Investing in real estate, while appealing, entails a myriad of responsibilities for property owners, including maintenance, tax payments, rent collection, and tenant vetting. Additionally, real estate’s inherent illiquidity presents challenges such as appraisals, inspections, title searches, closing costs, commissions, and mortgage approvals.
The introduction of Real Estate Investment Trusts (REITs) and real estate crowdfunding has effectively addressed these challenges. REITs, established by Congress in 1960, grant individual investors access to income-producing real estate on a large scale. Real estate crowdfunding, initiated in 2012 through Title III of the JOBS Act, enables private companies and projects to raise funds from individual investors.
What Are REITs?
REITs operate by owning and managing income-generating real estate (equity REIT) or providing loans to real estate owners (debt REIT). Investors can acquire shares in publicly-traded REITs on stock exchanges or through mutual funds and ETFs. REITs return value to shareholders through dividends and share price appreciation, with a legal obligation to distribute at least 90% of taxable income as dividends. REIT shares are liquid and can be sold at any time.
What Is Real Estate Crowdfunding?
Real estate crowdfunding involves professionals or developers seeking external funding for investment opportunities. These opportunities, ranging from apartment complexes to medical complexes, are presented on crowdfunding platforms where investors contribute and share profits. Annual returns typically range from 2% to 20%.
REITs Vs. Real Estate Crowdfunding: How They Differ
Real estate crowdfunding offers transparency, allowing investors to know where their money is invested, a feature lacking in REITs. Crowdfunding provides a broader range of investment types and lower minimum investment requirements. While REITs offer guaranteed income through dividends, crowdfunding does not guarantee income, posing a potential risk of losing the entire investment. REITs are subject to market volatility, while crowdfunding projects have more holding restrictions.
Benefits Of Investing In REITs
- Passive investment managed by real estate professionals.
- 90% of taxable income returned to investors.
- Dividend income can be directed into tax-advantaged retirement accounts.
- Effective diversification of a portfolio containing stocks and bonds.
Benefits Of Investing In Real Estate Crowdfunding
- Access to private market real estate investments with potentially higher returns.
- Exclusive investment opportunities and increased investor control.
- Portfolio diversification, albeit with slightly higher risk than REITs.
In a climate of 4.9% inflation, dividend stocks, particularly from REITs, provide a reliable income stream to combat inflation. Investing in either REITs or real estate crowdfunding can be strategically beneficial, catering to different preferences and risk tolerances.