Why Crowdfunding Real Estate Is Better Than REIT

Making a property investment is a major commitment for most and can run into hundreds of thousands of dollars worth of commitment if not more. In response to that a few years back some clever finance folks came up with what is known as a Real Estate Investment Trust or REIT.

A REIT is conceptually very similar to a mutual fund. You are busy and don’t necessarily have the expertise or knowledge to make good investment decisions. And the amount of money you have is not sufficient to get the best possible deals. So you hand over your money to a fund manager who pools monies from a number of small investors just like you and then invests in a bunch of properties.

The idea behind investing in a bunch of properties is that you get diversification and get access to the growth and cash flow of a number of premium properties, which you would have never been able to get access to yourself. And most REITs are also trade-able. Just like Equities or Bonds you can sell the units you hold to some other investor who is willing to buy giving you ample liquidity.

So you have an expert property manager, diversification and liquidity. This thing is the best thing since sliced bread, correct?

Wrong.

While conceptually REITs make a lot of sense their performance leaves a lot to be desired. Let’s take a look at the benchmark REIT index in Australia.

In the last ten years investors have lost 3.5%. While yes there has been the GFC of 2008 in the interim, equities suffered a similar drop and have since recovered spectacularly.

So the theory has to be property market suffered a terrible crash in 2008 and has been limping since ever since and the expert property manager is not at fault.

Wrong again.

Australian property did not suffer a major crash in 2008 and have since performed well. If the so-called expert fund managers were worth the ungodly amount of fees they charge they should have at least mirrored the markets performance. Yet they have saddled their portfolios with white elephants. And remember whether your investment gains or looses they will still charge their fees. They always win!

People should be in control of their investment decisions. Most folks have a good amount of local knowledge. They know which property development is going to be a dud and which is going to be a winner. An innate knowledge of a myriad of local factors,which the fund managers sitting in their air-conditioned high-rise offices will never know or will care to know. And unlike equities, property is not volatile. You do not need to sit starting at a monitor worrying whether your asset prices are going up or down. A manager has limited role to play in making your selection.

A crowdfunding real estate platform allows you to pick and choose the specific and multiple properties you want to invest in and still invest only in small amounts. In this way, you don’t have to pay a fund manager unnecessary fees and be saddled with white elephants.

A crowdfunding real estate platform removes the middle men and empowers investors by giving them choice and saving management fees. This is why investing in opportunities listed on crowdfunding real estate platform is fundamentally superior to a REIT.