With the economy experiencing a volatile period due the pandemic, investors look for ways to diversify their portfolios and find investments, hence the renewed interest in REIT and real estate crowdfunding.
These options have always been attractive to investors because both employ a form of money pooling to purchase and operate properties that in turn provide profit to investors. Pooled resources also help in lowering the risk to investors, compared to sole ownerships where the owner assumes all the risks.
To make it simple, both are options to invest in commercial real estate without the hassle of operating and maintaining properties something that appeals to all kinds of investors. To maximize each real investor's priorities and capabilities, it is necessary to know more about both concepts.
What is Real Estate Investment Trust, or REIT?
REITs are companies or corporations that own real estate properties and allow people to invest in their properties through purchases of shares. The company or corporation will use these investments to purchase commercial properties such as apartment buildings, hotels, commercial hubs, and hospitals to name a few. The REIT then collects rent and distributes the income to the investors in the form of dividends.
There are two types of REIT, one of which is the equity REIT, the more common one, where they invest in real estate and earn from rental incomes. The second type is the mortgage REIT, making up only 10% of REITs, which invests in mortgage real estate and earns from interest on those properties.
What is Real Estate Crowdfunding?
Crowdfunding isn't a new concept and has evolved since the rise of social media. It refers to raising capital from a large pool of investors to finance a project, idea, business, or innovation. When investors pour money into a project, they become partial owners of the property but elevates their risk as their investments are directly tied to the performance of that property. It does have a higher risk, but it also comes with a greater potential to earn.
If a person wants to invest in real estate, but doesn't want to or have the capacity to maintain a building, they can become a lender to the developer and expert monthly fixed returns via a crowdfunding company. Any profit that comes from the real estate venture including rentals or property flipping are passed on to the investor.
Which is better?
REIT can be considered as a short-term investment due to its liquidity but can also be used as a long-term investment that generates guaranteed income returns through dividends. These properties trade relatively easy like stocks, and help diversify an investor portfolio that can provide exposure to real estate without having to deal with owning properties and the hassle that comes with it.
One of the biggest disadvantages of REITs is that they generally require high expenses, as real estate can come with maintenance costs that demand a deep pocket.
Real Estate Crowdfunding investments are generally considered short-term and one of its biggest benefits is that investors can commit a lower amount of capital, and there are typically no investment fees needed such as closing costs or realtor commissions.
A drawback for real estate crowdfunding is that for most projects, you have to be an accredited investor that meets specific criteria established by Securities and Exchange Commission (SEC).
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