Most people will benefit from having some of their portfolios in real estate. But most people are not suited to own rental properties. This concept has opened a whole world of investments where someone else manages the properties, but individuals can invest in them and reap some of the rewards. There are a few different ways to go about investing in real estate, the two biggest are through REITs and a newcomer to the game: real estate crowdfunding.
How Do REITs Work?
Real Estate Investment Trusts, or REITs, are actually tax breaks for corporations. That is good news for you the investor. In order to qualify, REITs must distribute at least 90% of their profits back to the shareholders. This helps the corporation to qualify for some lower taxation, and it helps the investor to reap a larger portion of the profits than he or she otherwise may have been able to.
Most REITs are not held by individuals. They are complicated investment tools that the average investor has no interest in understanding. Fortunately, for lay-investors, there is an alternative. An individual can invest in REITs through mutual funds. This strategy helps to gather the gains that can be had from investing in real estate, without all of the risk.
How Does Real Estate Crowdfunding Work?
Crowdfunding is nothing new. There are many different sites out there that a person can use to help raise funds for their project, idea, business, non-profit, or invention. These crowdfunding sites are a great way for someone to get the investors that they need, without the hassle of going to banks or venture capitalists.
Real estate crowdfunding works in a similar manner. If someone wants to invest in some real estate, but they don’t want to actually own or maintain the building, they can become a shareholder through a crowdfunding company. Then, any profits that the real estate venture sees (profits that come from rental income or flipping of the property) are passed on to the investor.
Which Investment Strategy Is for You?
The idea behind both REITs and crowdfunding is that you get a piece of the pie without all of the risk. But there are pros and cons to each method.
The biggest drawback that many people have with REITs is that they generally include higher expenses. These are difficult to manage portfolios, real estate can come with some hefty maintenance costs, and there are profits to be reaped by those who run the companies. This translates into a lower rate of return for the investor.
The downside to investing with crowdfunding is that for most of these projects, you have to be an accredited investor. That means you have to meet some specifications that are set forth by the SEC, and many people do not meet those guidelines.
The Bottom Line
Real estate can be a great investment, but most people don’t want to worry about owning the actual property. Managing rentals can end up being a full-time job; the stress of renters can be a nightmare; the rates of return can be negative if done incorrectly. REITs and real estate crowdfunding take away a lot of those nightmares and open up real estate investment to anyone.
Both investment options are attractive – it all depends on how much risk you wish to take. Remember, higher risk generally translates into higher reward.