Real estate investing has become more accessible in the last decade. The property market presents plenty of opportunities for investors to profit in a non-traditional, easier way without actually being the owner of the property. REITs and real estate crowdfunding are two of these opportunities. The foundation of these approaches is that someone else finds, purchases, and manages the properties while you only have to invest. Basically, you delegate all the work associated with achieving returns to a third party that acts in your interest. So, what are the main differences between these two models and which one may suit you best?
The REITs Concept
In the Real Estate Investment Trust (REIT) model, people invest in a commercial real estate portfolio. Here, a company owns the assets that investors buy. Most REITs specialise in specific real estate sectors, but some hold various types of properties in their portfolios, which is their main advantage. There are equity, mortgage and hybrid types of REITs, which differ by the nature of the profit they generate. Investors can invest in REITs by purchasing shares or through mutual funds.1
The disadvantage of REITs is that they involve bigger expenses.2 This type of portfolio is difficult to manage and usually comes with high maintenance and transaction fees.1 Also, REIT stock price can often fluctuate during the trading day, and stock price movement can be influenced by various external factors. Moreover, REITs offer a slow rate of growth because the company reinvests only 10% of profit each year. Why? The company is under a tax requirement to pay 90% of its income to investors, so they must distribute almost all of their returns.1
The Property Crowdfunding Concept
Crowdfunding is a relatively new concept that has existed for just over five years. Property crowdfunding platforms give investors the opportunity to connect with real estate developers, agencies, and other types of asset owners, even individual owners. Investors become shareholders in a crowdfunding company where profits usually come from rental income and renovation, market growth or flipping gains, which are distributed later on between investors. Investors can benefit because crowdfunding campaigns allow them to participate in business ventures where many people invest small amounts of money in one project.
Unlike the REIT model, with property crowdfunding, investors can choose the properties they want to include or exclude from their portfolio. Property crowdfunding investment is not publicly traded and not constantly evaluated as is REIT investment. This means that investors can escape the dramatic fluctuations in the value of the real estate and its stock price.3
The property crowdfunding model may not suit investors who want to actively manage the real estate assets in which they have invested.3 Also, the risk remains as investors depend on general market fluctuations.
Investing in real estate does not have to be a time-consuming and potentially stressful process that demands you continually monitor a property, renovate it, and deal with tenants. There are solutions that allow you to simply invest your money and wait for any returns. If you are interested in a diversified portfolio and are not afraid to invest in projects with a slow growth rate and high volatility, REITs may be the right choice for you. In contrast, if you want more freedom in terms of asset selection and if you want to escape dramatic price movements during the trading day, property crowdfunding may be the solution you have been searching for.
However, it's not always necessary to choose between these two models. RealtyBundles has created a two-sided marketplace with a turn-key solution that draws from the property crowdfunding model and the dynamic portfolio concept that underpins the REIT model. We aim to combine the strongest features of these two investment paradigms on one platform.
How do we do it? We create real estate portfolios in several countries, which we call Property Bundles. These are curated global sets of properties managed by local real estate agencies and supervised by our service, offering investors a hassle-free experience. Investors just select the Property Bundles they are interested in and look to benefit from diversified portfolios.
Sources
- https://www.investopedia.com/terms/r/reit.asp
- https://www.investopedia.com/articles/personal-finance/071015/reits-vs-real-estate-crowdfunding-how-they-differ.asp
- https://www.investopedia.com/articles/investing/070915/pros-cons-investing-crowdfunded-property.asp
