Is Real Estate Crowdfunding Worth It?
Real estate crowdfunding could be a great addition to your investment portfolio, but make sure to read the fine print on these new types of assets. Crowdfunding isn’t just for your cousin who wants to take a trip to Peru. It can also be a great way for investors to find new opportunities outside of the stock market.
Real estate crowdfunding platforms are newer to the crowdfunding space, but they might be a worthwhile addition to your portfolio so long as you understand in what exactly you’re investing. Real estate crowdfunding works the same way as many other crowdfunding ventures: Investors pool their money to fund a project, a product or a company in the hopes that there will be a future profit. In many cases, investing in real estate has a high financial barrier to entry, like having a down payment saved. But some real estate crowdfunding platforms are working to lower that threshold so you can invest with as little as $500.
In most cases, real estate crowdfunding platforms direct investors’ money into real estate investment trusts or similar investments. REITs are companies that own, and sometimes operate, real estate, such as apartments, warehouses, malls and hotels. Shares of some REITs are publicly traded on stock exchanges, while other REITs are privately owned.
REITs, both public and non-traded, are legally mandated to pay 90% of their taxable income to investors. Because of this, many REITs offer a strong history of dividends.
Real estate crowdfunding platforms often give investors access to private market real estate investments that may offer higher returns than publicly traded REITs. According to one platform, Fundraise, a REIT investment in the public market with daily liquidity (an ability to sell at any time) has an average trailing 20-year annual return of 8.2%, while a REIT investment in the private market with an investment horizon of three to seven years has an average 20-year trailing return of 12.3%.
While that number may seem exciting, it is not advisable to dedicate too much of your portfolio to crowdfunding services. A balanced portfolio of stocks and bonds has a proven track record over the long term. But allocating some funds to a crowdfunding platform could make sense if you’re looking to diversify and a chance at some healthy returns.
Topics: Real Estate Investment Trusts, Crowdfunding
Work cited: Alana Benson, Nerdwallet, May 22, 2020
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