#REIT vs fractional ownership

[timokipp]

Understanding the Nuances of Investing in Commercial Real Estate

Investing in commercial real estate (CRE) presents a unique set of opportunities and challenges that differ significantly from residential property investment. CRE refers to properties used solely for business purposes, which investors purchase to generate income through leasing space and capital gains. The intricacies of CRE investment require a strategic approach to optimize returns and minimize risks.

What Makes Commercial Real Estate Investing Distinctive?

CRE investment deals with properties like offices, retail spaces, warehouses, and industrial buildings. Unlike residential real estate, commercial properties usually have longer lease terms, which can provide a more stable and predictable income stream. However, the initial capital required for CRE investment is often substantial, making it potentially less accessible for individual investors.

The Mechanics of Commercial Real Estate Investment

Investing in CRE can be approached through direct investments in properties, fractional ownership, or indirectly via real estate investment trusts (REITs). REITs function similarly to mutual funds, pooling money from investors to purchase a diversified portfolio of real estate assets. Fractional ownership involves investors pooling funds to share in the ownership of a property. Investors typically receive a slice of the income and capital appreciation proportional to their investment.

Direct Investment vs. Indirect Investment

Direct investment in commercial real estate involves purchasing a property outright or as part of a syndicate. This method gives investors more control over their investments but requires significant capital and active management. Indirect investment, through REITs, offers a more hands-off approach, enabling investors to enter the market with less capital and benefit from professional management.

The Importance of Location and Tenancy

Key factors in the success of a CRE investment include the property's location and the quality of its tenants. A prime location with high demand and limited supply can drive property value and attract premium tenants. The financial health of tenants and the terms of their lease agreements can also significantly impact the investment's stability and profitability.

The Impact of Market Cycles and Due Diligence

Understanding market cycles is crucial for timing CRE investments appropriately. The economy, unemployment rates, and GDP can all impact the CRE market's health. Thorough due diligence is necessary to uncover any potential issues with the property or market that could affect profitability. This includes understanding zoning regulations, market saturation, and the property's physical and financial condition.

Contingency and Capital Reserves

Unexpected expenses can arise in CRE investment, making contingency and capital reserve funds essential. These funds can cover unforeseen costs and help maintain cash flow during the stabilization phase of the investment. A standard contingency budget ranges between 5% to 15%, depending on the asset and its performance level.

Investing in commercial real estate is a complex but potentially rewarding venture that requires careful planning and consideration. Factors such as location, tenancy, market cycles, and due diligence play pivotal roles in the success of a CRE investment. Whether through direct property investment, REITs, or fractional ownership, investors must weigh the associated risks and rewards to make informed decisions that align with their financial goals.

[jewarland]

HOW TO INVEST IN REAL ESTATE

These are five easy ways for a typical retail investor, or even someone with access to much more funds, to invest in real estate and earn a profit.

Conventional vs Traditional Investment Model

Purchasing an asset or leasing it for a lengthy period of time, then renting it out to either residential or commercial tenants, is the most straightforward method of investing in real estate. Although the process is straightforward, it requires a significant initial investment and entails yearly maintenance and upkeep fees. Make sure the asset is not subject to any legal issues before leasing, purchasing, or borrowing it.

In the event that the property is commercial, you will need to follow the protocols described by the sub-registrar’s office and complete the required registrations there with two witnesses.

After the property is registered, you can advertise it or let people know that it is available for purchase. The monthly rentals from the property will be your passive income after the tenant signs and accepts the lease.

To ensure that the property is never totally empty, it is a good idea to have tenants in the same asset that have overlapping lease periods. It also lowers the expense of timely maintenance. Even if you hire a property management company to take care of everything for you, you would still have to pay their commission fees.

If the property is residential, simply a visit to the sub-registrar’s office is required. Every renter will require a similar rental agreement to be drafted, and the monthly rentals you receive will be used to calculate the return on your investment.

Letting Go of a Part of Your Current Property

If you don’t want to take on the full financial responsibility of a large investment, you can begin with something as simple as leasing a room to business or residential tenants. It makes more sense to rent out a complete floor if you currently own a home that is unoccupied. You will, however, have to handle the additional traffic that is produced. The conditions may not be suitable for living in the same location if the firm you rented the chunk out to has a particular product or service. It is necessary to include all of your terms and conditions in your leasing agreement.

Fix-and-Flip

This mode of investing has been picking up popularity with people who have had experience in general contracting.

If you are flush with cash, you can purchase a high-maintenance residential or commercial property, make the necessary repairs, and then sell the asset to asset/property management companies for a premium. Although the item is owned for a comparatively shorter period of time, this type of investing might yield strong profits if one has done their research on the market beforehand.

This option offers less restrictions on routine maintenance, registration work, and other related tasks than owning a property forever. It does, however, need that you have a solid understanding of the supply and demand for real estate in the market, as well as the price of the renovations you intend to undertake. Having an experienced partner in this helps.

Ownership in Parts

This has been accelerating since REITs in India became successful. Indians continue to favor real estate as their investment vehicle of choice, and fractional ownership significantly lowers the cost of real estate ownership while enabling investors to lodge their capital in real estate.

While fractional ownership concentrates on a single asset at a time, it also incorporates several investors, much like REITs. Investment companies that deal in fractional ownership of real estate or property frequently seek out properties based on thorough market analyses and past rent performance in the area. The asset is then subjected to additional analysis in light of the potential returns it may yield. The asset is placed as available for investment on the company website once it has been conclusively determined to have strong growth prospects.

The company establishes a Special Purpose Vehicle (SPV) to oversee investments and transactions pertaining to a certain asset. The management of the SPV also includes any expenses for upkeep and maintenance. Usually, commercial properties with leases of three years or longer receive this investment.

Lease durations in some business premises with a speciality might reach ten years or longer. Fractional ownership has the potential to offer a rental yield of 8% to 10% over an extended investment period. This might translate into an internal rate of return (IRR) of 16% to 20% during a five-year investment period.

Investors can diversify their portfolio by holding fractional interests in a variety of asset subclasses, such as parking lots, industrial floors, warehouses, labs, and commercial office spaces. It’s simple to withdraw from a fractional ownership investment. You have two options for transferring ownership: either wait until new tenants come in to decide whether to keep or sell the asset, or use the management firm’s own portal or services.

Real Estate Investment Trusts (REITs)

REITs, or real estate investment trusts, are companies that manage and hold real estate with the goal of making money. Real estate investment trust businesses are companies that manage mortgage and high-value real estate asset portfolios. They are paid, for example, to rent out houses. The investors receive revenue and dividends from the rent that was effectively collected.

Real estate investment trusts (REITs) offer investors the opportunity to acquire high-end real estate along with dividend income that will progressively boost their wealth. Investors can benefit from this opportunity to grow their wealth and generate income at the same time. Both big and small investors can store their money and make money with this investment option. Small investors may want to consider pooling their money with other investors’ to make a bigger investment in noteworthy commercial real estate ventures. REITs include infrastructure, data centres, medical facilities, apartment buildings, and other real estate.

Because they own and manage expensive real estate holdings, REITs are among the priciest investment possibilities. As a result, investors who place their money in REITs are typically very wealthy people. For example, large institutional investors can make profitable investments in a variety of financial instruments, such as pension funds, endowments, insurance firms, and bank trust departments.

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[addindiagroup]

Is investing in Fractional Ownership of Commercial Office Space Profitable?

People begin to consider investing when they have extra money. Typical queries include where to put money, how profitable it will be, and how safe it is to put money in a certain place. Although fractional investment has been more common in the West, it is becoming more and more well-liked in India. It makes it possible for investors to purchase commercial office space, even in small amounts. You might not be able to accomplish this alone. Investing in commercial office space also enables portfolio diversification.

Fractional ownership opens up opportunities for the purchase of prime commercial office space that would not have been feasible otherwise. This asset type is accessible to members of the average middle class. Prior to now, residential real estate was more popular among Indian investors than commercial office space. After a period of stagnation in residential real estate sales, investors began to search for more profitable ventures. 

Investing in real estate is a more stable option. This presents a less hazardous choice for investors. In real estate, the projected five-year IRR is 16–20% while the rental yield is 8–10%. A significant portion of those looking to use commercial office space as a source of alternative income are young Indians and non-resident Indians.

What is Commercial Office Space?

A piece of property used for business is known as commercial office space. Rather than being a living area, it serves as a workspace. Residential real estate is the segment that includes living spaces. Tenants of commercial office space frequently lease it to them so they can carry out revenue-generating operations. From a single storefront to a sizable retail centre, commercial real estate can be found. Commercial office space includes things like office space, retail establishments, hotels and resorts, and medical institutions. 

What is Fractional Ownership?

A percentage of an asset is called fractional ownership. Individual shareholders purchase fractional ownership shares of the asset. They split the asset's advantages, including usage rights, revenue sharing, first dibs, and discounted pricing.  

What is Risk like in Real Estate?

It is an illiquid asset due to its immovable nature

Which renders it relatively immune to market risk

Its lack of occupancy

Tenants quitting early

Fractal Ownership in Commercial Office Space

Enables more investors to contribute to a larger investment in the asset by paying their share.

Their % contribution to the overall sum is tied to their return.

Depending on the amount they invested, each investor is the asset's owner.

Risk Assessment 

Because real estate is immovable, it is a largely risk-free investment.

The asset needs to be thoroughly studied, and financial modelling needs to be done. For example, you ought to be aware of the builders' track record and past experience.

Commercial Office Space vs Residential Real Estate 

Strict lease terms, longer lease periods, and a lock-in period allow investors to count on returns from a CRE investment.

Residential property market requires significantly more time and effort to maintain the returns from the asset.

Commercial office space typically proves to be a better deal than residential real estate.

CRE offers more income (2x gain over residential)

CRE has a higher annual rental appreciation mark.

CRE is highly sellable.

CRE has much better returns once sold.

Investing Individually

Property, claims, rent value in the market and the history of the price of the asset all become the responsibility of the individual.

Investment companies or firms charge to take care of all of the above.

REIT vs CRE

One could invest in CRE and join a Real Estate Investment Trust (REIT) to avoid all of the aforementioned annoyances.

This would prevent you from selecting which REIT assets receive which portion of your investment.

Fractional ownership would provide you this option.

Companies that own or finance income-producing real estate in a variety of property industries are known as REITs. To be eligible as a REIT, these businesses must fulfil a number of requirements. The majority of REITs are very beneficial to investors and trade on large stock markets.  

Fractional Ownership

To handle investments in an asset, an SPV (Special Purpose Vehicle) is typically used.

The SPV oversees both the asset and the rental return distribution.

Since the investment amount is divided, investors are free to choose the amount and degree of risk they wish to take.

Source Link : https://addindiagroup.com/is-investing-in-fractional-ownership-of-commercial-office-space-profitable/

[briash26]

REIT vs Fractional Ownership: Understanding the Differences

Explore the disparities between REITs and Fractional Ownership to make informed investment decisions. Learn about ownership, control, risks, and returns.

[kavithask]

REIT vs. Fractional Ownership: Which Real Estate Investment Option Suits You Best?

Delve into the world of real estate investment with a comparison of REITs and fractional ownership. Discover the pros and cons of each to make an informed decision for your investment goals

[poonam-4-z]

reit

fractionaownership

realestateinvestment

[leena-2023]

REIT vs Fractional Ownership

Real estate has long been recognised as a valuable asset class for diversifying investment portfolios. Two attractive real estate investing possibilities are Real Estate Investment Trusts (REITs) and Fractional Ownership. While both provide opportunities to invest in real estate, they differ significantly in structure, control, and potential returns. Understanding the differences between REITs and fractional ownership is crucial for investors seeking to make informed decisions. 

[yieldassest]

Things to Know Before Investing in a Commercial Property

Commercial property investment is one of the most profitable ways to invest. The Indian real estate market hasn't been this good since the pandemic. A big part of the commercial real estate market comprises cities in Tiers 2 and 3.

Regarding cash flow, industrial and residential real estate investments come after commercial real estate investments. But it's not as easy as it seems because taxes, rules and regulations for commercial property are higher than those for residential property. For someone to be able to invest in commercial real estate, they have to put up a lot of money and take a lot of risks. So, it is best to invest money after taking a calculated risk.

This blog will show you how to invest in commercial property and tell you if you should invest in commercial property investment companies.

Commercial Real Estate: What Is It?

Commercial real estate is land or buildings used for business or commercial purposes. There are many different kinds of commercial real estate, from single stores to shopping centres with many floors. Hotels, strip malls, resorts, health care facilities, restaurants and office spaces are all examples of commercial real estate.

Check out the necessary details below to learn more about commercial real estate:

·        The world's platform for investors to make indirect real and commercial estate investments in publicly traded real estate investment trusts (REITs).

·        It requires more capital than residential real estate. In this market segment, both the profits and the risks are greater.

·        Investing in commercial real estate allows you to get rental income and see your money grow.

How Do I Start Investing in Commercial Real Estate?

Investing in commercial real estate usually involves putting down a lot of money. Real Estate Investment Trusts (REITs) and fractional ownership are the most common ways to invest in commercial real estate.

Direct Investment Vs. Indirect Investment

Direct Investment

When you make a direct investment, you own the property outright. You can make money if you have enough money and know enough about the commercial real estate business. But these investments tend to be both high-risk and high-reward. Since investing in CRE requires a lot of money, there is a chance to build up a large net worth. You get more cash flow if you make more investments.

You must also be aware that your investment is vulnerable to market risk. Lower CRE and higher demand are the best places to invest in real estate. The rental income from these kinds of properties is higher. The value of the CRE will be determined by the strength of the local economy.

Indirect Investment

Indirect investments in CRE are made by owning various market securities. Exchange Traded Funds (ETFs) or Real Estate Investment Trusts (REITs) that invest in commercial property stocks, real estate agents and banks are examples of indirect real estate investments.

Should I Invest in a Commercial Property?

The Indian real estate market and sector are unique in different parts of the country. A big part of India's real estate industry occurs in big cities. During the pandemic, there was a certain slowdown in the business market.

But according to the government, Tier 2 cities are those with a population cap of between 50,000 and 100,000 people, and Tier 3 cities are those with a population cap of between 20,000 and 50,000 people. In the coming years, the commercial real estate market will likely improve thanks to these cities. Because of this, now and the next few years will be the best time to invest in commercial real estate. Before making a financial investment, we strongly suggest you make a well-researched model. Even if the returns look good, the risk is high.

Before investing, you should consider the calculated risk, as it could help your commercial real estate investments.

To Sum Up

Commercial real estate is a good property investment platform for making a high income. The more lucrative an investment opportunity, the higher the risk. Commercial property investments demand more money. Mishaps and miscalculations are unacceptable. Before making a financial choice, study the property's situation, purpose, zoning, size and condition.

[strata-prop]

The way the fractional ownership model works is a bit different. An asset or a CRE property is listed or advertised to be open for investment. Based on the total investment required, a minimum ticket size is allocated as a portion of the property. Your investment can be in multiples of the same ticket size. Based on your investment amount, you legally own a percentage of the property. Based on the percentage of ownership, your returns are a mix of monthly rentals and interest on the security deposit paid by the tenants.

https://strataprop.com/insight-details/fractional-ownership-vs-reit

Galaxy Building, 43 , Residency Rd, Ashok Nagar,Bangalore, Karnataka -560025. Email - hello@strataprop.com

[andrewdburton]

Stocks vs. bonds: What’s the difference?

If you’re a newbie investor, you may have no idea what you’re doing when it comes to investing in the stock market. If so, don’t feel bad – you’re not alone. According to Gallup, in 2019, only a little over half of all Americans were invested in the stock market. But this is a huge mistake.

If you want to build wealth, especially long-term wealth, investing in the stock market is a necessity.

But why? Couldn’t you just invest in real estate, or precious metals like silver and gold, or even a new-fangled investment like cryptocurrency to reach your financial goals? While you could, you’d be missing out on one of the greatest (if not the best) wealth creators of all time.

If you’ve never invested in the stock market before, you probably have no idea where to start.

Maybe you don’t even know what an investment really is. One of the most common questions for newbies is, “What should I invest in?”

Two of the most common types of investments are stocks and bonds. This post will break down what stocks and bonds are, the differences between them, the benefits of holding them in a portfolio, and where you can purchase them.

But before we get into the specifics of stocks and bonds, I thought it might make sense to show why the stock market is such an amazing wealth builder.

Why Is the Stock Market Such a Good Wealth Builder?

The stock market helps people build wealth through the power of compounding. Most people, investors or not, are familiar with this term. Put simply, compounding is the growth of previous growth. When you earn $20 in a savings account, say, that $20 of earnings grows (or “compounds”) in the future. It’s a virtuous cycle!

If you haven’t seen how compounding affects wealth over the long term, you may not understand why investing in the stock market is such a necessity.

Here’s an example.

Let’s say we have two different people, savers A and B. Both are 35 years old, have $10,000 to invest, and are planning on retiring at 65 years old.

Saver A wants to invest in the stock market, so she decides to invest in a portfolio made up of stocks and bonds earning an average return of 6.8% per year.

Saver B has no interest in the stock market. In fact, he’s kind of afraid of it. As such, he decides to just park his money in a high-yield savings account earning 1.8% interest per year.

Let’s see how much of a difference this makes:

Saver A:

Saver B:

Compounding makes quite a bit of difference!

Saver A has increased her investment by more than seven times! Saver B, on the other hand, hasn’t even doubled his investment. Now imagine adding more to your pile each year and you can see how regular investing in the stock market makes a huge difference over investing in a savings account — or, even worse, not investing at all.

What Are Stocks?

Buying stock is like buying an extremely small stake of ownership in one company.

When a business issues stock publicly for the first time, they decide how many pieces of stock to issue. These are called shares. For example, a company may issue 100,000 shares for investors to purchase. Each share is considered fractional ownership in the company.

When you purchase one of these shares, you are holding a tangible piece of the company. This is commonly called equity. Because you are now a shareholder, you have benefits, such as voting rights in the company, along with a claim to that company’s earnings and assets.

However, the biggest benefit comes from seeing the value of your stock increase over time and sharing in the company’s profits.

The two main ways stocks build wealth are through capital appreciation and dividends.

Capital appreciation is when the price of a stock is worth more than when you purchased it. For example, if you purchased a share of Apple for $150 and later sold it for $300, that would be a capital appreciation of $150. This is the main way stocks help build wealth. Stocks typically average 6.8% growth per year. (But, it’s important to note, average is not normal. And some years, stocks lose money.)

Dividends are monies paid out to shareholders, often every quarter, for holding ownership in the company. (Not all companies pay dividends.) Dividends are paid per each share of stock you own. For example, if you own 100 shares of company X and their dividend per share is $.02, you’ll earn $2 in dividends. This income is a secondary way stocks help build wealth.

What Are Bonds?

Bonds, on the other hand, are securities issued by the federal government, local government, bank or other entity. Essentially, when you buy a bond, you’re lending money to the bond issuer. In exchange, the entity promises to pay you back the full amount of the loan, as well as interest while you hold it, in exchange for lending them money.

Related: 11 Things to Know about Bonds

Bonds earn money in two ways: interest and capital appreciation.

Because a bond’s purpose is to provide steady income with less volatility, interest is paid out more frequently, typically twice a year, but depending on the bond and type, can even be issued monthly. These interest rates can vary widely depending on the type of bond and when it’s issued.

Compared to stocks, the capital appreciation of a bond is much lower. While stocks on average earn 6.8% in appreciation per year, a bond may only appreciate by 2.4% per year.

How Are Stocks and Bonds Different?

While stocks and bonds are similar in many ways, there are quite a few differences between these two asset classes. The main differences between them are their purpose in your portfolio, the risk associated with each, their performance, volatility, and their liquidity.

Stocks are meant to provide the greatest amount of return for your portfolio. Because they have higher potential for loss, stocks are considered higher risk. This higher risk corresponds to greater fluctuations in price in the market, meaning they are much more volatile than bonds.

Conversely, a bond’s purpose is to provide stability and income to your portfolio. Because they have lower potential for loss compared to stocks, bonds are considered relatively low risk. This lower risk translates to more stability, meaning they are less volatile than bonds.

Stocks and bonds also vary greatly in their performance. While the stock market returns an inflation-adjusted average of about 6.8% a year, the bond market only averages a return of 2.4% a year. Having both in your portfolio allows you to get the increased exposure to potential for returns with stocks while mitigating their risk using bonds.

Stocks and bonds differ in how liquid they are as well. A stock can be sold relatively quickly — any time while the market is open. A bond can be sold in different ways, but if the bond hasn’t matured yet, you may not get back the face value of your bond.

The Benefits of Stocks and Bonds in a Portfolio

Depending on your financial goals, you may invest more heavily in either stocks or bonds. Most portfolios use a combination of the two. That’s because the way stocks and bonds perform in the market complement each other.

For example, when the stock market is doing well, bonds tend to hold steady or decrease in value. When the stock market is doing poorly, investors typically flock to bonds, causing them to rise in value.

Having a combination of stocks and bonds in your portfolio keeps your portfolio diversified and minimizes risk.

Asset Allocation

Your asset allocation is the way your portfolio is structured, and is usually discussed in terms of how much stock you have in your portfolio versus bonds. For example, if your portfolio is 80/20, that means your portfolio is made up of eighty percent stocks and twenty percent bonds.

Your asset allocation will depend on many factors, including your age, income, risk tolerance, distance from retirement, and more. If you’re just getting started in investing, you may want to opt for a 60/40 split. This is considered pretty conservative. It’s a safe starting point.

Another rule of thumb you can use to get your asset allocation is to subtract your age from 100. The result is the percentage of your portfolio you should have in stocks. For example, if you’re 30 years old, you should keep 70% of your portfolio in stocks. If you’re 70 years old, you should keep just 30% of your portfolio in stocks. While rules of thumb like this are useful starting points, you’re really best served by having a plan for your asset allocation — then sticking to it.

If you’re unsure what your asset allocation should be, you can use this asset allocation questionnaire from Vanguard to help you figure it out.

Where to Buy Stocks and Bonds?

Although stocks and bonds are different types of assets, they can typically be purchased in the same place.

You can buy stocks and bonds using a number of different services, including brokerage firms, financial advisors, and mobile apps.

Brokerage Firm

A brokerage firm — also called a broker — is a financial institution that allows you to buy and sell securities. Whether you’re investing in stocks, bonds, mutual funds, ETFs or REITs, brokerage firms are what most people use to invest.

A brokerage firm usually has additional features to help investors, such as advanced trading tools, educational materials, videos, webinars, and more.

Some of the most well-known brokerage firms include:

Vanguard

Fidelity

E*TRADE

Charles Schwab

TD Ameritrade

A brokerage firm works great if you know what you want to invest in and are comfortable managing your portfolio yourself.

Financial Advisor

A financial advisor is used as an umbrella term for anyone that helps manage your assets – but not every financial advisor is the same.

Some financial advisors can craft a plan to help you build wealth, minimize debt, save for a particular goal, and provide advice over the long term. Others may simply execute trades on your behalf.

The type of financial advisor you’ll need will largely depend on your financial goals.

Another important thing to keep in mind is that financial advisors charge a fee. This fee can range from anywhere between 0.25% to 1% of your portfolio’s value, depending on the type of advisor.

When investing, it’s important to minimize fees as they can eat up lots of your gains. Still, some people choose to use a financial advisor because they believe it gets them better returns, even after the fee. In many cases, though, it doesn’t.

Mobile apps

With the ubiquity of the cell phone, you can now purchase stocks and bonds on the go by using apps on your smartphone. Some of these apps, like Robinhood, allow you to purchase individual stocks. Others, like Stash and Acorns, invest through the purchase of mutual funds and ETFs.

Mobile apps are typically some of the easiest platforms to use for investing because they don’t charge high fees and they have low minimum balance costs.

Some of the most popular mobile apps right now are:

Robinhood

Stash

Acorns

M1 Finance

Check out our post on the best investing apps for 2020 here.

Final Thoughts

Investing in a portfolio of stocks and bonds (allocated based on your risk tolerance) is one of the best ways to build long-term wealth. It’s also one of the main tools I (and many other people) are using to become financially independent. In just three years, my investment portfolio has increased by almost 20%, earning over $5000 in market returns and almost $2000 in investment income, helping to inch me closer to my goal of early retirement by 45.

While this may not seem like a lot of money, any additional income you have in the market can help build your wealth snowball. And the sooner you start investing, the less time and money is necessary.

Whatever your financial-related goals may be, investing in stocks and bonds is one of the smartest, fastest, and easiest ways to get there.

Maybe you’ll even be able to retire early!

Plus, with today’s technology, the barrier to entry for investing is so low, it’s available to practically anyone with a cell phone. If you’re ready to take control of your financial life so you can build the life of your dreams, invest in stocks and bonds. You can do so for as little as $5 to start.

from Finance https://www.getrichslowly.org/stocks-vs-bonds/ via http://www.rssmix.com/

[propertycrowd]

When we speak to people about our platform Property Crowd, and real estate crowdfunding in general, one of the most common queries is “so how is that different from a REIT?”

Good question. But let’s take a step back.

As we highlighted in a previous article, those wishing to invest in real estate have typically faced a binary choice: the do-it-yourself direct route or the hands-off option of a managed REIT. While directly owning a buy-to-let property is the preferred option for many people, others may lack the capital and/or the experience needed to get started. The de facto alternative to invest in real estate without having to purchase and manage an entire property has thus been Real Estate Investment Trusts (REITs).

REITs are (usually) listed entities that pool together money from thousands of individuals and invest in a diversified portfolio of real estate assets. This diversification can come in many forms – some have global exposure while others focus on just one jurisdiction (e.g. US, UK, Europe), some could have a mandate to hold income-producing commercial assets while others can blend that with development exposure to residential or logistics projects – the possible permutations are numerous. But the one thing that’s consistent, when investing in a REIT, is that you have no say in how things are run; you’re a passenger with a ticket on a bus, but you don’t know where it’s going or what route it’s taking to get there.

Real estate crowdfunding, which is rapidly gaining adoption, is a relatively recent innovation but builds on the fundamental principles of fractional ownership found in REITs. Much like direct investing, crowdfunding investors have the ability to target specific properties through an online platform like Property Crowd’s for an equity stake in the asset or participation in the underlying secured debt. For the asset managers and principal lenders behind the deals, crowdfunding gives them access to a broader pool of capital at a speed and cost previously not possible. For investors, crowdfunding also opens up the world of lucrative syndicated or club deals that have traditionally been the preserve of the well-heeled and well-connected.

Here is a recap of the key differences between a REIT and Real Estate Crowdfunding:

Scope & Transparency: In real estate crowdfunding, you are able to personally and directly select which property assets to include and exclude from your portfolio, allowing for further flexibility and diversity in your investment portfolio. Platforms such as ours, Property Crowd, provide investors with substantial informational resources to enable deep-dive due diligence and further research on each property before making any investment decision. In contrast, REITs are in effect professionally managed blind pools with guidelines as set out in the investment mandate, but zero input from shareholders. The REIT investor is typically so far removed from the properties in the underlying portfolio that real estate investment is reduced to a joyless number on an annual report.

Fees: Those who invest in crowdfunded real estate usually do not have to pay substantial additional fees for access to properties or their membership to the online crowdfunding platform. For example, Property Crowd’s investors are not charged any fees upon subscription, holding or redemption of the debt securities we have offered so far. With exposure to the equity portion of a crowdfunded property deal, there may be basic estate management charges that arise, however, these will no doubt be significantly less than the fees associated with a REIT, which will have to cover their listing costs, fund manager salaries and other overheads in addition to costs associated with estate management.

Liquidity: REITs allow for an investor to trade and sell their shares on an open market; if you need to liquidate your position and raise money quickly, you should be able to do so relatively easily with a publicly traded REIT. Crowdfunded real estate investments are generally less liquid as they are not publicly traded, so it is typically more difficult to cash out an investment before the property is disposed. Such investments are meant to be fixed-term investments, so investors should be prepared to hold on to their real estate crowdfunding investments until the specified maturity date / expected exit event. That said, Global Alternatives is preparing to launch Prop-X later this year, which will be the world’s first cross-border exchange for private real estate securities, and that could create liquidity where there previously was none.

Volatility: Although real estate is an undoubtedly effective way to diversify an investment portfolio, the performance of REIT shares have historically proved highly correlated to overall equity market returns resulting in correlation coefficients as high as 0.86 (see chart below). This means that investments in REITs move in close synchrony with the broader market and are thus of limited use when it comes to mitigating overall portfolio risk / volatility. The comparable equity market correlation versus direct real estate investment has been close to 0.14 (ranging from -0.03 and +0.25; a very low correlation). This market-related component of REITs also gives rise to the possibility that their share prices may deviate significantly from the true value of the underlying real estate – i.e. premiums or discounts to NAV (net asset value) – for long periods of time.

Source: www.REIT.com

Real estate crowdfunding, as the technology-driven online platform model that we know it today, is still very much a nascent industry, but the underlying idea of fractional ownership (and the legal structures that enable it) is neither new nor out of reach. Property Crowd’s Prime Custodian Model, for example, is designed to provide investors in each of its deals with the same custodial safeguards associated with publicly-listed securities.

If you are a savvy investor with a clear approach to your investment strategy and goals, real estate crowdfunding could work very well indeed: giving you disintermediated access to a universe of previously inaccessible property deals and offering your portfolio a dimension of discretion and granularity that REITs cannot. Furthermore, with the security of an institutional grade infrastructure like ours and the promise of secondary market liquidity in the not-too-distant future, real estate crowdfunding could just be the proverbial cake you can both have and eat.

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