Crowdfunding, REITs, or direct lending: Which do you choose?

Real estate investment trusts are good for people who have very little time to devote to real estate investing and do not mind giving up almost all the decision-making control to a third party. They also involve a timing risk. At any given time, the stock market's price of a REIT can either overvalue or undervalue the underlying assets. The "true" value on any given day for a REIT is very subjective at best. Five years ago, this was my best option for giving my portfolio some exposure to real estate returns.

Direct lending is the obvious choice for the greatest return — if you have the time and knowledge to devote to it. I personally run or help run three businesses, and I also have a family that requires my time. This pretty much rules out direct lending for me. Having said that, 3 to 4 percent origination fees and interest rates of 12 percent and up are very appealing.

For my circumstances, real estate crowdfunding is a no-brainer. Access to deal flow across many different asset classes and different geographic regions is a game-changer for a passive investor. Now, you can also further diversify by investing in different durations and putting money into both debt and equity deals. With CDs paying less than 1 percent and the stock market at record highs, this is the perfect time for a new investment alternative.

The hard part is choosing which deal to invest in. There are really two routes you can take. 

One is to use a crowdfunding platform that curates the deals and does a great deal of due diligence on your behalf before offering an investment. The platforms that do the most due diligence also charge the highest fees.  

The second route is to rely less on the crowdfunding platform and do your own extensive research and due diligence on each individual deal. You usually do not have to pay the 1 to 2 percent yearly platform fee when you go this route. It depends on how important your time is to you and how confident you are in your research and due diligence skills.

I make investments using both types of crowdfunding platforms. My ultimate decision depends on the unique characteristics of the deal. I am willing to pay the 2 percent yearly platform fees on some self-storage, mobile home park, and similar nontraditional deals because of the higher returns and the diversification they offer. However, if I can choose between two similar shopping

center deals, and one platform has a 0.25 percent fee and the other platform has a 2 percent fee, the deal with the lower fee gets my money.

For the typical investor, who may not have a great deal of real estate investment experience, there is a strong need for crowdfunding platforms such as Realty Mogul. The ability to take advantage of the platform's investment committee and due diligence will greatly reduce the risks associated with real estate investment

 


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