Differences between REIT & Real Estate Crowdfunding

The investment market is full of options that include stocks, mutual funds, gold, real estate investments and more. In the Middle East, alternative real estate investments like REITs and Real Estate Crowdfunding are comparatively new.

A few years ago, the property market was the domain of rich investors. Smaller investors needed to look at different avenues of investment. However, with the rise of new investment options, real estate investments have opened up to smaller investors. Today, we will look at REITs and Real Estate Crowdfunding platforms and compare the differences.

Real Estate Investment Trust (REIT)

REIT is a trust which collects funds through an IPO and uses the money to buy, develop, manage, and sell real estate assets. This IPO is just like any other initial public offering that offers an option to buy a unit, which is a portion of a managed real-estate pool to the investors. The trust handles purchases, leases, finances and sells property to pass on returns to the unitholders. The REIT units can be purchased and sold on the stock exchange.

Investing in a REIT is similar to investing in a company. While some companies offer lucrative opportunities, some others might have higher risk and lower value. You must look at the performance of a REIT in terms of the NAV (Net Asset Value), dividend, growth, portfolio composition, performance to gain an understanding of the property market.

Real Estate Crowdfunding

Real Estate Crowdfunding platforms allow a group of investors to pool funds in order to finance real estate development projects. This allows investors to create a portfolio of real estate investments spread across different assets, locations, and in properties developed by different builders.

This way, if you want to invest in real estate, but don’t want to buy/develop a building, then you can become a shareholder in the property by means of a real estate Crowdfunding platform. This allows for any profits made by the real estate venture to be passed on to you. However, like with any other investment, Crowdfunding has its own share of risks. Investors are exposed to volatility in the market along with the risk of default from the developers. The absence of a secondary market can also restrict the liquidity of the investment.

REIT vs. Real estate Crowdfunding

There are many similarities between REITs and Real Estate Crowdfunding platforms. They allow investors to balance their portfolios by offering current income as well as long-term appreciation on the underlying real estate assets.

The primary difference between a REIT and a Real Estate Crowdfunding investment is that when you invest via a Crowdfunding platform, you can invest in multiple commercial real estate projects, while with a REIT, you invest in a trust which invests your funds into real estate. Further, when you invest in a REIT, the returns on investment can be in assets other than just in real estate. Real estate Crowdfunding platforms also offer a higher level of transparency and better selection of opportunities than a REIT since you can choose from a wide array of pre-verified investment opportunities.

Many investors find REITs to be expensive, especially considering heavy maintenance costs, difficulty in managing portfolios, etc. which eventually translate into lower returns. On the other hand, most Crowdfunding platforms require investors to be accredited before allowing them to invest.

Also Read: How can Real estate Crowdfunding help you take advantage of the current market?

Here are some important differences:

Returns

When you invest through a real estate Crowdfunding platform, you have a better opportunity to earn returns as compared to investing in a REIT.

Liquidity and Tradability

REITs are highly liquid and are traded every day across major financial markets. While investing in real estate, Crowdfunding platforms offers customization opportunities whereas REITs score high on the liquidity and tradability aspect.

Transparency

The best way to invest in the real estate market is by investing in it directly or through a real estate Crowdfunding platform since the process is completely transparent. When you invest in a REIT, you basically buy into a trust which owns multiple properties. Hence, you are unaware of where exactlyyour funds are being invested.

Investment Spread

When you invest through a real estate Crowdfunding platform, you can spread your investments by investing small amounts across multiple investment options. However, investing in a REIT allows you to invest in a trust which usually owns thousands of properties spread across different types and geographical locations.

Market Expertise

When you are investing via a Crowdfunding platform, you don’t need to have the expertise or resources to invest in the real estate market. On the other hand, investing in a REIT, usually, comes coupled with an expert opinion to help you make investment decisions.

Remember…

Investing in real estate is a great way to invest in the current market. You may choose between REITs and real estate Crowdfunding based on the requirements of your investment portfolio. Also, remember that while Crowdfunding platforms allow you to invest in individual projects, a REIT is similar to investing in the stock of a company. If you prefer investing in single projects, then Crowdfunding projects are your best bet. On the other hand, if you prefer to have a collection of large investment ventures, then you should probably choose a REIT.

Best Investments for Young People

Investment is not a one-time activity. For a financially secure and independent life, saving and investing should become a part of your life. The sooner you start, the better chances you have of seeing your money grow exponentially. In this article, we will talk about the best investments for young adults. Before we start, there are certain things about investments that you must keep in mind:

Continue reading

How can Real estate Crowdfunding help you take advantage of the current market?

We all want to be smart with our money, and we all try to make good decisions when it comes to investment. We could do worse than considering the advice given by American business magnate, investor, speaker and philanthropist, Warren Buffet, widely regarded as one of the most successful investors of all time. He says: “Be greedy when others are scared and be scared when others are greedy.”

A lot of people are scared by the current market conditions – which translates into a good time to get great deals. Savvy investors like Buffet make the most of their money in the ‘bad times’ because they sit on a lot of cash when people need it the most – so can dictate (investment) terms.

Sadly, most of us don’t have enough money saved up to take advantage of times like this, the ‘bad times’. That’s why the wealthy get wealthier. Average people like us are probably struggling in the slow market, or too afraid to take the risk. Real estate Investment, for example, requires a lot of one’s capital to make an investment, right?

But not anymore. Our business model – crowdfunding – means pooling your (small) amount of investment money together with numerous others, to generate the sort of buying power only the wealthy normally have. For the average person, this is a great idea, as you are not allocating a majority share of your portfolio into one investment, making you more able to shoulder risk in the current market situation.

So, the first advantage of this ‘crowdfunding’ in real estate is that it allows each and every one of us to get into real estate investment with much smaller amounts of money. Using a smaller amount of your hard-earned wealth means you can afford to exercise more patience with your investment, and ride out the ‘storm’ of bad times in the market, waiting for the uptick to come back – and property is most definitely a cyclical market.

You can diversify your investment with ease, too – spreading the risk, investing in multiple properties, in different areas, and different types of development (residential or commercial, for example) as they do and will perform differently. You can gradually build on your investments that are seen to be working.

In this current low-price market, through a crowdfunding investment, you have the ability to find a good entry point that will provide a good yield. In practical terms, this means you can make a decent return and get paid while you wait for the next up cycle.

By being smart with your money, diversifying your investment into a number of smaller, more manageable pockets, you are giving your wealth the chance to grow. You are joining forces with other like-minded people, all helping to grow each other’s investment.

Most of us don’t have the time or ability to spend all of our time hunting for the best property investment deals. Investing in a real estate crowdfunding vehicle means the legwork has already been done. Experts have already researched the markets and worked out where the best possible investments lie, and risk assessments made. It’s time-saving, it’s convenient, and it mitigates risk as much as you want it to.

Of course, as with any investment, it’s important that you do your homework to ensure you are investing through a reputable and regulated platform that provides you full protection and complete transparency.

Many ‘crowdfunding’ platforms have been formed recently, but only a few pass muster.

While considering where and who you might invest with, ask whether the platform is regulated, and how the investments are structured. Ensure you are not exposed to the operational risk of the platform. Is your investment ring-fenced and protected against fraud?

Before considering any investment, make sure you understand how much due diligence the platform does itself. You should raise serious questions about anything that seems unclear.

Real estate crowdfunding is a fairly new concept and is innovating how real estate investment takes place. It offers many benefits, but it is also important to understand the cost structure. Ensure you receive value for your money.

You must evaluate the returns offered on a risk-adjusted basis, and don’t allocate your entire investment portfolio on such platforms. Utilise it as an integral part of your investment portfolio.

At Smart Crowd, for example, we were cognitive of all of the above. We have worked hard to ensure our platform is regulated, and our legal structure adheres to local rules and regulations. Each property investment is also ring-fenced to protect investors.