Real estate investing is a great way to build wealth. There are many advantages including cash flow, appreciation and a large pay off when you sell it. The downside is that it requires a lot of capital and time to buy, fix, manage and sell a property. However, you don’t have to physically buy a property to invest in real estate. Passive real estate investing through Crowdfunding platforms and REITs may be right for you.
Situations
Actively investing in real estate may be challenging to some or fun at times but there may be situations when you prefer passive real estate investing:
- Difficulty getting a mortgage loan
- Seek diversity across commercial and residential investments
- Decrease risk by giving control to professional managers
- Reduce time commitment required for active investing
- Minimize capital required for buying
- Seek higher returns/ dividends
Passive Real Estate Investing Through Crowdfunding
Crowdfunding is when you pool money from large number of people to fund a project, venture, or a cause. Crowdfunding leverages the internet to raise capital through the collective effort of friends, family, customers, and individual investors. Kickstarter (for creative projects) and Indiegogo (tech & design) are popular crowdfunding sites. Investors may be able to participate in the launch, receive a gift or portion of the profit. Similarly, there are crowdfunding platforms for real estate.
Pros of real estate crowdfunding platform is that you require a small capital, less time commitment and diversity. Cons include your funds being illiquid, fees and minimum investment requirements. They are best for investors with a long-term outlook of 5 years or more.
CrowdStreet
CrowdStreet is a crowdfunding platform for accredited investors who wants to invest in commercial real estate. Investors have a potential to receive high returns. However, there are fees and minimum investment amount. Fees for CrowdStreet varies from 0.50% to 2.2% and the minimum for investing is $25,000.
Accredited investor: Investors with net worth, excluding the value of their primary residence of at least $1 million or annual income of at least $200,000 for the last 2 years for single and $300,000 for married.
Fundrise
Fundrise gives non accredited investors the ability to invest is a in private commercial and residential properties. Investors purchase shares of REITs, which they call “eREITs” by buying one of their portfolios. You can select a Starter, Supplemental Income, Balanced Investing or Long-term Growth. They charge 1% fee and have a $500 minimum for investing.
DiversyFund
DiversyFund is also for non accredited investor. You buy shares in DiversyFund’s REIT, which is a public non listed real estate investment trust. They do not charge a management fee for they own and manage the properties. The minimum amount to invest is $500. For these reasons, it’s a low cost and efficient way to invest in commercial real estate deals. Another difference with DiversyFund is that all distributions are reinvested into properties until they are sold.
Passive Real Estate Investing Through REIT
Real Estate Investment Trusts are the easiest way to invest in real estate. Admittedly, investing is complex and there are different types of REITS. Public traded REITs are listed on the exchange. Public non-traded REIT is non-listed REIT, which means it’s not listed on the exchange. Private REITs are syndication and are for accredited investors only. For simplicity sake, I’m referring to publicly traded REITS.
Pros
High Dividend
REITS are required to pay 90% of their annual income as shareholder dividends. For this reason, they offer some of the highest dividend yields in the stock market. While the bond yields are currently low, REITs can offer passive income for those seeking consistent payout. Due to high dividend yield, REIT investments are a good hedge against inflation.
Liquidity
They are easy to buy and sell through the exchange. It will take you minutes to buy and sell compared to months it takes you to buy and sell an actual property.
Diversity and Low Volatility
When you’re a sole investor, you have limited in fund and time. These limitations also limits the properties you can invest in. By investing passively, you EITs can add diversity to your portfolio. They are also less volatile than stocks.
Cons
Heavy Debt
REITS have more debt than a typical company. Remember that real estate is all about leverage. What platform or product do you know that you can pay 20% down and take the house with you? It works the same way with REIT. It’s the cost of doing business.
Low Growth
REITs pay most of their profits in dividends. You’re not going to buy a REIT for $100 and have it go up to $200 in a year. During a recession and when the market sentiment is low, you may now see rapid growth. When people start buying stocks again, REIT will also go up.
Taxes
Dividends investors receive will be taxed. For this reason, REITs are great investments for IRAs. When you withdraw money from your IRA, you will be taxed according to your income tax bracket. The dividends paid gets folded into this rate.