Many individuals can profit from getting some of their portfolios in real estate. But most investors are not suited to own rental properties. This concept has opened up a whole world of investment, where someone else manages properties, but individuals can invest in them and reap some rewards. There are a few different ways to invest in real estate, the two largest of which are through REITs and a newcomer to the game: crowdfunding in real estate.
- REITs purchase commercial properties and distribute the rental income as dividends to shareholders.
- Crowdfunding enables entrepreneurs to raise capital from a large group of individuals for projects.
- Investors can purchase shares of REITs through mutual funds or ETFs.
- If you don’t want to buy property, you can invest in a crowdfunding company specializing in real estate.
What’s a REIT?
Real estate investment trusts, commonly known as REITs, have been around since the 1960s and allow investors to invest in real estate without having to purchase any real property. How are they doing this? It’s kind of simple. REIT owns various properties — condominium complexes, large apartment buildings, hotels, office buildings, warehouses, retail outlets and other similar properties — and leases or rents them to tenants. Investors are buying shares in the REIT. The rent collected by the REIT shall be distributed to investors in the form of dividends.
How do REITs Work
In fact, REITs are tax breaks for corporations. This is good news for you, the buyer. In order to qualify, REITs must distribute at least 90% of their profits back to their shareholders as dividends. This helps the corporation qualify for some lower tax while helping the investor to make a larger portion of the profits than he or she might otherwise have been able to make.
Investing in the REIT
In general, REIT investors are institutional investors. That’s due to the fact that they’re complicated tools for investments that may be difficult for the everyday, individual investor to comprehend. If this investment type really intrigues you, there are other choices. You can invest in REITs via mutual funds. This helps gather the gains that can be made from investing in properties, minus all of the hazards. You may also want to consider looking into REIT exchange-traded funds (ETFs), which you can buy via a broker. REITs trade as stocks, while crowdfunding can be carried out on a website or on a social media platform.
Crowdfunding is nothing new. But it has reached new heights with the rise of social media. The word refers to raising capital from a broad pool of individuals to fund an entrepreneur’s dream, concept, company, non-profit, or innovation. This helps us to meet a broader community of prospective investors outside the normal suspects, such as families, colleagues, and venture capitalists.
How Real Estate Crowdfunding Works?
Crowdfunding has opened up new avenues for people who want to start their own business or project, but don’t have the money to do that. They may not necessarily have the best credit score, which automatically disqualifies them from obtaining a loan through traditional avenues. There are many different sites out there that a person can use to help raise money. These crowdfunding sites are a great way for someone to get the investors they need, without the trouble of going to banks or venture capitalists.
Real estate crowdfunding works in a similar way. If someone has the wish to invest in properties, but does not want to have or maintain some infrastructure, they can become a shareholder via a crowdfunding business. Any profits directed to the real estate venture — profits derived from rental income or the flipping of the property — are passed on to the investor.
Which Investment Strategy Is for You?
The idea behind both REITs and crowdfunding is that you can get a piece of pie without the risk. But there are pros and cons to each.
REITS: Pros and Cons
Because they pay dividends, REITs provide investors with guaranteed income and trade relatively easily, just like stocks. They help diversify the portfolio, providing investors with exposure to real estate without having to deal with the headaches that come with owning properties.
The biggest drawback that many people have with REITs is that they generally have higher costs. These are investments that are usually difficult to manage, because real estate can come with some high maintenance costs. There are profits to be made by those who run the companies, which sometimes means a lower rate of return for the investor.
Crowdfunding: Pros & Cons
One of the greatest advantages of investing in crowdfunding for real estate is that you can contribute a smaller amount of capital to the investment. You can find a number of different projects that may require as little as $500 or $1,000. Another advantage of this route is that there are generally no investment fees, as opposed to the additional costs that you would expect to pay with traditional real estate investments, such as closing costs or commissions on real estate.
The downside to investing with crowdfunding is that you have to be an accredited investor for most of these projects. It means that you have to conform with some of the specifications set out by the Securities and Exchange Commission (SEC) and many individuals do not comply with those standards.
The Lower Line
Real estate may be a major investment, but most people don’t want to worry about buying the actual property. Managing rentals could end up being a full-time job. The stress of the tenants may be a nightmare, and the rate of return may be negative if incorrect. REITs and crowdfunding real estate take away a lot of these nightmares and open up investment in real estate to anyone. The two investment options are attractive. It all depends on how much risk you want to face. Remember, higher risk generally translates into higher rewards.