For thousands of years, real estate investing has been reserved for the rich, and thanks to advances in finance and hedge funds, it’s only gotten easier for them as they can invest through Real Estate Investment Trusts (REITs). They were the only ones to have the capital and connections to break into this trillion-dollar asset class. Well, not anymore. Due to advances in technology, real estate investing is now open to the masses through Real Estate Investment Platforms or what we like to call – (“REIPs“) via a crowdfunding model. So, what do we mean by REIPs?
The Difference between REIPs and REITs
A REIT is a trust which collects funds through an IPO and uses the money to buy, develop, manage, and sell real estate assets. This IPO is just like any other initial public offering that gives an option to buy a unit, which is a portion of a managed real-estate pool to the investors. The trust handles purchases, leases, finances, and sells the property to pass on returns to the unitholders. The REIT units can be purchased and sold on the stock exchange.
A REIP allows a group of investors to pool funds through crowdfunding in order to finance real estate investment projects. This enables investors to create a portfolio of real estate investments spread across different assets, locations, and properties developed by different builders – at a fraction of the cost of going at it on your own.
Think of it like a GoFundMe – except, rather than crowdfunding for a cause you all believe in, you and other like-minded individuals are crowdfunding for an investment you all believe in.
If you want to invest in real estate, but don’t want to buy/develop a building, then you can become a shareholder in the property through a REIP. This allows for any profits made by the real estate venture to be passed on to you. However, like with any other investment, crowdfunding has its own share of risks. Investors are exposed to volatility in the market along with the risk of default from the developers. The absence of a secondary market can also restrict the liquidity of the investment.
REIT VS. REIPs in Various Aspects
Choice: REITs are more like funds, the institution will do their due diligence and select properties for you – with no input from you in most circumstances. REIPs, however, let you choose which listed property you want to invest in. The platform will do its due diligence and list attractive opportunities and you get to decide which individual project to invest in.
Affordability: You usually need a minimum capital requirement to enter a REIT on the stock market, which can constantly change as it’s traded daily. REIPs on the other hand, allow you to gain partial ownership of a property via crowdfunding and these platforms are open to all as their minimum investment amounts can be as low as a few hundred dollars.
Cost: REITs tend to have high management, transaction, and performance fees that can take a sizable chunk of your invested capital and overall returns. REIPs tend to have a different cost structure and could vary, but generally are more inexpensive than REITs.
Liquidity: REIPs aren’t as liquid as REITs, which are traded every day across international financial markets. REIPs aren’t as liquid as they aren’t traded and need to reach their full investment horizon to fulfill their returns potential.
Risk: Since they are traded on the stock exchange, REITs are more prone to market risk, whereas REIPs aren’t as exposed.
Diversification: REIPs let you choose which and how many properties you want to invest in. You can diversify your portfolio by investing in small amounts across numerous properties that are a part of their own micro-markets. REITs also allow you to invest in a trust, which usually owns thousands of properties across different classes (commercial, residential, etc) and geographic locations – so there’s no real customization and you are reliant on the trust’s portfolio to perform well.
Transparency: REIPs are incredibly transparent as you know exactly what property you’re investing in and the platform provides their reasoning and methodology for listing the property. With REITs, you invest into a trust which owns thousands of properties – so you don’t know exactly where your funds are being invested.
Ownership: Through a REIP, you are a shareholder in a property, so you have direct proportional ownership of the property. REITs are owned by the trusts that you’re investing into.
Market Expertise: When you’re investing with a REIP, you don’t need to have the expertise or resources to invest in the real estate market. When investing with a REIT, it usually also comes with an expert opinion to help you make investment decisions.
You can choose between REITs and REIPs/real estate crowdfunding based on your portfolio’s investment and allocation requirements. A REIP lets you invest in individual properties, REITs let you invest in a pre-existing collection of properties. It’s à la carte vs buffet, so if you prefer investing in properties on a case-by-case basis at an affordable cost, then REIPs and crowdfunding are your way to go. In case you’re wondering how crowdfunding is viable within the MENA region, SmartCrowd serves as an ideal opportunity. However, If you prefer a large collection of investments at once, then you should invest with a REIT.