REITs Vs. Real Estate Crowdfunding: What You Need To Know

TABLE OF CONTENTS

The idea of investing in real estate and collecting rents sounds good, but an owner is responsible for a host of things: making repairs, paying taxes, collecting rents and vetting prospective tenants. Also, real estate is a highly illiquid asset because the transfer of property requires appraisals, inspections, title searches, closing costs, realtor commissions and mortgage approvals.

The creation of real estate investment trusts (REITs) and real estate crowdfunding has solved both those issues. REITs were created by Congress in 1960 and were designed to allow individual investors access to large-scale, income-producing real estate. Crowdfunding is the raising of small amounts of money from a large group of investors to finance an invention, a business, a project, a company, a non-profit or real estate. Real estate crowdfunding was launched in 2012 with the passage of Title III of the JOBS Act, allowing private companies and investment projects to raise money from individual investors.

What Are REITs?

The way REITs work:

A REIT owns and manages income-generating real estate (equity REIT) or it makes loans to owners of real estate (debt REIT).
On stock exchanges, investors can directly buy shares in publicly-traded REITs or they can acquire them through a mutual fund or an exchange-traded fund (ETF); shares of some REITs are privately owned.
Value is returned to shareholders through dividends and share price appreciation; by law, REITs must distribute at least 90% of the taxable income back to their shareholders as dividends.
Dividend yield is the total annual dividend payment divided by the share price. According to one of my colleague’s recent articles, “the dividend yield on the benchmark FTSE Nareit All REIT Index in 2022 ranged from 3.1% to 4.3%.”
Shares in REITs are liquid; an investor can sell at any time.

What Is Real Estate Crowdfunding?

The way real estate crowdfunding works:

Real estate professionals or developers find an investment opportunity that they can’t or don’t want to finance themselves, these can include apartment complexes, hotels, shopping centers, medical complexes and self-storage facilities.
The real estate professional or developer contacts a crowdfunding platform where, if their project is accepted, they become known as “sponsors.”
The best crowdfunding platforms closely vet their sponsors and each of their offerings.
The crowdfunding platform connects sponsors with individual investors who will contribute to the project and share in any profits from rents or flipping the property; annual returns typically run from 2% to 20%.

REITs Vs. Real Estate Crowdfunding: How They Differ

Real estate crowdfunding allows investors to determine exactly where their money is being invested while REITs don’t provide that same transparency.

Crowdfunding offers a broader range of investment types, such as industrial assets or multifamily properties, than REITs.
Investment minimums for real estate crowdfunding are typically lower than that of REITs, with some crowdfunding platforms offering investment minimums as low as $500.
While REITs are open to any type of investor, many crowdfunding platforms require that investors be accredited, which the Security and Exchange Commission (SEC) defines an individual whose gross income has exceeded $200,000 over the past two years, or whose joint income with a spouse or partner has exceeded $300,000 over that period and as someone who has over one million in assets not including their primary residence.
REITs provide investors with a guaranteed income through dividends while real estate crowdfunding doesn’t provide a guaranteed income; it’s possible for crowdfunding investors to lose their entire investment.
REITs have more exposure to market volatility than do crowdfunding projects.
Shares in REITs trade easily like stocks, whereas crowdfunding investments must be held until the conclusion of the investment. However, some real estate crowdfunding platforms offer redemption programs that allow investors to withdraw their money early.

With inflation running high at 4.9%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.

Benefits Of Investing In REITs

REITs are a passive investment, requiring less work on the part of the investor.

REITs are actively managed by real estate professionals.
REITs must return 90% of their taxable income to investors.
You can direct your REIT dividend income into a tax-advantaged retirement account such as a 401(k).
REITs are a great way to diversify a portfolio containing stocks and bonds.

Benefits Of Investing In Real Estate Crowdfunding

Crowdfunding gives investors access to private market real estate investments that can provide higher returns than those offered by publicly-traded REITs.

Crowdfunding provides access to exclusive investment opportunities.
Crowdfunding gives investors more control over their investment than do REITs.
Like REITs, crowdfunding is a great way to diversify a portfolio, albeit with slightly higher risk than with REITs.

The Best REITs And Real Estate Crowdfunding Platforms To Buy Now

The best-performing REITs as of May 2023 are shown below; the share price is current as of this writing:

Service Properties (SVC) with a share price of $8.52, provided a one-year total return of 43.6%.
Getty Realty (GTY) has a share price of $34.20 and provided a one-year total return of 33.2%.
Aimco (AIV) has a share price of $8.40 with a one-year total return of 38.6%.
CareTrust REIT (CTRE) has a share price of $19.49 with a one-year total return of 15.4%.
Gaming and Leisure Properties (GLPI) has a current share price of $49.61 with a one-year total return of 13.5%.

Our top picks for crowdfunding platforms are:

Fundrise: Both accredited and nonaccredited investors, easy-to-use website, better for long-term investors, privately held investments may be illiquid.
RealtyMogul: Accredited and nonaccredited investors, investment minimum of around $5,000, varying fees, higher rates of return.
CrowdStreet: Accredited investors, a minimum investment of $25,000, higher returns on investment, provides some due diligence, better for long-term investors.
Yieldstreet: Accredited and nonaccredited investors, a minimum of $1,000, both long- and short-term investments.
EquityMultiple: Accredited investors, focus on commercial holdings, a minimum investment of $5,000.

REITs Vs. Crowdfunding FAQs

1. What are REITs?

REITs are real estate investment trusts that own and operate income-generating properties, such as office buildings, apartment complexes and shopping centers. Investors can buy shares of REITs and receive a portion of the income generated by the properties.

2. What is real estate crowdfunding?

Real estate crowdfunding is a way to invest in real estate by pooling funds with other investors to buy properties. Investors typically invest in a specific property or portfolio of properties and they can earn returns through rental income or property appreciation.

3. Which is better, REITs or real estate crowdfunding?

There is no clear answer to this question, as both options have their pros and cons. REITs offer passive investment and professional management, while real estate crowdfunding provides the potential for higher returns and more control over investments. Ultimately, the best choice depends on an investor’s individual goals and risk tolerance.

4. Can I lose money investing in REITs or real estate crowdfunding?

Yes, like any investment, there is always a risk of losing money when investing in REITs or real estate crowdfunding. It is important to do thorough research and understand the risks before investing.

5. What are the tax implications of investing in REITs or real estate crowdfunding?

REITs offer tax advantages, such as the ability to deduct dividends from taxable income. Real estate crowdfunding investments are typically structured as partnerships, which can have tax benefits but also require careful tax planning. It is recommended to consult with a tax professional before investing.