Property, one of the biggest and most trusted asset classes, offers investors a wide range of options, each offering something a little different, crowdfunding and real estate investment trusts (Reits) are two options.
As the golden rule of investing is to do your homework first, here are some of the benefits and downsides to crowdfunding and Reits to help investors make more informed decisions.
What is crowdfunding?
Crowdfunding involves a group of people joining forces to fund a project or venture together; it is also a form of crowdsourcing. It usually takes place online and each venture involves three groups – the project initiator, who comes up with the project; the individuals or groups that support the idea; and a moderating organisation that brings the parties together to launch the idea.
What are Reits?
Reits are specialised mutual funds focused on property and traded on stock exchanges, including the Johannesburg Stock Exchange (JSE) and New York Stock Exchange (NYSE). The investors do not own any of the actual property, but rather a share of the total fund that owns the property.
How crowdfunding and Reits compare:
- Shares in a crowdfunded property are not transferable and the money is received only at the sale of the project or during refinancing, making them a relatively illiquid asset, though online investment platform Wealth Migrate, for example, pays out quarterly dividends. Reits, on the other hand, are highly liquid, which is good news if you need to get your hands on funds quickly, but this liquidity comes at a cost as Reits are at the mercy of market sentiment.
- With crowdfunding, investors can vet the other members of the group and do thorough research into the project before signing up, so you know that the people involved in the project have the relevant experience and skills. Wealth Migrate uses its GIDDS System, a globally recognised system that gives investors access to partners in the right markets. “We are proponents of educating investors to ensure that everyone is in a position to make more informed decisions,” says Wealth Migrate CEO Scott Picken. With Reits, where investors are buying shares in a fund that owns the property, it is difficult to get information on who is managing the property, for example.
- Managing property is expensive and, as every homeowner knows, never ending, but Reits do not spare investors from extra costs. The fee structure is often based on assets under management (AUM) and not necessarily aligned to investors’ long-term interests. There are also middlemen involved in selling and marketing Reits, which can dilute investors’ returns.
- Reits tend to be more of a hands-free investment, while crowdsourcing allows you to feel part of the project. Investors who prefer more of a hands-on approach may find investing in Reits unfulfilling.
There are many ways to invest in property, but whichever one you choose, begin with good quality research and partners you can trust with your hard-earned money.