REITs and crowdfunding models are popular investment strategies taking over the world of real estate investment. Traditionally, if you want to invest in property, it means you need to buy a physical unit such as a single-family home or apartment, and then rent it out for passive income.
Traditional real estate investing is a hassle for first-time investors. The burdens of a landlord are often frustrating, and there’s always the risk of your tenant damaging your property.
Sure, you could hire a property manager, but that eats into your profits. With margins being so thin in the real estate investment market at the moment, hiring a property manager could mean the difference between a positive and negative monthly cash flow.
Fortunately, REITs and crowdfunding options changed the way investors view their real estate portfolios.
- So, what’s the difference between these two models, and which one should you add to your portfolio?
- Should you invest in a crowdfunding platform like Fundrise.com?
- Or is it a better investment option to go with a REIT?
With a real estate crowdfunding model, investors have direct access to investments in real estate. In contrast, a REIT gives the investor exposure to the property market, without owning any real estate directly.
Let’s unpack each of these models in more detail.
- 1 REITs Explained
- 2 Real Estate Crowdfunding Explained
- 3 How Do REITs Compare with Real Estate Crowdfunding?
- 4 The Types of Real Estate Crowdfunding Opportunities
- 5 Real Estate Crowdfunding into the Future
A Real Estate Investment Trust (REIT) is a corporate entity that manages a portfolio of income-earning, investment properties, such as commercial buildings, apartments, complexes, or hotels. The company owns the assets, classifying the investments as equity REITs, or eREITs.
REITs also invest in mortgages secured by these real estate assets, also known as MREITs. Some REITs will offer a combination of the two assets, forming a hybrid REIT. As an investor, you can buy into a REIT, and receive dividends on the total rental income produced by the corporation on these assets.
REITs are also either public or privately owned investments. Private REIT investments do not have to register with the Securities and Exchange Commission (SEC), as they raise capital from accredited investors.
Accredited investors are individuals with a total net worth exceeding $1-million, or with an annual income that exceeds $200,000. Private REITs are only available to accredited investors due to legislation passed at the end of the last financial crisis.
Trusts and other investment firms might also choose to add REITs to investment portfolios they manage. Therefore, retail investors can invest their money into these vehicles using outside firms that manage other investments, such as 401(k), IRAs, or mutual funds.
These publicly REITs have a listing on a stock exchange, whether it’s the NASDAQ or NYSE. At the moment, there are more than 800 private REITs, and more than 200 REITs publicly trading in United States stock markets, consisting of assets totaling more than $400-billion under management.
$400-billion might seem like a large amount of money, but it’s only a fraction of the $12-trillion real estate market. However, REITs are an attractive investment, and gives the average investor limited exposure to the real estate market, without the need to physically buy any property.
Real Estate Crowdfunding Explained
Real estate crowdfunding models are the latest addition to real estate investing. Through a real estate crowdfunding platform, both accredited and non-accredited investors now have the option to gain exposure to the trillion-dollar real estate market without taking on much risk.
You can use crowdfunding real estate platforms to start your property portfolio or to build on your existing portfolio of real estate assets. The model makes it easy to start investing in real estate, especially if you’re avoiding doing so due to the costs involved with buying and managing an investment property.
Crowdfunding models give any investor access to high-end real estate deals that were previously only available to accredited investors.
In a nutshell, crowdfunded real estate investments give private individuals a platform to raise capital for real estate investments and business ventures. The model does so by giving them access to a pool of investors from around the globe.
Sites like “GoFundMe” and “Kickstarter” were the original crowdfunding platforms allowing anyone to list their projects and get funding from the private capital markets. The success of these platforms led to the development of specialized real estate crowdfunding models utilizing the same crowdsourcing model for acquiring capital for projects.
In essence, real estate crowdfunding refers to a group or company or individuals pooling money together to invest in a real estate asset.
How real estate crowdfunding differs from the traditional models used on sites like GoFundMe, is that they offer investors the opportunity to complete their transactions online, or continue their exposure through taking on more risk in the hundreds of crowdfunded platforms available online.
It seems like there are endless real estate crowdfunding platforms available, with each of them focusing on a specific niche in the real estate market. Investors can browse through countless offerings online for pre-selected and pre-qualified deals where someone else has already done all of the due diligence on the deal.
All the investor needs to do is read through the report, check the IRR, and send money.
There are two methods of investing into crowdfunded real estate opportunities.
- Equity Investments – These investments allow investors to qualify for owning shares in income-producing property, such as a hotel or apartment building. The investor collects passive income from rental while they invest in the property, and they also receive dividends and appreciation when the property sells.
- Loans – This model is becoming increasingly popular in China and the United States. Crowdfunding loans for real estate investment allow the investors to collect monthly cash flow from interest accrued on loans to property investors that require capital to fund a project.
How Do REITs Compare with Real Estate Crowdfunding?
Surprisingly, REITs and real estate crowdfunding models have plenty of similarities. Both models offer investors diversification away from the traditional equity and bond markets, spreading the risk in investment portfolios.
The investor also gets value from the rental income produced by the assets in the portfolio, as well as capital appreciation as the value of the real estate assets rise over time.
Both options also rely on pooled money from investors, giving the group more buying power with their capital. As a result, investors can diversify into multiple properties, reducing the risk of losing capital should any individual investment default.
Both REITs and crowdfunding models also offer investors a hands-off investment approach. All the properties involved with the REIT or crowdfunding program have full management teams operating the real estate portfolio. Therefore, there’s no need to play landlord; all you do is sit back and collect checks.
The key difference between a crowdfunded model and a traditional REIT is that with the crowdfunded option, you’re directly investing in commercial and residential real estate opportunities, whereas, through a REIT, you’re investing in a corporation. Some REITs might have as much as 25% of its assets under management, locked up in investments other than real estate.
Therefore, choosing a crowdfunded platform, such as Fundrise or Roofstock, allows you to gain control of your investments by increasing the transparency in your investment decisions. You get the opportunity to personally vet each investment opportunity, whereas, with a REIT, you have to go along with the fund manager’s decisions.
Other notable benefits of utilizing crowdfunding platforms over REITs include the following.
Higher Returns Through More Leverage
SEC regulations state that REITs cannot use more than 50% leverage on assets under management. However, crowdfunded models that utilize direct investment take advantage of leverage levels of up to 80%. More leverage increases your returns because you can buy more real estate with your money. (Think more property for less equity.)
Most REIT investors tout the vehicle as a way to diversify their investment portfolio away from the stock market. However, recent research shows growth in REITs over the last 10-years is moving in lockstep with the growth of the market.
Therefore, investors don’t get any additional returns from investing in a REIT. Correlation coefficients are as high as 0.86 when comparing the performance of the stock market against REIT performance.
Therefore, most REIT investments are also subject to the same levels of volatility as stocks, which is what investors are trying to diversify away from by using a REIT strategy.
Over the same period, private real estate and the market have a correlation of 0.14, which is a low figure, and gives the investor less exposure to market volatility.
More Control and Transparency
When investing directly into a real estate asset. The process is transparent, and you know everything you need to about the deal before closing. Therefore, the investor has more control over their investment decision.
However, with a REIT, you’re buying into a corporation, not real estate directly. Therefore, you might not have any control over where the fund manager allocates your money. In some cases, you might not even know the types of properties the REIT is investing in either.
The Types of Real Estate Crowdfunding Opportunities
As mentioned, there are hundreds, if not thousands, of real estate crowdfunding opportunities available right now.
We took a look through plenty of them and came up with two options that we feel offer investors the best value for their investment dollars.
Fundrise – The eREIT of Choice for Savvy Real Estate Investors
Fundrise offers both accredited and non-accredited investors the opportunity to invest in real estate deals. It’s important to note that some of the opportunities available on Fundrise are only for accredited investors.
Fundrise offers investors the opportunity to invest in real estate deals using its “eDirect Technology.” The company’s founding members, Dan and Ben Miller, created the platform with the vision of offering both accredited and non-accredited investors the opportunity to invest in the real estate market.
Fundrise also boasts returns of up to 33% higher than other traditional REIT investments. The company gets its competitive advantage from other platforms by focusing on the following four pillars of its business model;
- Expert Management
With Fundrise, investors can tailor their portfolio to meet their individual investment goals. Using fundrise, you can gain access to the real estate market, and you know where every cent of your investment goes.
|Fundrise Real Estate Crowdfunding - Visit|
|Product Type||Real Estate eREITs and eFunds|
|Potential Return||Average return in 2018 was 9.11%|
|Fees||Around 1% (Asset Manage Fee 0.85% & Advisory Fee 0.15%)|
|Property Types||Commercial, Residential, Single Family|
Roofstock – For Single-Family Home Investors
Traditional real estate investing in single-family homes experienced a revolution with the launch of Roofstock. This company has over $-billion in transactions completed, and they exclusively invest in single-family homes.
Roofstock prides itself on being a crowdfunding platform built by real estate investors, for real estate investors. When you invest with Roofstock, you get analytics and research that helps you choose and evaluate independently-certified real estate deals.
Roofstock runs its marketplace as a transparent marketplace, increasing the ease of buying real estate anywhere in the United States. Potential investors can vet homes investment profile, as well as the cash flow potential of the property.
With Roofstock, you can focus on asset allocation, rather than the hassle of managing the property. It’s a true hands-off approach that acts more like a stock portfolio than a property portfolio. Roofstock hosts an entire team of property managers based all around the country, and they take care of the day-to-day management of the property, so you don’t have to worry.
|Roofstock Rental Property Investing - Visit|
|Product Type||Equity, Direct Ownership|
|Potential Return||Varies by Property|
|Fees||0.50% setup fee|
|Min Investment||From $500 with Roofstock One|
|Property Types||Single Family|
Real Estate Crowdfunding into the Future
We expect crowdfunding real estate models to continue its domination of the retail real investment market. With options available to both accredited and non-accredited investors, the playing field is level, and you can start investing and building your property portfolio today.
We expect to see continuous innovation in this space, moving into 2020 and beyond. More crowdfunding models are popping up online every day, and the loans side of the model is gaining traction in countries like China.
With real estate crowdfunding models, traditional boundaries into the real estate market, such as where you live in the world, are no longer relevant. You can invest through your smart device, from the comfort of your armchair, into any location on the planet.