Have you always wanted to invest in real estate, but didn’t pull the trigger? Maybe you don’t have enough capital, or you worry about how you’ll be a landlord.
What if there were ways to invest in real estate without owning the property?
Today you can. You can be a real estate investor with only a little capital and no 3 AM phone calls that the pipes burst. How is it possible? Through crowdfunding or real estate investment trusts. Both options provide passive investing strategies. But, you still get the same high returns real estate investors enjoy.
So how do they work?
Crowdfunding for Dummies
You’ve heard of crowdfunding for fundraisers, but for real estate? It works in a similar way. You invest in real estate alongside possibly hundreds of other investors. You may buy both residential (rental) properties and commercial real estate properties.
Some of the most common platforms are Fundrise, RealtyMogul, and PeerStreet. The platform does the work vetting the properties and/or the owners. All you have to do is choose your properties and invest your money – the platform handles the rest.
The Benefits of Crowdfunding
- Most crowdfunding platforms have low minimum investment requirements
- You can diversify your investments over a series of real estate investments
- You can invest in real estate halfway across the country if you want since you don’t have to manage the property yourself
The Downsides of Crowdfunding
- It’s not a liquid investment. Many crowdfunding opportunities have a long time commitment, which means you’re stuck in it until it matures.
- You have little control over the investments.
REITs for Dummies
Real estate investment trusts are baskets of real estate investments from a company that manages several properties (typically income-producing). They automatically diversify your investments, which lowers the risk of default that would occur if you invested in a single property yourself.
REITs often focus on a specific sector or industry. For example, you may find an REIT that uses its funds to buy several multi-unit properties in an area or apartment complexes. REITs typically fund income-producing properties. They usually trade on the major stock exchanges and must meet strict criteria to qualify.
There are also private REITs that get their funds from private investors (not on the stock exchange). The money comes from accredited investors. Today there are over 200 publicly traded REITs and 800 private REITs.
The Benefits of REITs
- If the REITs diversify, your risk of a loss decreases more than it would with an investment in a single property
- Most REITs pay dividends, which you can reinvest to further your earnings; this is in addition to the property’s appreciation
- REITs help diversify a portfolio, especially one that’s heavy in stocks
The Downsides of REITs
- REITs are publicly traded and often rise and fall with the stock market
- The property manager manages the project and controls your profits (or loss)
- You have no control over the property, how it’s managed, or its profits
Which is Better – Crowdfunding or REITs?
Both crowdfunding and REITs provide diversification and balance, especially if you have a stock-heavy portfolio. They also offer investors high real estate returns without the need to own properties themselves. Pooling your money with other investors, gives you a lot more buying power, whether you choose crowdfunding or REITs.
One advantage REITs have over crowdfunding is liquidity. When you take part in crowdfunding, you’re stuck in the investment until the loans’ maturity or the owner sells the property. REITs, on the other hand, are liquid. You can trade them on the stock market, as you would stocks, which means there’s always a market for your investment. Just watch the value as they rise and fall, just like stock values.
REITs also diversify your risk automatically. While you can choose your crowdfunding investments carefully, diversifying your funds, REITs do it for you. REITs are easier to track and often have steady income streams over the life of the investment.
Which is right for you – crowdfunding or REITs? It depends on your risk tolerance, desired returns, and how you want to invest in real estate. Do you need a liquid investment? Then turn to REITs. If you have the money you can let sit for the duration of the investment, crowdfunding is a great option too.