Historically, investors have had three main options to invest in real estate: Buy a rental property, Invest in a private real estate fund, Buy shares of a REIT. But lately, a fourth option has become increasingly popular, and that is that of real estate crowdfunding. They are online platforms that pool capital together from many investors to make real estate investments.
They are quite similar to traditional private real estate funds, but the main difference is that they are often open to unaccredited investors, allowing anyone with as little as $10 to participate in their deals. Many of these platforms really took off following the pandemic, when interest rates were ultra-low and amassed $100s of millions or even billions of assets under management ("AUM"). Today, some of the biggest ones are: Fundrise, RealtyMogul, Crowdstreet, YieldStreet, Arrived, Cardone Capital and more. But are they really the best investment choice for you? Let's find out.
Reason #1: Significant Conflicts of Interest
Real estate crowdfunding platforms are incentivized to raise as much capital as possible to maximize fee income and profits for themselves, not necessarily aligned with the investors. On the other hand, REITs use an 'internal management' structure that eliminates fees and better aligns the interests of the management and shareholders.
Reason #2: High Fees Masked as Low Fees
Crowdfunding platforms often promote themselves as a 'low fee' option for investing in real estate, compared to REITs which have proven to be more cost-efficient in terms of management fees.
Reason #3: Too Much Leverage
Crowdfunding platforms will often take on too much leverage to grow the volume of assets under management, leading to potential bankruptcy risks. REITs, on the other hand, have learned their lesson from the past and adopt lower leverage strategies.
Reason #4: No Competitive Advantages
REITs typically achieve superior returns by focusing on specific property types, developing relationships, and using their scale to attract the best talent. Crowdfunding platforms lack this competitive advantage.
Reason #5: Poorer Access to Capital
REITs have a major advantage in efficiently raising capital due to their public listing, giving them access to better deals and lower cost of capital compared to crowdfunding platforms.
Reason #6: No Liquidity... No Control... No Problem
Crowdfunding platforms lack both liquidity and control, making it hard for investors to exit their investments when needed. REITs offer better liquidity and some control over investments.
Reason #7: REITs Are Much More Dynamic
REITs are more dynamic in their approach to real estate investments, often developing properties and offering additional real estate-related services to generate additional profits for shareholders.
Reason #8: REITs are Far Cheaper Today
REITs are currently priced at a discount relative to the fair value of their properties, making them an attractive investment option compared to overpriced crowdfunding platforms.
In conclusion, when considering real estate investments, it is clear that REITs offer a more compelling investment case compared to real estate crowdfunding platforms. With lower fees, better alignment of interests, lower leverage, competitive advantages, better access to capital, liquidity, and dynamic investment opportunities, REITs present a stronger investment proposition for investors seeking exposure to the real estate market. Make an informed decision and choose wisely for your real estate investment portfolio.