Introduction
Investing in commercial or income-generating real estate has long been an option only accessible to ultra high net worth and institutional investors. However, platforms have emerged allowing even ordinary investors to consider allocating capital in the high-value property asset class. Specifically, real estate investment trusts (REITs) and real estate crowdfunding open new doors for portfolio diversification.
This article will extensively compare real estate investing through REITs vs crowdfunding platforms to equip you with clarity between the paths.
Understanding REITs
A real estate investment trust or REIT is a company that owns, operates, or finances income-producing real estate. Publicly traded REITs are listed on major stock exchanges and invest in portfolios of assets like apartments, offices, malls, healthcare facilities, cell towers, and more. They are required to pay at least 90% of taxable income as shareholder dividends annually, making them attractive income investments.
The product structure, reporting requirements, governance, and transparency around publicly listed REITs is regulated closely to protect everyday investors. This makes them relatively more liquid and lower risk compared to directly owning private commercial properties. REIT shares can be conveniently purchased through ordinary brokerage accounts.
What is Real Estate Crowdfunding ?
Real estate crowdfunding platforms facilitate the financing of various private real estate projects by pooling together small investments from hundreds of accredited and non-accredited individuals. This allows developers to raise funds for projects without relying solely on banks or private equity.
Investors participating on these platforms can browse through various commercial, residential or mixed-use property deals for as little as $500 to gain exposure to returns from high-value assets that would normally require huge upfront capital.
Now let's do an in-depth feature-by-feature comparison between these two technology-powered investment mediums offering exposure to income-generating real estate assets.
Returns Performance
REITs: Historically, publicly-traded REITs in the US have delivered attractive long term returns in the range of 7% to 15% annually when dividends reinvested, though performance varies based on macroeconomic cycles and geography. Global REITs have charted over 9% annual gains.
Real Estate Crowdfunding Returns: Given the emerging state of real estate crowdfunding, long term data remains limited. However industry averages for successfully exited deals fall in the targeted IRR range of 12% to 20% for investors. Projects and investor outcomes are certainly more heterogeneous given the private capital nature.
WINNER: Real estate crowdfunding projects today display potential for higher returns compared to publicly listed REITs, but factors like illiquidity and risk should be weighed relative to investors’ preferences.
Liquidity & Exit Options
REIT Liquidity: A major advantage of REIT investing is quick liquidity available since these are exchange-traded instruments like regular public stocks. Investors can conveniently buy and sell shares daily during market hours at prevailing prices, allowing easy rebalancing.
Real Estate Crowdfunding Liquidity: In contrast, crowdfunded projects come with multi-year investing timelines, ranging from 1-5 years depending on asset class and strategy. Investors commit capital which gets tied up as properties undergo initial development/redevelopment before reaching a marketable state for the eventual exits to happen. Typical end outcomes for investors include getting bought out by a follow-on capital provider or asset sale. Secondary transfers also slowly emerging as platforms mature.
WINNER: Access to daily liquidity hands down makes publicly traded REITs a much more liquid and flexible instrument versus the locked-in capital required during long-term crowdfunded projects.
Fees
REIT Fees: Investing in publicly traded REITs comes with nominal trading commissions when buying/selling through brokerages, ranging from $5 to $10 per transaction. Low management fees ranging from 0.5% to 2% annually also apply depending on the REIT.
Real Estate Crowdfunding Fees: Platform fees are more complex, with usage charges for investors to just access deals including due diligence fees, admin fees etc. On funded deals, average asset management fees range from 0.50% to over 3% of capital invested. Platforms also charge various success or profit-share fees when projects exit.
WINNER: Though not devoid of charges, low trading commissions and fund expense ratios give REIT investing much lower friction relative to the often opaque or loaded fee structures employed by real estate crowdfunding platforms.
Investment Fundamentals
REITs Fundamentals: For publicly listed REITS, all business plans, financials, management bios, and operating data is fully transparent via regulatory filings. This allows investors continuously monitor assets and update projections. Historical performance across macroeconomic cycles also easier to examine for listed REIT classes.
Real Estate Crowdfunding Fundamentals: Each crowdfunded property deal presents unique projected returns thesis based on asset plan, market analysis, operations modeling, and sponsor team capabilities. Investors pin hopes on future performance rather than trailing fundamentals. Ongoing reporting provides glimpses into fund progress as assets get developed or stabilized. But ultimately less standardized.
WINNER: The level of financial information and operating history with publicly listed REITs makes them easier investment fundamentals for investors to consistently assess. Crowdfunded deals require embracing new projections.
Asset Classes
REIT Asset Classes: Public REITs focus on popular, stable property categories - apartments, malls, offices, warehouses, healthcare, self-storage, mortgages etc. They replicate investing in income-generating legacy real estate markets that formed the early REITs of the 1960s.
Real Estate Crowdfunding Asset Classes: Crowdfunding platforms today facilitate financing across nearly all higher risk/return segments of property markets from hotel and mixed-use to senior housing, storage, urban infill, student dorms and niche sectors often ignored by institutional funds. This allows for differentiation.
WINNER: When it comes to asset segment exposure, real estate crowdfunding expands the playing field into non-traditional property categories overlooked by listed REITS and funds.
Risk Factors
Public REIT Risks: Underlying assets owned by publicly traded REITs also face operational and market risks like vacancies, debt repayment, natural disasters etc impacting returns. And negative stock market cycles bring own volatility versus direct asset links. But strong regulation, reporting, governance and transparency controls mitigate risks.
Real Estate Crowdfunding Risks: Each crowdfunded property deal and platform carries additional risk considerations around sponsor quality, execution uncertainties, fraud possibilities requiring extensive due diligence. Market fluctuations also hit harder prior to asset stabilization. And untested implementation teams pose downside risks.
WINNER: Seasoned REIT managers navigating macrocycles coupled with public market accountability provide likely better risk controls than crowdfunded sponsor teams undertaking new projects with retail investor capital alone.
Barriers to Entry
REIT Investment Minimums: One key benefit of publicly traded REITs is no minimum investment amount for purchasing shares. Investors can start REIT portfolio allocation with any budget through brokerage accounts. Any retail investor has access.
Crowdfunding Investment Minimums: Historically real estate investing required huge capital to buy physical properties directly. Now crowdfunding brought minimums down to the $500s. But SEC accredited investor regulations mandate $200K+ income/net-worth for some deal types, closing out many Main Street investors.
WINNER: REITs win for democratization with no minimum investment, allowing even new investors on limited budgets full and equal access to add commercial real estate assets to a diversified portfolio.
Conclusion
REITs and real estate crowdfunding each carry relative pros and cons for investors to weigh based on their personal preferences, portfolio strategy, risk tolerance and more.
The liquidity, governance, regulatory legitimacy, and fundamentals transparency with publicly traded REITs lowers overall risk profile while still delivering moderately attractive income plus capital returns historically.
Meanwhile real estate crowdfunding offers potential higher returns, wider asset class breadth including ground-up development projects, but with greater execution uncertainty and liquidity tradeoffs requiring multi-year capital commitment.
Both options let individuals access institutional real estate markets once reserved only for the wealthy and diversify from volatile stock and bond markets. As technology democratizes alternative investing channels, education and due diligence pave the way for long term gains.