The investment market is full of a myriad of options including stocks, mutual funds, gold, real estate investments, etc. 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)
A 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 purchases, leases, finances and sells property and passes on the 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 and have 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.
So, 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 through a real estate Crowdfunding platform. Therefore, any profits made by the real estate venture are passed on to you. However, like with any other investment, Crowdfunding has its own share of risks. Investors are exposed to the volatility in the market along with the risk of default from the developers. Also, the absence of a secondary market can 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 asset.
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 real estate. Also, real estate Crowdfunding platforms 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 as expensive including heavy maintenance costs, difficult to manage 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.
Here are some important differences:
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 via real estate Crowdfunding platforms offers customization opportunities, REITs score high on the liquidity and tradability aspect.
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 your funds are exactly being invested.
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.
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.
Investing in real estate is a great way to invest in the current market. You must 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 your preference is a collection of large investment ventures, then you must choose a REIT.