Please Note: when reading this article, keep in mind that exceptions do exist. This article applies mostly to equity-based real estate crowdfunding websites. While we generally have a negative view on real estate crowdfunding, we recently recommended one particular website that allows to make Hard Money Loans with yields up to ~14% yield to the subscribers of High Yield Landlord. We consider this one website to be an exception because it focuses on short-term loans rather than traditional equity investments. We favor REITs for most of our real estate investments but use this one crowdfunding website for diversification purposes.
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In the recent years, real estate crowdfunding has experienced significant growth and is now often compared to REITs (VNQ) as a superior alternative for the small investor. For the ones who are unfamiliar with real estate crowdfunding companies, simply put, they are online platforms that allow investors to directly invest in certain specific real estate deals. Three of the most popular websites include Fundrise, Realty Mogul and RealtyShares.
On the other hand, REITs are most often publicly traded companies that invest in real estate and as such, by buying shares of REITs, investors can participate in the return of large real estate portfolios.
Increasingly, many investors consider crowdfunding to be the better alternative because the "technology" behind it is supposed:
- Reduce fees.
- Allow for greater diversification.
- And ultimately boost risk-adjusted returns.
While there may be some truth to that, we are not buying it. Crowdfunding websites are very good at selling this concept to unsophisticated retail investors, but they do less of a good job at presenting the risks in a fair manner. We see many big flaws in real estate crowdfunding, and generally speaking, we consider it to be one of the worst ways to invest in real estate. Below
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