Real estate has long been a top option for investors, but real estate comes in many forms. Investors looking to invest in real estate can do so in a myriad of options.
These options include various types such as residential or commercial real estate. Investors can also participate by purchasing a property directly, working with a crowdfunded platform, or committing funds to an REIT.
So, which of these options is best? While each of these options have the potential to be highly profitable, there are pros and cons associated with all of them. In this article, we are going to focus on two of them: crowdfunded real estate and REITs. Specifically, we will look at a crowdfunding platform that has gained popularity recently called CrowdStreet and compare it to investing in an REIT.
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CrowdStreet is a crowdfunded real estate investing platform that provides investment opportunities in commercial real estate. This platform has a minimum investment of $25,000 and is limited to accredited investors. Once signed up, investors have a chance to browse various deals listed on the site. These deals are highly vetted and represent the top 5% of deals CrowdStreet receives.
An REIT is a trust that owns and operates income producing properties. Investors are then given the opportunity to buy shares of the company and participate in real estate investments more passively. REITs are popular for their high dividends and diversification across many properties.
Since its launch in 2014, CrowdStreet has listed over 524 commercial real estate investment offerings. Of those 524 offerings, 54 of those have been fully realized. Over $2.25 billion in capital has been raised and over $245 million has been distributed to investors.
One of the main concerns with any investments is the security and safety an individual can expect. These numbers highlight the platform's ability to demonstrate trust to their investors.
The company is essentially a marketplace that connects developers, or sponsors, with investors. These sponsors bring deals to Crowdstreet, who then carefully reviews the offerings and determines whether or not the deal is a good fit for the platform. If a deal makes it to the site, then investors can begin funding a project.
Check out our full Crowdstreet review for more.
CrowdStreet allows investors to invest in one of three ways: Individual Deals, Diversified Funds & Vehicles, and Tailored Portfolios. Let’s dive in and discuss each of them.
Within the CrowdStreet marketplace, users can browse different projects currently in production, or soon to be. After doing research and their own due diligence, investors can choose to participate in various listings. The minimum investments vary but in general, it’s around $25,000.
On the website, users can sift through a myriad of options from apartment complexes in college towns to new developments in up-and-coming cities. As an investor, you can do all the research necessary to make you feel comfortable before diving in.
Since this is obviously quite a lot of hands-on work, the team at CrowdStreet has made it easy with detailed deal documents, sponsor history, and progress tracking.
In addition to being able to select individual deals on your own, you can also choose to invest in a fund. With trained fund managers, you can access a quicker path to diversification, a tried and true strategy, and an average lower per deal upfront investment.
Within these funds, you can choose between single-sponsor funds or CrowdStreet funds. Single-sponsor means that one real estate firm is leading the charge and will usually focus on that firm’s specialty within a certain region or asset type.
On the other hand, CrowdStreet funds are managed and constructed by CrowdStreet employees and are set up with a variety of locations and property types.
These funds have a much higher minimum investment usually between $150,000 and $250,000.
If you are looking for a more personalized experience, then a custom-built portfolio might be best. These portfolios are designed by a CrowdStreet advisor specifically with your goals in mind.
These advisors will take your goals and bring them to life by investing in properties that line up with your objectives. This obviously comes with a fee, which varies depending on the size of the investment. It also comes with a hefty minimum balance of $250,000.
Crowdstreet fees really depend on the deals that you choose; however, they generally range from 0.50% to 2.5%. There is no fee to sign up, meaning investors can create an account and start browsing potential deals before ever committing funds.
A Real Estate Investment Trust (REIT) is a trust that owns and operates real estate assets. Investors are offered the ability to buy shares of the company. This gives retail investors the ability to invest in real estate investments they may not have been able to before often due to high costs or exclusivity of the investment. REITs can give you exposure to real estate that you would not typically be able to buy directly.
Traditional REITs may be an attractive investment because of the relatively high dividend yields along with the ability to provide passive exposure to real estate. To be classified as a REIT, one of the requirements is that at least 90% of the taxable income needs to be passed along to shareholders in the form of dividends.
REITs allow investors to gain diversified exposure to thousands of real estate assets throughout the world. Before the invention of the REIT, investors would have to purchase real estate themselves or in syndicates, which were limited to wealthy and accredited investors. REITs have opened up real estate markets to common everyday investors, providing more liquidity and an explosion of investment into real estate.
REITs come in various shapes and sizes, but there are generally 3 different types of REITs. The type of REIT you choose will determine things like liquidity, holding periods, minimum investment, and correlation to the stock market. Let's review them here.
Public Traded REITs are those that are traded on an exchange, meaning they are open to anyone. Investing in a public traded REIT means there is no minimum investment depending on your brokerage. For example, if you use a brokerage that offers fractional shares, then the minimum is however much you want to invest. Otherwise, the minimum would be the price of 1 share.
One of the main benefits of this type of REIT is the high liquidity. Because you can buy shares of a public traded REIT on an exchange, you can also sell at any time.
A downside is that these REITs generally have a high correlation to the stock market.
A public non-traded REIT is one that is open to any investor, but it is not traded on an exchange. An example of a public non-traded REIT is when a platform such as Streitwise offers investors access to a fund that they manage outside of an exchange.
The immediate downside here is that there is low liquidity. Since you do not buy and sell your shares on an exchange, there are generally holding requirements. Some platforms may offer early redemption of your shares, but others do not. Sometimes, this holding period can be 10 years.
This type of an REIT generally does come with a larger minimum investment compared to a public traded REIT, though still low.
Because this type of an REIT is not bought and sold on an exchange, there is typically much lower correlation to the stock market.
A private REIT is like a public non-traded in that it is not traded on an exchange. However, the key difference is that a private REIT is limited to Accredited investors as defined by the SEC. With this limit for Accredited Investors, the minimum investment is typically significantly higher than public non-traded REITs.
These types of REITs are typically highly illiquid and have a low correlation to the stock market.
If you are looking to invest in real estate, then you will find a vast array of options. Many investors look for ways to invest in real estate without having to buy properties directly on their own. This more traditional option for real estate involves long processes and high initial costs.
Luckily, other options exist. Crowdstreet is a platform that focuses on commercial real estate and utilizes crowdfunding. This gives investors access to commercial real estate without being required to buy a property on their own. They can also completely avoid the traditional process of finding a property, closing, and managing tenants.
REITs are also a way to avoid the traditional process. The key benefit of REITs is access to a diversified portfolio of real estate properties. While CrowdStreet does have options for funds, this platform really focuses on offering investors access to pick and choose the investments that they like.
CrowdStreet is reserved for accredited investors with a hefty $25,000 minimum investment. On the other hand, REITs come in a large range of types. Some REITs have no minimum investment at all.
Another important key difference is the holding period. Crowdstreet's deals typically feature a holding period of 3-10 years. Private and Public non-traded REITs will also have longer holding periods, but Public traded REITs have high liquidity as they are traded on an exchange.