One of the beauties of real estate is that there are many ways to invest in it. You can fix and flip properties, buy and hold them, lease rental units, invest in real estate investment trusts (REITs), get into self-storage, and so much more.
One (relatively) new way to invest in real estate is through crowdfunded real estate platforms. They’ve only been around since 2012 and offer lay investors an easy way to get into real estate with little effort.
But is going in on crowdfunded real estate deals as good as sticking to the tried-and-true method of profiting from your own rental property?
Read on to find out. The truth is there are pros and cons to both real estate investing strategies. What’s best for you will depend on how hands-on and in control you want to be.
Let’s get started!
Real Estate Crowdfunding
So, what is real estate crowdfunding exactly? Basically, it’s the practice of pooling your money together with others to invest in real estate deals. These could be single-family, multi-family, or commercial properties. The idea is to give small investors access to deals they couldn’t otherwise afford.
These days, there are many real estate crowdfunding platforms out there: Fundrise, Arrived, Crowdstreet, and Yeildstreet (just to name a few).
For some, you must be an accredited investor (i.e., someone with a net worth over $1 million, an annual income of at least $200,000, a combined income of $300,000 with their spouse, or works in the financial industry). For others, anyone can invest for as little as $10 (e.g., Fundrise). In either case, you get exposure to the real estate market with little effort.
Let’s take a look at the benefits and drawbacks of real estate crowdfunding:
Pros of Real Estate Crowdfunding
1. Truly passive income
Unlike other types of real estate investing, real estate crowfunding is truly passive. Once you set up an account and choose a fund to contribute to, you can sit back and relax. You don’t have to worry about financing properties, managing tenants, maintenance and repairs, and so on. It’s really a hands-off experience.
2. Low barrier to entry
Because real estate crowdfunding lets you get in on real estate deals with fractional shares, you can get access to deals you wouldn’t otherwise be able to afford. Real estate used to be the game of the rich. Now anyone can play.
3. Easy diversification
Instead of putting a lot of money into one property (like most people do), real estate crowdfunding lets you spread your capital (and risk) across multiple properties. It’s diversification at its finest.
4. Few operating expenses
Typically, the only operating cost that comes with real estate crowdfunding is a small percentage management fee. All the maintenance and repairs, property taxes, home insurance, HOA fees, and other property expenses are included in the fee and taken care of for you.
Cons of Real Estate Crowdfunding
1. Lack of control
Probably the biggest downside of real estate crowdfunding is the lack of control. Instead of choosing your own properties, neighborhoods, tenants, property managers, and so on, you must let fund managers or sponsors make those decisions. They’re the ones that choose and underwrite each deal. So it takes a lot of trust on your part.
2. Restrictive holding periods
Real estate is an inherently illiquid asset, meaning it’s hard to buy and sell quickly. But this is even more true with real estate crowdfunding. Most platforms have long holding periods before they will give you your money back. This is because you only own fractional shares, and it’s difficult to liquidate a property on a partial basis.
3. Infrequent payouts
When you own traditional property, you can expect monthly payouts in the form of rent. But when you own crowdfunded real estate, your dividends are less frequent. Typically, they are paid out in quarterly distributions. So you’ll have to wait for your earnings for longer periods of time.
4. The industry is relatively new
As exciting as real estate crowdfunding can be, it’s a relatively new and untested industry. The first successful real estate crowdfunding platform was Fundrise, founded in 2012 by brothers Ben and Daniel Miller. The company has had impressive historical returns so far, but they’ve only been around for a decade. You don’t know how long any real estate crowdfunding platform will last, and in rare cases, if you’re not careful, you could even become the victim of fraud (see iFunding and Prodigy).
Rental Property Investing
Now that you know the pros and cons of real estate crowdfunding, let’s go over what traditional rental property investing has to offer.
So what is rental property investing in the first place? Basically, it’s when you buy property for the purpose of leasing it out. This could be to tenants (for single-family and multi-family properties) or to businesses (for commercial properties). Either way, you make money through rental income and the property’s appreciation over time.
But like real estate crowdfunding, investing in rental property has its ups and downs:
Pros of Rental Property Investing
1. Full control
When you own rental property, you have complete control over the investment. You can choose which property to buy, how to finance it, who you will accept as tenants, the type of property improvements to make, when to sell, and more. It’s all up to you.
2. Steady cash flow
Rental property owners can look forward to a steady monthly cash flow in the form of rent. So long as you keep a high occupancy rate by filling vacancies quickly, you can count on your bank account growing each month.
3. Good returns
Real estate is known for generating good long-term returns that are comparable to (if not better than) stock market returns. According to the National Council of Real Estate Investment Fiduciaries (NCREIF), the average 25-year return for residential and commercial investments was 10.3% as of Q1 2021.
4. Greater access to equity
With direct ownership of your rental property, you can access your equity without restrictive withholding periods. This lets you take out other loans, refinance, or even flip the property for a profit.
Cons of Rental Property Investing
1. Not as passive (unless you hire a property manager)
As much as people talk about passive rental income, the truth is that being a landlord is hard work. For one, you have to find a good rental property, which requires a lot of investing knowledge and analysis (you must consider a property’s location, age, condition, proximity to employment and schools, neighborhod crime rate etc.). Then you have to finance the property and market, maintain, and manage it. Unless you partner with a reliable property manager, this can easily become a full-time job.
2. Homeowner expenses
With all the benefits of owning rental property also come some responsibilities. As a landlord, you have to pay for property taxes, home insurance, maintenance and repairs, tenant screening, HOA fees, and more. If you’re not careful, these expenses can quickly eat away at your profit margins.
3. Lack of diversification
Real estate is expensive, which means you must tie up a lot of money with it to reap any rewards. If you choose the right property, this is fine. But if you choose the wrong one, you could lose a lot because you’re putting all your eggs in one basket. So be careful about concentrating all your wealth into one asset.
4. High upfront costs
To buy a rental property, you usually get a mortgage. This requires making a down payment of around 20%. On a $500,000 house, that’s $100,000! This kind of money can be hard to come by, which is why many are kept out of investing in real estate. The barrier to entry is too high.
The Final Verdict
At the end of the day, real estate crowdfunding and rental property investing can both be lucrative. What you choose really depends on your investing style. Are you willing to give up some control for a hands-free approach to real estate investing? Or would you rather be in control of the investment for more work? Choose what suits you.
To get the best of both worlds, buy rental property and outsource the work to a reliable property manager like Green Residential. We’ll ensure your units stay filled, your property is well-kept, and your investment is secure. Contact us today for a free analysis of all your property management needs. We look forward to chatting!