It is typical for investors to diversify their portfolios whenever the economy undergoes a tumultuous period, such as the one we have experienced recently. Due to this, real estate investment trusts (REITs) and real estate crowdfunding have gained renewed attention.
Both of these investments are ways to acquire commercial property without owning it outright, making them appealing to beginners and experts alike.
In spite of the similarities between REITs and real estate crowdfunding, there are some key differences that investors should be aware of. Throughout this article, we’ll examine two of the most popular investments in real estate—real estate investment trusts and real estate crowdfunding.
Table of Contents
What is a REIT?
Real estate investment trusts, commonly referred to as REITs, are investment opportunities that emerged in the 1960s. In essence, this type of organization owns a property and rents it out to tenants.
Similar to real estate stocks, REIT shares can be purchased by investors on major exchanges. Profits then can be earned from the rent that tenants pay back to the REIT. The properties they can invest in can be an apartment or office building, a retail outlet, a hotel, a commercial center, etc.
What is Real Estate Crowdfunding?
For starters, crowdfunding platforms for real estate offer a lower investment threshold, which makes them more accessible to a broader audience. Secondly, numerous experts recommend diversifying a portfolio with real estate.
A loss of funds is indeed a risk associated with any investment. Even so, property crowdfunding is considered to be a relatively low-risk venture. Simply put, there are more options for mitigating risks.
Investors can select the property they wish to fund through real estate crowdfunding platforms, unlike REITs. In addition, they can choose multiple property types, including office buildings and apartment blocks, whereas REITs typically focus on one type of property.
REITs Vs. Real Estate Crowdfunding: How They Differ
Real estate investment trusts and real estate crowdfunding both invest in commercial real estate, but there are some significant differences between them. Taking a closer look at them will help us better understand them.
Due to their ability to be bought and sold easily, REITs are inherently more liquid than real estate crowdfunding investments. REIT shares, for example, can be purchased in the morning and sold that same afternoon if the investor so desires.
Those who need to preserve liquidity for any reason, such as buying a house, attending college, or taking a vacation, will benefit from this feature.
The REIT structure allows people to invest in real estate without worrying that their capital will be locked up for a long period of time. If, for example, a person would prefer direct ownership of commercial property but finds it difficult to find the right deal, they can invest in REITs in the meantime and then sell their shares when another opportunity arises.
There is less liquidity in real estate crowdfunding. There is usually a predetermined period of time in which investors are locked into a deal, usually three to five years, but sometimes longer. An early exit can be negotiated with most sponsors, but there may be penalties or fees involved if you do so.
There is no minimum requirement to invest in REITs now. An investor can purchase a single unit of a REIT for whatever value the REIT is trading at the time.
When you invest in REITs online, shares can trade for less than $20 per share, while in others, they can trade for hundreds. It lowers the bar for someone looking to invest in real estate via REITs, who may not have the capital needed to invest via crowdfunding or direct ownership.
The real estate crowdfunding market is often a good choice for investors looking to invest at least $5,000. It is possible to invest as little as $100 on some platforms, but most deals require a more substantial initial investment.
While this is still less than what would be needed to purchase a commercial property outright, it is more than what would be necessary to invest in one REIT share.
By law, REITs must pay dividends to investors of at least 90% of their profits, which is why they are a high-yield investment. On the other hand, real estate crowdfunding offers less regulation regarding profit sharing. In the case of the latter, it is up to the sponsor to determine the projected returns—preferred returns, waterfall splits, etc.
While REITs make regular distributions to shareholders, a crowdfunded real estate syndication may not distribute to shareholders for years.
Portfolio Vs. Individual Asset
Generally, REITs are corporations that own a portfolio of properties that people can buy shares of. Due to this, REIT shares are not affected by the performance of individual assets. As a result, REITs are able to spread risk across a variety of assets.
Typically, crowdfunding real estate deals involve investors making equity investments in specific commercial properties. As an example, the sponsor might raise capital to transform an outdated strip mall into a modern lifestyle center.
While investors have more knowledge about individual projects, their investment is also dependent on how those projects perform. This results in a greater concentration of risk.
Which One is Right for You?
Both have advantages and disadvantages, and both can be valuable additions to an investor’s portfolio. In that regard, those who are risk-averse and prefer to preserve liquidity should invest in REITs. People who are willing to take on a bit more risk in exchange for a higher return could think about investing in real estate crowdfunding.
A person’s investment amount will also influence their decision since each REIT, and a crowdfunded deal has its own minimum investment requirements.
Work with Trusted Real Estate Professionals in California
In addition to the two vehicles discussed today, there are many other ways to invest in commercial real estate and real estate in general.
In fact, these vehicles can even be used in multiple ways, such as mutual funds, exchange-traded funds, or self-directed IRAs. If you’re considering investing in a REIT or real estate crowdfunding, please consult with a real estate expert first.
Our continuous improvement process allows us to provide investors with the best service possible. To learn more about how to invest in REITs and have access to a diversified and consistent portfolio of real estate assets of institutional quality, contact us at 949-881-7128 at Saint Investment Group today!
President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.