If you are thinking about launching your investment platform to raise capital for real estate projects, you may be choosing between a real estate investment trust and a crowdfunding platform.
Both of them are viable business models, but may have differences in some aspects:
- Investor types
- Investment limits
- Availability and publicity of projects on the platform
- User interactions (direct investing vs. trust investing)
- Regulations, etc.
Real estate investment trust
A real estate investment trust (REIT) enables investments in large real-estate projects such as office buildings, shopping malls, warehouses, apartment blocks, hotels, etc. A REIT purchases and develops properties to manage them as a part of its investment portfolio.
A REIT can be publicly traded, public non-traded, and private.
Publicly traded REITs are registered with the SEC and have to disclose information on their holdings and activities. One can buy and sell their shares easily on a stock exchange.
REITs that are not traded publicly are also registered with the SEC and are also obliged to publish their reports. Investment in public non-traded investment trusts is illiquid because their shares are not traded on major exchanges. Management may buy back the shares from time to time, or one may sell them on a secondary market.
Private REITs are not obliged to register with the SEC. They do not have to disclose their information publicly, their shares are not traded on secondary exchanges, and thus, investing in them is risky.
How does a REIT earn money?
REITs generate profits on their property: they lease space and collect rent. Then, the income is distributed among investors and shareholders.
REITs that don’t own property but finance its purchase (e.g. mortgage REITs) get profit from the interest on their investments.
How to invest in a REIT
Everybody can invest in a REIT by purchasing the stock of a company, through an exchange-traded fund (ETF) or a mutual fund. The REIT stakeholders get a share of the income produced by the property without a need to purchase, maintain, or manage it.
Publicly traded REITs are open to anybody, and if one considers fractional investment, the minimum may be as low as $5. The minimum investment in a public non-traded REIT is $1,000 – 2,500, so although legally, everybody can invest in it, the entry barrier is high.
Pros of investing in a REIT
REITs can constitute an important part of an investment portfolio because they offer the following benefits to investors.
- They offer a dividend-based income which is relatively constant.
- The income can potentially increase moderately through the long term because of the property appreciation.
- The investment in publicly traded REITs is liquid.
- Investment in a REIT has a low correlation with stocks and bonds – a fact that allows investors to earn even if the market is down.
Cons of investing in a REIT
Investing in a REIT is connected with some risks such as:
- Public non-traded and private REITs are illiquid investments. If one wants to sell its stock quickly, it may be difficult to do so.
- The lack of transparency is another disadvantage. Investors do not see in what properties their funds are invested and from which ones they get dividends.
- Real estate investment funds may charge high management fees.
Real estate crowdfunding platform
A real estate crowdfunding platform intermediates a project owner and investors.
A project owner is usually somebody who manages the property, a property developer, or an owner. He submits the offering on the platform. The platform performs due diligence, and if the project complies with all requirements and is interesting for investors, the offering goes live.
Investors commit some capital to the project and receive a share in it. They may be entitled to one-time repayment (if the property is sold at a profit) or recurring income (if the property is leased or rented).
The platform ensures the authenticity of investment opportunities, verifies the identities of investors and project owners, and advertises the available offerings to the public. It also facilitates communication as well as the exchange of funds and ownership rights between investors and project owners.
Types of real estate crowdfunding platforms
Real estate crowdfunding platforms can be divided into two categories:
- Equity — they provide direct ownership of either a property or the company that manages it. This investment type is risky because any changes in the price of the owned real estate impact investors’ profits.
- Debt — investors lend funds to a project owner and get income at a fixed rate (usually, it varies from 3% to 15%) until the maturity date of the debt.
The minimum investment varies greatly depending on the platform and the offering. While some platforms advertise that anybody can invest with as little as $10, most deals will set a much higher limit, from $1,000, $20,000, or even higher.
Some platforms allow anybody to invest, while some limit their offerings to accredited investors only.
Real estate crowdfunding vs. REIT: what is better?
The choice of whether to invest in a REIT vs. crowdfunding depends on many factors. Investments in a REIT are usually complex because they shall be made through a public stock exchange. Alternatively, one can invest in a REIT through a mutual fund or exchange-traded funds. This is why only experienced investors can handle it even though officially, REITs are open to anybody. High management fees are another detail that can impact investors’ profits significantly.
Compared to REIT, crowdfunding is easier for beginners, the minimum investment can be significantly lower, and there are no heavy management fees. However, the most lucrative offerings are open to accredited investors only.
How to start a crowdfunding Non-Accredited REIT
Those thinking about launching a real estate investing platform shall pick an experienced team that specializes in the development of specialized Fintech solutions.
With JustCoded, you can be sure that your investment platform will not only be built from scratch, but all the processes will be tuned, the solution will be brought to market, and all the needed support will be provided to make your idea work.
Besides, the company developed its own product — LenderKit. This white-label crowdfunding software solution can be used as a foundation for your custom development project or as an out-of-box investment platform for a quick launch.