If you’d love to reap the financial benefits of investing in real estate but don’t want to deal with the hassle of owning and managing physical properties, then here’s some good news: You’ve got options!
Investors looking for higher returns than what a single-family rental unit can produce will often seek to partner with a private equity firm. These are companies that buy and manage large-scale commercial holdings such as:
- Office buildings
- Shopping malls
- Medical offices
The obstacle for most people with private equity is that you have to first be what’s considered an accredited investor. This is defined as someone who has a net worth exceeding $1 million, not including their primary residence, or who has an annual income exceeding $200,000 (or $300,000 for joint filers). Due to such high financial requirements, this excludes the average American.
Fortunately, things have evolved, and now investors with modest resources can become partial owners of commercial real estate that was once only reserved for private equity partners. This is through two types of products: REITs and crowdfunded real estate.
A REIT is a “real estate investment trust”. This is essentially a company that buys, holds, and manages many of the same types of commercial real estate that private equity companies do.
If you’ve ever invested in a mutual fund, then you already know how a REIT works. Thousands of investors will buy shares of the REIT and pool their money together. The REIT will then use this capital to fund its real estate projects.
The main draw for people to invest in REITs is that they pay handsome dividends. To avoid corporate taxation, REITs are required to pass along at least 90 percent of their profits to investors. This is done through quarterly or monthly dividend payments.
Sometimes these dividend payments can be quite large relative to stocks and mutual funds. Depending on which type of REIT you buy, it can pay anywhere from 4 to 10 percent. To put this in perspective, consider that the S&P 500 stock market index has an average dividend yield of just 1.9 percent.
What Do They Invest In?
Most REITs will specialize in one or more specific types of properties. For instance, you can find REITs that only purchase medical buildings or hotels. The idea behind focusing on one particular sector is that investors can take advantage of opportunities for growth and risk mitigation.
Rather than owning physical property, some REITs specialize in mortgage-backed securities. These provide to other companies and developers to purchase real estate holdings (similar to a bank).
Crowdfunded Real Estate Investing
Have you ever heard of people asking for money on sites like GoFundMe or Kickstarter? These are called “crowdfunding sites” because they ask “crowds” of strangers for support by donating or “funding” a particular cause.
Because this model has proven to be so successful, it’s been adopted by real estate entrepreneurs as a way to raise the money they need for their latest projects. This is how real estate crowdfunding sites like Fundrise and CrowdStreet were founded.
Unlike donation sites like GoFundMe, you’re not just freely giving away your money with crowdfunded real estate. You’re actually buying a stake in the project, usually in the form of equity or debt. In some ways, you could think of it as buying a share of stock or a mutual fund.
Note that when you buy shares of crowdfunded real estate, you’re investing in the project directly. This is different from a REIT where you’re buying shares of a company; not the individual projects.
Similar to REITs, the benefit to investors is the potential for higher-than-average dividend yields. Although they are subject to change, some crowdfunded real estate sites boast double-digit returns over particularly good years.
What Do They Invest In?
Crowdfunded real estate projects can consist of a wide range of assets. They might include portfolios of rental properties and condos. Or they could have larger holdings that are more like that of REITs and private equity.
REITs vs Crowdfunded Real Estate
At first glance, REITs and crowdfunded real estate might sound like nearly the same thing. In many ways, they do process a lot of the same characteristics. But there are also some subtle differences.
Here’s how these two types of investments compare.
Both REITs and crowdfunded real estate require little investment. REITs can be bought in the open market with your favorite broker for as little as the cost of one share. Some crowdfunded real estate platforms will let you start investing with as little as $10.
Both assets can produce income for investors through their handsome payout of dividends. However, unlike the dividends you’ll receive from regular stocks and mutual funds, REIT and crowdfunded dividends are considered “unqualified” by IRS standards. That means you’ll pay regular income taxes on them as opposed to the more favorable tax brackets for qualified dividends.
To avoid this tax complexity, you may want to purchase REITs as part of your traditional or Roth IRA. Unfortunately, when it comes to crowdfunded real estate, you can’t invest directly into this through a regular IRA. If you wanted to, it would need to be with a financial institution that offers a self-directed IRA.
One of the major advantages of REITs over crowdfunded real estate is the length of time your money will be tied up. Just like stocks, REITs can be bought and sold at any time. However, most crowdfunded real estate platforms will require you to not make any withdrawals for at least five years without penalty. This is typical because of how long it takes for the projects to mature.
One of the things estate crowdfunding investors really like is that you can actually see the projects you’re sponsoring. Most platforms will show you pictures and even provide the addresses of the properties.
With REITs, however, the holdings are vague. This is because when you invest in a REIT, you own shares of a company rather than the project itself. They are required to disclose how many properties they have, but little more is ever revealed.
Because REITs are publicly traded companies, they have to meet strict SEC regulations (just like stocks and mutual funds). However, crowdfunded real estate is a different business structure and does not have to meet the same set of SEC regulations.
All of Your Investments in One Place
Whether you decide to invest in REITs, crowdfunded real estate, or anything else, it can get pretty complex trying to keep track of it all. If you’d like a simple one-stop place to see all of your investments at once, then you need the Buxfer Investments feature.
Buxfer syncs with over 20,000 financial institutions so that you get real-time updates on your investment holdings. By just clicking the app, you’ll see your entire portfolio all in one convenient dashboard.
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