The two most hands-off ways to invest in real estate are undoubtedly real estate crowdlending and REITs, but how do they stack up against investing in a rental property?
In both of the aforementioned cases, there are advantages and disadvantages, but a good mix of the two is what often brings better results.
People who have already invested in physical real estate know how complicated and time-consuming it can be.
On paper, rental investing looks quite easy.
- Buy a property in good condition and in a good area.
- Try to negotiate the price.
- Give it a little fix if it’s used. Call it home staging which sounds cooler.
And off you go, start looking for the dream tenant.
But it doesn’t always work that way.
Prices are consistently high in high-end areas.
You can’t buy at the price you want and you may end up contracting too much debt.
The unforeseen expenses can also quickly turn your dream into a nightmare.
Your dream tenant loses their job and sublets your house in secret to some graffiti lovers.
In short, it’s no picnic to invest in physical property on your own.
In addition to this, there is tax to pay when you buy, when you hold, when you rent and even when you sell the property.
So let’s analyze the two most indirect and effective ways to invest in real estate. Let’s find out if it is possible to reduce the hassle and to boost the return on investment.
Let’s start with REITs
One of the biggest advantages of investing through Real Estate Investment Trusts is that, even though you don’t own any real estate, you are indirectly engaged in property investing.
REITs can represent investments in very specific sectors because most REITs are specialized in very clearly defined investment areas.
Investing in REITs is, however, very similar to investing in funds and ETFs. They are both traded on the stock market.
To reduce the volatility of an investment in REITs, it is good practice to spread your capital over several different REITs.
These funds are generally listed on the world’s largest financial markets and US REITs are among the largest and most attractive for investors.
A REIT can focus on offices, shops, hospitals, nursing homes, database servers, condos, so really anything.
Crowdfunding and crowdlending are even more interesting
Crowdinvesting in real estate is a much more recent development than REITs.
REITs have existed for decades, Crowdfunding as we know it today is approximately 10 years old.
It is easy to predict that in the not too distant future we will see a huge expansion of this investment mode. The reason for this is that crowdlending and crowdfunding platforms greatly simplify and amplify the possibilities for both investors and real estate development companies. Basically, everyone has to gain, and all this is likely to bring in large amounts of capital in the sector.
To invest in real estate crowdfunding you need only a small amount of capital. This is the biggest barrier that has been broken down.
When is it preferable to invest in real estate crowdfunding instead of REITs?
The first difference is that REITs offer much less direct exposure, so potentially less transparency.
Moreover, the general market trend influences REITs quotations.
In the case of real estate crowdlending, the loan you finance is a specific one.
When I finance a real estate loan it is well defined what the money is being used for, how I will be repaid and when I will be repaid. It is always very clear which are the properties that are there to guarantee the deal and the interest rate that I will be paid. In short, everything is very predictable except for possible complications.
Even in case of complications and delays, everything is at least always well defined.
Penalties for late payments are often foreseen and a recovery plan is always ready to be deployed. In the worst-case scenario, the property itself is put up for sale and investors should be able to recover all or most of the capital invested in the specific project.
The volatility of Crowdlending investing
Volatility is also very low when investing in real estate crowdlending. In fact, crowdfunding may represent a good way to reduce the overall volatility of a balanced portfolio.
Crowdlending is almost completely disconnected from the market trends and follows different dynamics than physical real estate. In addition to this, real estate crowdfunding can include properties in many different countries thus diluting the geographical risk of a single area.
It is clear that new trends in real estate may change many of the old certainties we have become accustomed to.
Remote work is here to stay, it’s clearly not a temporary fad. A lot of people will no longer return to the office to work and, being able to choose where to live, they could easily migrate to less central and less expensive areas.
Real estate is probably going to become one of the sectors that will benefit the most from this historical phase for various reasons. One of these is that the low interest rates may remain low for a long time to come and therefore mortgages will still be convenient for the buyers. Another reason is that the first house, the one we live in, is now seen as an even more valuable asset than before. It is the place where we spend more quality time and in many cases also where to work from.
Real estate is historically the safest investment class, and all indications are that this will remain the case.
All investments, including real estate, are speculative in nature and involve substantial risk of loss. We encourage our investors to invest carefully. We also encourage investors to get personal advice from a professional investment advisor and to make independent investigations before acting on information that we publish.