The popularity of internet based crowdfunding has now spilled into the capital markets, particularly in global real estate investment funds.
One of the main selling points of these funds are easy access and a low threshold for investing in the real estate market. For example some funds sell the point that you can get started for $100 or $500 or even less. Another point is the use of technology of manage the fund.
Most people invest in real estate for income or capital appreciation or both. For the most part income producing real estate is considered a stable and above average investment vehicle.
While investing in a crowdfunded REIT sounds appealing for many people especially considering the excitement of social media, let’s not forget the existence of well funded, publicly traded, exchange traded funds.
There are several types of publicly traded real estate funds such as stocks, open end funds, closed end funds, REITs, mutual funds and others. They each have their various nuances and details, however all of them offer the most important thing that nearly all crowdfunded funds do not. That is LIQUIDITY.
Having liquidity means that you can sell your shares and get your share value back right away. Most crowdfunded REITs have a minimum investment holding period, for example 6 months before you can sell your shares, then they have a processing period to return whatever the shares are worth back to you.
Sure investing in physical real estate isn’t necessarily liquid either, but if you intend to keep your funds invested and not withdraw at any time then a crowdfunded REIT may be suitable for you.
However, if you need to sell your shares at any time, your shares are not trade-able as in a stock. Whereas exchange traded funds are. When you sell your shares on an exchange traded fund, your trade clears within 5 business days and the money is back in your trading account available for withdrawal.
Another reality of exchange traded funds is that many have low entry thresholds as well. A brand new close ended fund or mutual fund may only have a $1000 threshold. Funds that are trading on stock exchanges can be bought in one share increments from a discount stock broker, which is even much less than the entry level threshold for crowdfunded REITs.
Of course there is one drawback to exchange traded funds and that is price volatility which is usually correlated to the overall stock market or economic picture. Of course volatility works both ways so it can benefit you as well. But for the most part, a poorly-timed investment and subsequent quick liquidation of an exchange traded real estate fund can and frequently does result in a loss of principal. Whereas as a crowdfunded real estate fund investment in a growing property market held to maturity should result in income and “almost guaranteed” capital gains.
As always before investing in any of the above, do your due diligence and as the saying goes, “Don’t put all your eggs in one basket.”
Any real world experiences, positive or negative with crowdfunded REITS or exchange traded REITS that you’d like to share with others? Let us know below in the comments below.
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