A real estate investment trust(REIT) is a company that manages a portfolio of high-value real estate properties that generate income. REITs are like a mutual fund for real estate, pooling money from hundreds of investors who become shareholders of the company, and professional managers decide how to invest it.
REITs allow investors to earn dividends from real estate without having to own or manage the properties themselves. Most REITs are traded like stocks which makes them highly liquid.
- REITs spread the investment across a portfolio of property which diversifies the risk.
- Unlike most real estate investments, REITs are liquid investments.
- REITs can offer steady dividends and potential for long-term capital gains.
- Less transparency.
- Dividend taxation: (find the tax bracket)
REITs vs Crowdfunding
From the outlook, a REIT looks similar to a real estate crowdfunding deal. However, there are significant differences in how each of these works.
Crowdfunding offers a direct investment into the asset
Real estate crowdfunding allows you to invest in a specific property while investing in REITs, you are investing in a company which in turn invests in income-generating properties.
REIT offer higher liquidity
REITs are traded on stock exchanges, which means they can be bought or sold at any time. However, crowdfunding deals can be liquified only after the holding period.
Crowdfunding is transparent
Crowdfunding deals are very transparent as you get to access the property which you are investing in. However, REITs own many properties and do not disclose their holding to investors.
REITs are more diversified
Crowdfunding deals invest in a single asset which makes it far riskier than REITs. For example, a crowdfunding deal may plan to invest in an outdated commercial property, renovate it, and sell it after certain years when the property increases in value. The investor is completely dependent on the performance of the single investment. On the other hand, crowdfunding has the potential for higher returns.
REITs spend your investment over a portfolio of properties that diversifies your risk. For example, if you invest in REITs that own multiple properties and one property struggles, it doesn’t affect your investment as badly as crowdfunding.
REITs are volatile
REITs are traded on the stock market which makes it prone to market volatility regardless of whether or not the value of the property owned by REIT has changed. These changes constantly affect the value of your investment.
In case of a crowdfunding deal, the downturn might affect the value of your property temporarily, your investment will keep bringing in monthly cash flow in case of a rental property.
REITs could be a great addition to your investment portfolio without the high risk and investment which are usually associated with real estate investment.