that owns and/or manages income-producing commercial real estate. REITs come in two types, equity, and mortgage. Equity REITs own a wide range of property types ranging from offices, shopping centers, hotels, apartments, hospitals, senior living homes, co-living, etc. Equity REITs derive most of their revenue through rent on those properties. Whereas, mortgage REITs may invest into both financial and residential properties and earn revenue from interest earned on their investments in mortgages or mortgage-backed securities. Moreover, REITs may be publicly traded or private companies.
When a person invests in a REIT they are buying a share of the business that owns and operates the rental property. So basically, investors invest in a company that invests in commercial real estate assets. REITs follow a set of well-defined rules and regulations. One among these rules is the 90% rule that makes it compulsory by law for REITs to return 90% of their earnings to the stakeholders in the form of dividends.
Many REITs, especially the publicly traded companies, unlike conventional real estate, are traded on a stock exchange. REITs are a popular way for you to invest your money if your goal is to earn a passive income because REITs stocks tend to pay a higher dividend than regular stocks.
- Greater Liquidity- One of the benefits of investing in REITs is that shares can be bought and sold easily online. This is especially true of publicly-traded REITs, which make up the vast majority of REITs on the market.
- Easily Accessible to Individuals- The majority of REITs are available for purchase in the same way as stocks are. This reduces the barriers to ownership and makes REIT shares more available to the general public; anybody who can purchase stocks can invest in a REIT.
- Less Exposure to Risk– A REIT with very small exposure is a good option for those looking to add real estate to their portfolio. Direct ownership, for example, poses considerably more risk than investing in a REIT. As a result, purchasing REIT shares is a great option for risk-averse investors.
- Experienced Management- The operations under REITs are managed by experienced professionals who have spent years in the real estate field. A credible management team puts the investor’s mind at ease as they do not have to worry about managing these deals personally.
- Lack of Transparency-One disadvantage of investing in REITs is that the individual investor has no control over how their money is invested. They have no idea when or where the REIT would put money into a house. Instead, the investor is relying on the REIT to make sound investment decisions that are consistent with the investment parameters.
- Investors Do Not Have Control Over Allocation of Funds– Unlike direct ownership of the commercial real estate, REIT investors have no discretion of how their money is spent. An investor, for example, has no say in any decisions regarding the property. REITs decide solely whether the property must be renovated, leased out, or sold.
- Influenced by Market Fluctuations– REIT shares fluctuate in value during the day, much like conventional stocks. Far more than the value of a single commercial property, REITs are subject to market fluctuations. Individual assets do not usually have a clear correlation with stock market success, but REITs do.
REAL ESTATE CROWDFUNDING
Real estate crowdfunding brings together a group of online investors to purchase a single property or a portfolio of properties. It helps individual investors to make a direct investment in a property without having to purchase or maintain it. Investors earn dividends from the money earned by the crowdfunding company by selling or leasing out the property. Assetmonk is an example of a website where the general public can invest in real estate ventures.
Your savings and profits are more visible because everything is done online. You don’t even have to buy or operate the property to benefit from it; the organization that operates the crowdfunding website does it for you.
These firms, unlike REIT businesses, are not publicly traded. This is why property price fluctuations are unusual in a crowdfunding real estate environment. Real estate crowdfunding investments are generally not easily liquefiable and investors have to usually wait till the end of the year to make the majority of their substantial profits. But as a long-term investment option, it certainly yields high returns.
- Transparency- Unlike buying shares in a REIT that invests in a variety of assets, when investing in real estate crowdfunding, an individual normally knows exactly what they are buying a share in – the actual property, its financials, the business plan for generating expected returns, and more.
- Offers Direct Ownership- Investing in real estate is a great way to diversify your portfolio. Crowdfunding is a fantastic way for people to get a piece of commercial real estate that they otherwise wouldn’t be able to afford. For example, crowdfunding can provide access to owning a piece of a downtown office building, which few individuals will be able to own outright due to scale, accessibility to certain opportunities, or other factors.
- Offers Direct Ownership- Offers High Returns- Real estate crowdfunding ventures are typically required to provide attractive returns in order to appeal to all. Some sponsors use crowdfunding to fill holes in their capital stack, which can result in large profits for those who invest in the platform.
- Not influenced by the Stock Market- Individual commercial properties’ output has no association with the stock market, unlike REIT securities, which are subject to frequent market fluctuations. During a recession, commercial assets tend to lag the economy and sometimes outperform other asset groups.
- Comparatively Less Liquid- Most crowdfunding deals enable investors to make a one-year or longer financial commitment. Some investment opportunities enable investors to commit to a three-, five-, or even ten-year time frame. As a result, real estate crowdfunding is necessarily less liquid than REIT investing. However, most crowdfunded deals have clauses that enable investors to exit early, even if doing so incurs a penalty or fee.
- Greater Risk Involved– Investors that participate in single ventures do not profit from diversification and may end up with large concentrations in single assets that are susceptible to real estate market cycles. Various threats may have a negative impact on the progress of individual projects. Business and construction risks, as well as underwriting and management risks, are examples. In such a case you could look for crowdfunding platforms that allow you to invest into a portfolio of assets to mitigate this high risk.
- Track Record of Sponsor- Since, any real estate company can venture into crowdfunding, it naturally gives birth to a certain level of doubt in the investor’s mind about the caliber of the managing team. Therefore, it is important to conduct due diligence on the sponsor and their expertise.
To Sum Up…
Real Estate Crowdfunding
No minimum investment
Requires a substantial initial investment
Offers a diverse portfolio
Only specific individual asset
Expertise of Management
Professionals with decades of experience are in charge of the management
Since any real estate company can launch a crowdfunding campaign, the management may not be of the highest calibre.
Since the assets are indirectly owned, there is less transparency
More transparent as investors have direct access to assets
While trying to decide which one to choose amongst REITs and Real Estate Crowdfunding, there really isn’t any right or wrong option. It depends on each individual investor’s risk capacity, budget, understanding of the tax implications on dividends earned, and tenure of the investment. For investors who are risk-averse REITs may be a better option that would allow them faster liquidity as compared to real estate crowdfunding. On the other hand, investors with a greater entrepreneurial mindset who are willing to take on certain risks and long-term financial goals could opt for real estate crowdfunding.
Do you want to make a real estate investment? Assetmonk is an online real estate crowdfunding website that allows you to invest in properties that are available in small ticket sizes. On our platform, we list highly curated properties in prime locations such as Hyderabad, Chennai, and Bengaluru. The assets are expected to yield a high IRR of up to 21%. To know more about the investment opportunities, click here!
REITs vs Real Estate Crowdfunding FAQ's:
There is no minimum investment requirement while investing in REITs. Investors can start with any amount and they can invest as little as the price of one share. There are no barriers to entry on publicly-traded REITs hence, investors can invest in them as they invest into stocks.
Firstly, real estate crowdfunding helps you diversify your portfolio. Through real estate crowdfunding, you can earn impressive dividends from your share of the commercial real estate property, without the hassle of managing and looking after the maintenance.
Real estate crowdfunding is regulated by a multitude of laws and regulations. A project sponsor must first decide the rules to crowdfund under—those that allow for general solicitation but require accredited investors, or those that allow non-accredited investors to participate. After this, a sponsor can choose to post their offer on a crowdfunding platform to gain visibility to investors from all over the world, or they can post directly to investors on their own website – or they can do both.
In either case, the transaction details would include general information about the deal, estimated returns, investment horizon, and a call to action encouraging people to invest right now. For an investor to invest, there are typically minimum investment thresholds that must be met. After becoming a co-owner of the asset, investors generate income in the form of dividends from rental income and asset appreciation.
REITs are assets that have a complete return. They typically pay high dividends and have a modest chance of long-term capital appreciation. REIT securities have long-term total returns that are equivalent to value stocks and higher than lower-risk bonds.