Since joining the CrowdStreet team earlier this year and meeting with many real estate developers, operators, brokers, and investors about our emerging marketplace, one of the key questions I receive is “how does crowdfunding compare to REITs?” I have come to realize that currently, the competition between real estate crowdfunding platforms and real estate investment trusts (REITs) looks a bit like a battle between David and Goliath. Crowdfunding is an emerging niche, while publicly-traded REITs alone have grown into a $670 billion industry.
Investors who are looking to enjoy the benefits of commercial real estate investment, without making a multi-million dollar commitment, have typically gravitated to buying Modeled after mutual funds, a REIT (real estate investment trust) is a company that owns, operates or finances income-producing real estate. They allow individual investors to buy shares in commercial real estate portfolios.... More stocks. The rise of the crowdfunding sector in recent months has created a new option for investors. Although minimum investment amounts vary depending on the individual deal, some offerings are available for as little as $5,000. For investors that are weighing those two choices, it is important to highlight some notable differences between the two vehicles.
One of the key distinctions between crowdfunding and REIT investing is that crowdfunding offers direct investment in a specific property. Investors buying stock in a REIT, such as a Simon Property Group, are buying shares in that broader real estate company. So, rather than getting an ownership stake in Simon’s Houston Galleria, an investor is buying shares in the company and its 325-property portfolio.
For some investors, that more homogenized strategy of buying a sliver of a much larger real estate enterprise works just fine. Yet other investors favor the advantages of direct investing that allows them to choose one specific property in a particular city. For example, investors can choose to invest in an office building in L.A. or a new seniors living facility in Denver.
The other Core commercial real estate investments are the least risky offering. They are often fully leased to quality tenets, have stabilized returns and require little to no major renovations. These properties are often in highly desirable locations in major markets and have long term leases in place with high credit tenants. These buildings are well-kept and require little to no improvements... More difference between crowdfunding firms and REITs is the fees. Any savvy investor knows that the devil is in the details when it comes to the amount of fees and where they are placed. As with any large entity, REITs have a number of expenses to carry in terms of running the broader company. In some cases, those operational costs result in more conservative return expectations. Non-traded REITs, in particular, have been highly criticized for their high fee structures, as well as the high commissions paid to broker-dealers. The front-end fees on non-traded REITs average 9.9 percent, according to data from Blue Vault Partners. So, effectively, investors start out underwater with only 90 cents on the dollar going into that non-traded REIT asset.
The crowdfunding fee structure can vary from company-to-company. As an example, CrowdStreet uses a model where the fee is the sponsor’s responsibility and can be managed similar to traditional fundraising expenses. There are no investor fees for joining CrowdStreet and no fees for accessing the investment opportunities.
Whether or not crowdfunding has the potential to grow to the size of the larger REIT industry remains to be seen. However, investors are taking note of the distinct differences and new opportunities that crowdfunding offers for direct real estate investing.