Real Estate Crowdfunding vs. REIT: Key Differences

For investors looking to diversify away from the stock market, the real estate market is full of attractive opportunities.  Allocating part of your portfolio to real estate investments can provide steady income streams and balance out risk in traditional markets. And you don’t need to own property to add real estate to your portfolio. Two popular real estate investment options are real estate crowdfunding and real estate investment trusts (REITs). But which is best for your portfolio? This comparison of real estate crowdfunding versus REITs will show you the pros and cons of each, so you can make an informed real estate decision.

When real estate acquirers want to buy a property, but don’t have the funds, they may source capital from a large group of investors. This process is called crowdfunding. Investors can typically invest in a crowdfunding project for as low as $100, though this varies between projects and real estate crowdfunding platforms. After the investment is made, investors will be paid their share of profits through quarterly dividends.

Crowdfunding allows investors to have real estate in their portfolios without the hassle of direct ownership and property management. Once the investment is made, investors can rely on the dividend payments as another stream of income. Investors should note that these investments are not very liquid. It may be difficult to sell your shares, and you may not be able to sell at all until a certain amount of time has passed.

A  REIT is another common investment for investors looking to include real estate in their portfolios. A REIT will create a portfolio of properties that could range from commercial to residential. Then, the company will sell shares of the portfolio. This provides investors with exposure to a diverse group of properties. 

Once investors purchase their shares, they will receive a percentage of profits through dividend payments. If the REIT rises in value, investors may also make capital gains on their shares. Many REITs are traded on the public market, making it easy for investors to buy and sell their shares.

Crowdfunding and REITs may seem to offer similar opportunities for reliable income and exposure to real estate. But these investments function very differently. Read about their similarities and differences below.

Real estate crowdfunding involves a collective effort of multiple investors who pool their funds to finance the down payment of a real estate project. Developers will list their projects on a real estate crowdfunding platform, and then harness the power of the internet and technology to connect with investors. The platforms offer a diverse range of projects such as residential properties, commercial complexes or data centers.

REITs, on the other hand, are investment vehicles that own, operate or finance a wide portfolio of income-generating real estate. REITs allow investors to buy shares and become partial owners of a diversified portfolio managed by professional teams.

One of the key advantages of both real estate crowdfunding and REITs is their accessibility to a wide range of investors. Crowdfunding opportunities typically only require a few hundred dollars as a minimum investment, so individuals can diversify across multiple projects.

REITs also offer shares at affordable prices, allowing smaller investors to easily participate. This accessibility permits investors to build a diversified real estate portfolio without concentrating all their funds on a single property. Both of these opportunities and their low minimum investment requirements allow you to gain exposure to real estate without needing to buy an entire property.

Liquidity in real estate crowdfunding can be limited, as investments are often illiquid until the project is completed or sold. Investors may face challenges in withdrawing their funds before the project matures. Before investing, you should check the project’s terms and ensure you won’t need your investment funds before then.

REITs offer a much higher degree of liquidity compared to real estate crowdfunding. Because REITs are sold on public stock exchanges, their shares can easily be bought and sold at any time. This is a great option for investors who need a higher level of liquidity.

The potential returns in real estate crowdfunding can vary widely based on the project’s success. Successful projects can generate attractive returns, but there is also a possibility of losses if the venture faces challenges. Crowdfunding is a bit of a risky investment, and thorough research should be conducted before investing.

REITs aim to provide stable returns through a combination of dividends and capital appreciation. The performance of a REIT is tied to the underlying real estate assets and the effectiveness of the management team. REITs may not offer as attractive returns as crowdfunding, but their lower level of risk can help balance a portfolio. 

Real estate crowdfunding investments may have varying time horizons, depending on the project’s development and the specific terms set by the platform. Some investments may take years to realize returns. Investors should only choose a project that has a time horizon that matches their goals and needs.

REITs typically suit investors with a long-term perspective, as real estate assets may require time to appreciate and generate substantial returns. However, their liquidity allows investors to sell at any time, though they will likely experience fewer returns if they only invest in the short term. Both of these investments should be viewed as long-term investments, but crowdfunding is more rigid and less liquid than REITs.

When investing in real estate crowdfunding, there are inherent risks to consider. As projects are often not fully developed, investors face uncertainties about the success of the venture and the potential return on investment. This uncertainty makes crowdfunding a riskier investment.

REITs are not immune to risks either, as they are subject to market fluctuations and management decisions. Economic downturns can affect property values, impacting the trust’s overall performance. But they are less risky than crowdfunding because of their liquidity and innate diversification.

Though they may seem similar, comparing real estate crowdfunding and REITs shows that they are very different investments. Before choosing one, or both, investors should consider their liquidity needs, risk tolerance, minimum investment and investment time horizon. Then, they should find the opportunity that will best help them reach their financial goals. If you have any questions about what investment is best for you, consult with a financial adviser for personalized recommendations.