Investing in REITs vs. Real Estate Crowdfunding

To invest in real estate, it is not necessary to buy an apartment, commercial premises or another property. One alternative is a REIT, which allows investment in the real estate market by purchasing shares in a company that owns or finances real estate. In this article, we will discuss how REITs work, where investment returns come from, the advantages and risks of this method, and compare it with real estate crowdfunding.

What is a REIT?

A REIT (Real Estate Investment Trust) is a company or fund that owns, operates or finances income-generating real estate. Its portfolio may include apartment buildings, offices, shopping centres, hotels, warehouses and other similar properties. By purchasing REIT shares, an investor indirectly invests in the real estate it owns or finances. Returns may come from dividends (funded by part of the income received from rent or interest) and appreciation in share value. Investing in a REIT does not require buying an entire property or managing its maintenance or tenants, so it generally requires less money and time than investing directly in real estate.

What is real estate crowdfunding?

Real estate crowdfunding is an investment method in which many investors finance a selected real estate project through a dedicated platform. The crowdfunding platform acts as an intermediary: it provides information about the project, collects investors' funds and administers payments. The funds raised may be used, for example, to purchase a building, finance construction, renovation and so on.

Crowdfunding can take different forms, but in the case of real estate projects, investors most often lend money to the project developer for a specified period. In return, they receive interest agreed in advance, and the invested amount must also be repaid at the end of the term. Generally, the investor does not become the owner of the financed property and does not participate in managing the project. Their role is to contribute part of the funds needed for the project and assume the risks associated with the investment.

REIT vs. real estate crowdfunding: key differences

Although both methods involve investing in the real estate market, the investment principle, liquidity and nature of the risks differ. The table below compares publicly traded REITs and loan-based real estate crowdfunding:

Advantages and disadvantages of REITs and real estate crowdfunding

When assessing both investment methods, it is important to consider not only potential returns but also liquidity, risk diversification and the investor's ability to choose specific real estate projects. Below, we discuss the main advantages and disadvantages of REITs and real estate crowdfunding.

Advantages and disadvantages of REITs

REITs provide an opportunity to invest in real estate without buying or independently managing a specific property. However, REIT shares are securities, so their value and the income received may fluctuate.

Main advantages of REITs:

Liquidity. Shares in publicly traded REITs can generally be sold much faster than physical real estate.

Opportunity to receive dividends. A REIT may regularly distribute part of its income to investors as dividends. The amount depends on the company's performance and may change.

Diversification. A single REIT may own many different properties, so problems with one building or tenant generally have less impact on the overall investment.

Professional property management. Property selection, maintenance, finding tenants and other day-to-day tasks are entrusted to REIT managers.

Main disadvantages of REITs:

Share price fluctuations. The value of a publicly traded REIT may change constantly due to conditions in the stock and real estate markets.

Sensitivity to interest rates. Rising interest rates may increase a REIT's borrowing costs, make it harder to acquire new properties and reduce the attractiveness of its shares.

Limited investor influence. A shareholder cannot personally select specific properties or tenants or make day-to-day property management decisions.

Advantages and disadvantages of real estate crowdfunding

Real estate crowdfunding makes it possible to select specific real estate projects and finance their implementation together with other investors through a dedicated platform.

Main advantages of real estate crowdfunding:

Low initial amount. The minimum investment is set by the platform, but it is often possible to start with just a few dozen or a hundred euros.

Opportunity to earn interest. The investor is informed in advance of the expected interest rate, payment arrangements and investment period.

No need to manage real estate. The developer is responsible for implementing the project, construction, selling or renting the property, so the investor does not need to find tenants, carry out repairs or maintain the property.

Opportunity to diversify investments. Funds can be spread across different projects, developers or locations, reducing the impact of one unsuccessful project on the overall investment portfolio.

Main disadvantages of real estate crowdfunding:

Lower liquidity. Invested money generally cannot be withdrawn before the specified term.

Loan default risk. If a project does not achieve the planned results, repayment of interest and the invested amount may be delayed, and some funds may be lost.

Limited investor influence. Although the investor can choose which project to finance, they do not participate in its management and do not become the owner of the financed real estate.

REIT or real estate crowdfunding – which is more suitable?

A REIT may be a suitable choice for those who want to invest in a broader real estate portfolio rather than select individual projects. One company may own apartment buildings, offices, shopping centres or other properties, so the investment is spread across several sources of income.

The investor may receive dividends, and publicly traded shares can generally be sold when necessary. However, their value changes constantly, so this option is not suitable for people who find it difficult to remain calm during short-term price fluctuations. Before investing, it is also important to examine what assets a particular REIT owns or finances, as not all REIT portfolios are equally diversified.

Real estate crowdfunding is more suitable for those who want to choose which projects to allocate their money to. On the platform, investors can compare the projects' purpose, location, term, expected interest rate, developer experience and investment security measures. This allows them to build their own portfolio of projects and allocate funds according to their chosen risk level. The investor does not need to deal with construction, property sales or tenants, while the repayment term and payment arrangements are generally set in advance. However, the money usually cannot be withdrawn early, and its recovery depends on the developer's ability to meet their obligations.

What should you consider before investing in a REIT or real estate crowdfunding?

Risk. Assess what the investment results will depend on. For a REIT, the company's financial position, debt and the quality of its property portfolio are important. In crowdfunding, the key factors are project implementation and the developer's ability to repay the loan.

Potential return. It is important to assess more than just the stated dividends or interest rate. Consider price changes, fees and the possibility that the expected income may decrease, be delayed or not be received at all.

Liquidity. Check how quickly you could recover your money. Shares in publicly traded REITs can generally be sold, whereas early withdrawal from a crowdfunding project is usually not possible.

Diversification. Find out how many properties, real estate sectors and locations are covered by the REIT's portfolio. When investing through a crowdfunding platform, risk should be spread across different projects and developers.

Investment term. REIT shares generally have no fixed holding period. For a crowdfunding project, the term is specified in advance.

Fees and taxes. Check share purchase, currency exchange, account administration and platform fees. Also assess how dividends and interest will be taxed.

Reliability. Choose regulated financial service providers. Check whether the REIT's shares are traded on a recognised stock exchange and whether the company publishes financial statements. A crowdfunding platform must hold the appropriate licence.

Property or project quality. When assessing a REIT, it is important to consider the occupancy, location and condition of the properties it owns. When choosing a crowdfunding project, its budget, developer experience, permits and planned security measures should be checked.

Is a REIT a suitable way to invest in real estate?

A REIT may be a suitable way to link part of one's investments to the real estate market without buying or managing a physical property. However, the investor buys shares in a company rather than a specific building, so investment results are affected by real estate market conditions, company performance, changes in interest rates and other factors.

Another alternative is real estate crowdfunding, which allows investors to finance selected projects and earn interest. Both methods have their own advantages and risks, so the appropriate choice depends on the desired liquidity, investment term and acceptable level of risk.