REITs Versus Crowdfunding

Contributor, Benzinga

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Investors today have several options for adding real estate to their portfolios that help make it more accessible and less complicated than it used to be. With options like real estate investment trusts (REITs) and real estate crowdfunding, some of the biggest obstacles keeping investors out of traditional real estate investing — like large down payments, extensive due diligence required for each property and high overheads for managing properties — are no longer the barriers to entry they once were.

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As accessible as they are, they are not without their risks and requirements so it’s still important to learn about these investment options before putting your money on the line. As your first step, read about the basics of REITs and real estate crowdfunding and start thinking about which option makes the most sense for you.

What is a REIT?

A REIT is a company that owns or manages income-generating real estate. Most focus on a specific type of real estate like multifamily buildings, retail, hospitality, office space or industrial property. Some also focus on specific regions, investing only in properties located in, say, the northeastern United States. 

Congress established REITs in 1960 as a way for individual investors to invest in large-scale, income-generating real estate ventures that were previously only accessible to the very wealthy or to institutional investors like banks and hedge funds. 

In order for a company to qualify as a REIT, it must meet certain requirements including:

  • Distribute at least 90% of its taxable income to shareholders each year in the form of dividends
  • Invest at least 75% of total assets in real estate assets and cash
  • Derive at least 75% of its gross income from real estate-related sources (e.g. rents, mortgage financing, etc.)

As an individual investor, these criteria mean that there is a fair amount of transparency about how your investment dollars are being used because it has to go toward real estate investments. It also means that REIT shares come with especially high dividend yields because, unlike other companies, it has to pay out at least 90% of its income to shareholders.

When you buy shares of a REIT, you’re investing in the company, not directly in the properties it owns or manages, so there are some key pros and cons that come with that.

The pros to REITs include:

  • High dividend yields. The average REIT dividend yield is about 5% for an equity REIT, compared to just 1.9% for the S&P 500.
  • More liquidity. You’re holding tradable shares, not physical property, so it’s easy to buy and sell as needed.
  • Easier to defer taxes. While you technically can hold property in a tax-deferred account like an IRA, doing so is complicated and comes with a lot of rules. With a REIT, you can just hold the shares in that tax-deferred account like you do with ordinary stocks. 
  • No management or financing responsibilities. As a shareholder, all you have to do is sit back and collect dividends. The company handles the work of finding investment opportunities, managing properties and securing financing.
  • No minimum capital requirements. An investor can become a shareholder in a REIT for the price of a single share. This is much more affordable than saving up to buy a property outright or to meet some of the higher minimum investment requirements of some crowdfunding platforms. It’s also easier to scale up at your own pace. You can keep buying new shares as your budget allows, earning interest and dividends on each new share immediately rather than waiting to save up enough money for your next property, meanwhile earning negligible interest while it sits in a savings account.
  • Gain more exposure to the real estate market. As an individual, investing in real estate at a large scale may not be practical. Typically, you’re buying just 1 property at a time, and you have to personally manage each property you own directly so there’s a limit to how much real estate you can realistically manage. With a REIT, that’s no longer a problem. You’re instantly gaining exposure to a large-scale portfolio of multiple properties. 

The major cons of REITs include:

  • No direct control over decision making. You’re close to the action and can choose a REIT that aligns with your investment priorities, but you won’t have control over which specific properties are added to the portfolio or how those properties are managed. For investors with little interest in actively managing real estate, that’s not a major drawback but for those who want to be more hands on, you might feel too limited by a REIT.
  • Prices fluctuate like stocks. Because REIT shares are traded on public exchanges like other stocks, the price fluctuates according to market sentiment just like other stocks. While that won’t affect your dividend yield, it can impact the net worth of your investment portfolio — and it can also be a little nerve wracking to watch if you’re risk averse.

What is Real Estate Crowdfunding?

Real estate crowdfunding is a newer option investors have for investing in real estate without the same barriers to access as direct real estate investing but offering a little more decision-making power than REITs do. Investors can go to 1 of the many real estate crowdfunding platforms that have emerged in the last few years and choose to invest in specific projects or deals.

Benefits to Crowdfunding

As an investor, going the crowdfunding route offers the following benefits:

  • Direct ownership. As a crowdfund investor, you become part of a pool of investors who directly own this property or this development project. This typically translates into a much larger share of the total project. REIT shareholders don’t have this same ownership. Shareholders own shares of the company — not of the properties it owns.
  • More transparency. Those who advertise projects or deals on a crowdfunding platform have to provide in-depth detail and clear parameters for what your investment will go toward and what you can expect in return. With REITs, you know most of its money is going toward real estate investments, but you won’t really know what specific decisions are being made or how the money is invested.
  • Higher returns. The annual returns on a project you invest in vary depending on the investment but are usually somewhere around 15%. As a direct owner, you also usually get a higher proportion of that return because it’s being divided among a smaller pool of investors. 
  • Choose your deals. Crowdfunding platforms present a wide range of different projects and deals, empowering you to choose which specific properties or projects you want to invest in. 

Drawbacks to Crowdfunding

While crowdfunding gives you more control and more ownership, it does carry higher risks. Here are the main drawbacks of crowdfunding:

  • Higher risk. Because you’re investing in a single property rather than in a portfolio of hundreds or more, the potential loss if this project doesn’t pan out is much higher. As a shareholder in a REIT, performance might fluctuate from year to year, but the failure of a single property in the portfolio won’t cause you to lose your entire investment.
  • Less liquidity. Because you’re investing more directly in real estate, you run into the same liquidity problems that come with that. Your investment will be tied up in this project until it’s completed, or the property is sold. Many projects also have restrictions around when you can withdraw your investment so it’s not possible to cash out early if you change your mind.
  • Strict minimum requirements. While the 2016 Jumpstart Our Business Startups Act removed the requirement that you had to be an accredited investor to invest in real estate through a crowdfunding platform, many platforms still restrict access to accredited investors only. Even when they don’t, many of the projects have higher minimum investments ranging from a few thousand dollars to hundreds of thousands of dollars. These requirements can make them less accessible to many individual investors.

What Real Estate Investment is Better?

There’s no one right answer here. The best option is the one that aligns best with your interests and goals. To make the best decision, you have to think about what your priorities are and how you see real estate fitting into your investment strategy. With that in mind, here are a few guidelines that can help you decide:

REITs are a better option for investors who prioritize:

  • Consistent, passive income from annual dividends
  • A hands-off approach that doesn’t require extensive knowledge of the real estate market
  • High liquidity so that your portfolio can be rebalanced as necessary
  • The ability to hold your investment in a tax-deferred account

Real estate crowdfunding is better for investors who prioritize:

  • A more hands-on approach that allows them to choose specific properties and projects.
  • Directly owning real estate
  • The potential to earn a substantially higher return on their investments

This also doesn’t have to be one or the other decision. If you value having the steadier, more passive income stream of a REIT but you’re also drawn to the excitement and high return potential of crowdfunding, you can certainly do both. Incorporate some great REITs into your portfolio but reserve a little play money to put toward crowdfunding projects. 

Benzinga’s Best REIT and Real Estate Crowdfunding Platforms

Whether you decide REITs or crowdfunding platforms (or a mix of both) are more aligned with your investment goals, choosing the best options for either is key to any successful investing strategy. To get you started, you can check out our best REITs for the month. You can also see reviews on real estate crowdfunding platforms below. 

Get started securely through Diversyfund’s website
Fees
No management fees
Minimum Investment
$500
1 Minute Review

-NOTICE- Benzinga has been alerted that Diversyfund has suspended its monthly dividend. This review will be updated once we investigate these changes to the platform’s dividend payments.

DiversyFund isn’t your average crowdfunding platform. You’ll find that the company puts a twist on the traditional everyday crowdfunding platform, beyond anything you can find online with a simple Google search. You only have to look under DiversyFund’s skin one layer to surmise that DiversyFund is a conscientious developer and sponsor and helps hedge risk through improved vetting.

DiversyFund offers a multifamily real estate investment trust, the DiversyFund Growth REIT, and its main goals are to increase cash flow and resale value. It’ll automatically give you access to multi-million dollar real estate assets.

Best For
  • Those looking for an alternative investment beyond stocks and bonds
  • Individuals who aren’t sure they want to be landlords in the traditional sense
  • Investors who aren’t accredited
Pros
  • Only need to pony up $500 to get started
  • Open to investors all over the world
  • No expensive broker fees
Cons
  • You’ll only be able to access “blind pool” investments, which means that you can’t opt out of specific properties
  • There’s only one real investment option, the DiversyFund Growth REIT
Get started securely through CrowdStreet’s website
Fees
1% – 1.75%
Minimum Investment
$25,000
1 Minute Review

Crowdstreet is an online real estate investment platform that lets investors choose from a wide range of real estate investment offerings to crowdfund. Crowdstreet investors are free to buy into managed funds, individual buildings or even build a bespoke investment portfolio that includes both kinds of deals.

CrowdStreet’s platform has a diverse range of property types, ranging from multifamily to office, industrial, self-storage and others.

 

Best For
  • Accredited investors
  • Long-term investors
  • Investors looking to diversify from stocks
Pros
  • User-friendly interface
  • Diverse investment offerings
  • Great investor resources
  • Proven performance history
  • Many offerings eligible for inclusion in self-directed IRA
Cons
  • Accredited investors only
  • Most offerings require a $25,000 minimum investment
get started securely through Groundfloor’s website
Fees
No investor fees
Minimum Investment
$10
1 Minute Review

Groundfloor is open to non-accredited investors and private individuals looking for active real estate alternative investment. Groundfloor has great volume with more than 10 investments. 

Individuals with small portfolios will also like the low $10 minimum and 0 investor fees. However, most of the loans are given to house flippers, and there is a risk of borrowers defaulting on their loans. 

Best For
  • Non-accredited investors: It is a good option for non-accredited investors who want to invest in an individual capacity.
  • Private investors with small portfolios: Groundfloor charges a relatively small premium of $10, which private investors with small portfolios find attractive.
  • Active-investors: Groundfloor is also ideal for investors who want to actively maintain and control their real estate portfolio.
Pros
  • Charges the lowest minimums in the industry
  • 0 investor fees
  • Open to non-accredited investors
Cons
  • Offers no bankruptcy protection
  • High rate of an uncured default
  • Many loans are for judicial-only states
Get Started securely through Arrived Homes’s website
Fees
1% asset management fee
Minimum Investment
$100
1 Minute Review

Arrived Homes is a real estate investment platform that focuses on building wealth through investing in rental properties. While most real estate platforms and REITs focus on commercial properties, Arrived Homes focuses on single-family homes as its source of rental income.

This focus on smaller properties allows Arrived Homes to sell ownership shares on individual properties to non-accredited investors with buy-ins as low as $100. Learn more about Arrived Homes with Benzinga’s review.

Best For
  • Small- to medium-sized investors
  • Investors interested in rental income
  • Investors looking to diversify
Pros
  • Buy-ins as low as $100
  • Open to non-accredited investors
  • Offers ownership shares in real property (and all the tax benefits)
  • Multiple ways to earn dividends (rental income and property appreciation)
  • Great way to diversify portfolio
  • Open to self-directed individual retirement accounts (IRAs)
Cons
  • Long hold periods
  • No secondary market to liquidate shares
Get started securely through Streitwise’s website
Fees
2% – 3%
Minimum Investment
$5,000
1 Minute Review

Streitwise is a unique online real estate investing platform that was designed to give investors, both big and small, an equal opportunity to invest in real estate. At its core, Streitwise is a real estate investment trust, but it’s one of the few online real estate investing platforms that is available to non-accredited investors.

Best For
  • Investors looking to diversify
  • Investors with less than $200k in annual income
  • Passive traders
Pros
  • Consistent quarterly dividends
  • Low, transparent fees
  • Low investment minimum
  • Convenient and easy to use
Cons
  • Limited offerings
Get started securely through Yieldstreet’s website
Fees
average 1-2%
Minimum Investment
$500
1 Minute Review

Yieldstreet is an online investment platform that specializes in alternative investment offerings designed to generate passive income and wealth for investors. The platform offers a 1-stop shop for a range of alternative investments ranging from real estate to structured notes and even art collections.

Best For
  • Accredited investors looking to diversify
  • Alternative investments to stocks and bonds
  • Investors looking for passive income
Pros
  • Easy-to-use platform
  • Carefully selected offerings
  • Excellent mobile app
  • Full spectrum of alternative offerings
  • Options for non-accredited investors
Cons
  • Majority of investments only open to accredited investors
Get started securely through AcreTrader’s website
Disclosure: For Accredited Investors Only
Fees
0.75% and 1% per year based on asset value
Minimum Investment
$15k – $25k
1 Minute Review

AcreTrader is an investing platform that makes it easy to buy shares of U.S. farmland and earn passive income, starting in just minutes online. The platform features actual parcels of farmland where investors can choose offerings to participate in based on their investment preferences.

Farm types range from Midwest Row Crop Farms to California Almond Orchards, but you don’t need to be an agriculture expert to get started. They have a very thorough underwriting process to vet the offerings, and present information in an easy-to-understand offering page on their website where you can get started with as little as $10k and 10 minutes.

Best For
  • Investors looking for diversification away from stocks and other traditional assets
  • Real estate investors interested in new opportunities
  • Accredited investors with multi-year investment horizons
Pros
  • Real, uncorrelated asset class with a history of consistently strong returns
  • Highly qualified team with best-in-class underwriting practices
  • The platform has some of the lowest fees that you’ll find in real estate investing
Cons
  • Investment minimums are typically $10,000+
  • Only open to accredited investors at this time
get started securely through Fundrise’s website
Fees
0.85% asset management fee per year
Minimum Investment
$10
1 Minute Review

Fundrise is an online real estate investing platform with two clear aims: to simplify and democratize real estate investing. While there is no shortage of real estate investing platforms, Fundrise is one of the few that is open to non-accredited investors. Traditional real estate investing, and by extension most real estate investment platforms, require investors to pledge large amounts of capital. As opposed to the $25,000 to $50,000 buy-ins on many competing platforms, Fundrise distinguishes itself from the crowd by accepting investor contributions as low as $10.

Best For
  • New real estate investors looking to get their feet wet
  • Non-accredited investors
  • Real estate investors who want a “set-it and forget it”-oriented option
  • Investors looking for low-to-moderate cost buy-ins
Pros
  • Multiple offerings available to non-accredited investors
  • Simple menu of investment options
  • Can use for IRA contributions
  • Incredibly affordable buy-ins
  • Low, easy-to-understand investor fee schedule
Cons
  • Extended hold periods
  • Limited secondary market

Become a Real Estate Investor Today

Now that you understand the basics of REITs and real estate crowdfunding, including the key differences between them, you’re better equipped to make the right decision about where to invest in your money. Make sure to come back to Benzinga for more information and tips to guide your investing career.

Frequently Asked Questions

Is a REIT crowdfunding?

Not really. With a REIT, you’re buying shares of a company through a broker rather than directly financing a real estate project. With crowdfunding, your money is going directly into a specific project. While you get a share of the income or profit in both cases, you’re not technically an owner of any property if you’re invested in an REIT.

REITS versus rental properties: Which is better?

Both can be great sources of consistent income. With your own rental property, you get to keep 100% of the income generated but you also have to manage the property — and cover overhead costs of operating and maintaining it even if tenants move out, and it’s not generating as much income anymore. With a REIT, you only get a small share of the income in the form of dividends, but you don’t have to do any of the heavy lifting, and there’s no ongoing overhead costs.

Accelerate Your Wealth

Arrived Homes allows retail investors to buy shares of individual rental properties for as little as $100. Arrived Homes acquires properties in some of the fastest-growing rental markets in the country, then sells shares to individual investors who simply collect passive income while waiting for the property to appreciate in value over 5 to 7 years. When the time is right, Arrived Homes sells the property so investors can cash in on the equity they've gained over time. Offerings are available to non-accredited investors. Sign up for an account on Arrived Homes to browse available properties and add real estate to your portfolio today.