There are many ways to invest in real estate, and the method you choose will depend largely on two factors: the amount of capital you have and the amount of time you want to spend on your investment. Two of the more low maintenance options for investors are REITs and crowdfunding. Both allow investors to reap the rewards of the real estate market without having to actually own and manage a property. They also require a lower amount of capital, in most cases. However, the two methods have key differences that will affect whether or not you choose to pursue them. Let’s take a closer look at crowdfunding vs REITs.
Differences Between REITs and Crowdfunding in Real Estate
REITs (Real Estate Investment Trusts) are well-known in real estate investing. REITs buy commercial properties and then distribute a percentage of rental income as dividends to investors. Investors can purchase shares in an REIT in much the same way they would any other type of publicly traded stock. REITs offer a great investment opportunity with relatively lower risk as they provide a stable income through rental income and dividend payouts. Real estate trusts also have the advantage of liquidity, which means investors can easily buy or sell their shares at any time they choose. Investment in REITs is a very hands-off approach to real estate investment, since you do not own any property
Crowdfunding, on the other hand, is a relatively new mode of real estate investing. It has gained popularity because it allows investors to pool their funds to invest in a single property or multiple properties. Crowdfunding thus eliminates the need for a large amount of capital, which was once a significant barrier to entry for real estate investing. Users can contribute money using several online financial platforms. When their property earns profits from a sale or rental income, the money is split between contributing members
Pros and Cons of REITs vs Crowdfunding
As an investor, you need to understand the risks and benefits of each option. One significant benefit of REITs is that they are highly regulated, ensuring investor protection. The regulations provide investors with transparency on the operations of the trust, and REITs are required to distribute at least 90% of their taxable income to shareholders. REITs can offer a steady source of passive income, though dividends can fluctuate depending on the market. Fees and income tax on any funds earned can further diminish profits.
Crowdfunding gives investors more control over the properties they invest in, but you lack the market savvy provided by professional fund managers in a REIT. Crowdfunding is also less regulated, which means you will need to do additional research to vet the platform you choose. And, while less capital is required up front, some sites require that you be an accredited investor to join. This is not always the case, though, so don’t feel discouraged.
Both Crowdfunding and REITs offer excellent investment opportunities in real estate. Your investment decision will depend on your investment goals, risk tolerance, and preference for control. Crowdfunding might be a good option for those with lower capital, investing in specific types of properties, and a higher risk tolerance. REITs, on the other hand, provide an easy entry point, diversification with lower risk, and are a more established option with regulated operations.
It’s important to ensure you conduct thorough research on any platform or trust you choose to invest in to minimize risk. Whatever option you select, real estate investment provides a reasonable means of diversifying your investment portfolio and earning passive income through rental income and dividend payouts. Overall, remember that diversification is key in investing, so you may consider including both Crowdfunding and REITs in your portfolio for a well-balanced investment strategy.