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Real Estate Crowdfunding Vs. Real Estate ETFs



  • Promising efficient and low-cost access to private market real estate, more than 100 online real estate crowdfunding platforms have emerged over the last decade, raising billions of dollars from investors.
  • Fundrise and other real estate crowdfunding firms have begun to offer online non-traded "eREITs" marketed primarily to younger investors as a better alternative to real estate ETFs.
  • Both FINRA and SEC have issued warnings about non-traded REITs, noting their high fees, lack of liquidity, “dividends” coming from return of capital, conflicts of interest, and lack of transparency.
  • Beneath a slick website and marketing materials, these "eREITs" are just your average highly-levered and conflict-ridden non-traded REIT. To be fair, Fundrise spells out these risks on their offering documents.
  • While we love the concept of making private real estate more accessible, these firms make misleading claims when comparing their inefficient and high-fee nontraded REITs to low-cost real estate ETFs.

What is Real Estate Crowdfunding?

Emerging from the relative success of internet-based capital raising platforms including Kickstarter and GoFundMe, a handful of entrepreneurial real estate firms have attempted to channel the “crowdfunding” model into the real estate investing world. More than 100 “real estate crowdfunding” firms have been established over the last half-decade, raising several billion dollars of investor assets under the premise that pooling small amounts of capital from many investors opens up new investment opportunities that were otherwise out-of-reach to individual investors seeking exposure to private market real estate. The crowdfunding model has evolved over time into two primary models:

  1. The traditional deal-by-deal model offered only to accredited investors.
  2. The nontraded REIT model offered to nonaccredited investors.

real estate crowdfunding

Real estate crowdfunding is the result of the 2012 Jump Start our Business (JOBS) Act, which removed the prohibition on general solicitation and advertising of securities offerings provided that the issuer takes reasonable steps to ensure investors are accredited, defined as investors earning a minimum $200k in income and $1 million in liquid net worth. A handful of early "crowdfunding" companies emerged, which offered accredited investors access to deal-by-deal capital raising by connecting a network of capital-seeking developers (typically seeking mezzanine debt) with a network of sophisticated accredited individual real estate investors. These deal-by-deal platforms are essentially an online brokerage platform connecting buyer and seller, opening up access to private market real estate in a way that had never been done before.

(Image: Patch of Land)

Like many of the "disrupters" however (Uber and Airbnb come to mind), the economic benefits don't always accrue to the disrupter. A labor-intensive business model requiring the individual financial evaluation of each proposal and the continued oversight of the project and the developer, this model is generally not a too profitable one for these firms, particularly with a relatively sophisticated investor

This article was written by

Hoya Capital profile picture

Alex Pettee is President and Director of Research and ETFs at Hoya Capital. Hoya manages institutional and individual portfolios of publicly traded real estate securities.

Alex leads the investing group Hoya Capital Income Builder. The service features a team of analysts focusing on real income-producing asset classes that offer the opportunity for reliable income, diversification, and inflation hedging. Learn More.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. All commentary published by Hoya Capital Real Estate is available free of charge and is for informational purposes only and is not intended as investment advice. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy. Hoya Capital Real Estate advises an ETF. Real Estate and Housing Index definitions are available at HoyaCapital.com.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (27)

Patrick Jonas3174 profile picture
Owner portfolio management PAJEnterprises, LLC. INC
Great article! But hey, you haven't added Assetmonk, it a great Real Estate crowdfunding website too, check it out.
Hoya....you are spot on regarding private reits...What folks forget is that in each decade the private reits go up in smoke and require adjudication. Simply put....the courts prevail, their deed is done and investors stand there empty handed. Investors are advised to do a very complete due diligence and then..."Just walk on and don't buy..." Readers should check into case law on same....It is all there....In plain sight....Great article Hoya....you continue to make salient points...Hope investors listen....because the marketing materials on private reits are slick...as in very!
Micah McDonald profile picture
Looks like the Wall Street Journal has finally come around to notice what you've been saying for a long time.... www.wsj.com/...
(VNQI) & (VNQ) are the best REIT ETFs
I've been invested in Fundrise since the Spring of and am happy with the result so far. I was looking for an alternative to the stock market where I could get a decent dividend to help fund my retirement and have the possibility of equity gain. Since I had no intention of bailing out early, I wasn't concerned about three or five year lockup period where I would be penalized for early withdrawal.

I've also invested in other crowdfunding real estate (CRE) opportunities through sites like RealCrowd, Peer Street, Patch of Land and Broadmark with mixed results. Some of the deals worked as expected or better, while others lost some principal or my money was held up because of foreclosure. I've decided I'm not a sophisticated enough of an investor to sink money into single property investments. Hence, CRE funds is what I look for now when I want to invest in CRE offerings. Fundrise fits that bill. Even then, I do a great deal of research before taking the plunge. There are many websites that do a good job of researching CRE opportunities.

One of my favorite CRE investments was with Broadmark. They paid a monthly dividend of around an 11% annualized rate. It was strictly a debt investment without any equity gain. Broadmark decided to go public and started trading on the NYSE last week. Many of the private investors in Broadmark didn't like the idea of riding the ups and downs of the stock market and redeemed their shares before the company went public.

Are investors right in thinking CREs are a good way to avoid the ups and downs in the stock market and still get a good return on their investment? CRE seems to be good at avoiding the 'minor' gyrations, such as those experienced by the market over the past year. However, market crashes like those of 2008 could be problematic to CREs as well.
ronlwinter profile picture
As I am new to REITs and Crowdfunding. I have a question.

Are all Real Estate Crowdfunding sites REITs?
Are there any deal-specific crowdfunding options that permit you to fund a single flip? Would a crowdfunded single flip still be considered a REIT?
There are several crowdfunding platforms that permit you to fund single flips, Peer Street being one of them. The investor pools their money with other investors who are also funding that flip. The investor may choose how much money to place into the pool.

Many of these are debt investments where the investor receives a specified yield but does not get an equity gain on the sale of the property. Yields have been in the 7% to 10% range and have been decreasing over the last several years. From my experience, most of these investments work as planned, but some go into foreclosure where distributions stop and principal may be lost when the property is finally sold, which may take a year or more. Some platforms seem better at managing these flips than others.
Thank you for this logical breakdown
Good Insight. Is there a part 2 of this story (for one-off projects)? I didn't find it in the articles list.
ronlwinter profile picture
I was wondering that also.
Micah McDonald profile picture
I had already drawn this conclusion, but it's great to see the actual data to back this up. Thank you Hoya.
MrFireby2023 profile picture
I have over 30% of my net worth invested in syndicated real estate crowdfunding via Crowdstreet.com, been with them over 3 years and I've been very happy with returns as well as constant cashflow. I am not in any type of eReits. I agree with the author that eReits are probably not appropriate for most investors. For accredited investors however, non-publicly traded real estate may be the way to go. It's not liquid and lock-up periods are usually 3-7 years but the returns and cash flow and ownership stake in equity deals is tremendous.
Hoya Capital profile picture
Thanks for the comment, @MrFireby2023.

Certainly agree that sophisticated and knowledgeable investors that don't need the liquidity can find value on the deal-by-deal platforms. It's unfortunate that many platforms abandoned this model in favor of the nontraded REIT model.
MrFireby2023 profile picture
I’m with you Hoya. I like to cherry pick individual deals, especially Hotels. The eReit structure is a bunch of crap. As I see it, Return of Capital distributions is phony money. Income distributions based on rent rolls is the only true form of passive inc9me in my opinion.
23 Aug. 2019
I see you don’t understand much about how REITs work then...
Great article, @Hoya Capital Real Estate. Considering the fees involved, net longterm performance (of just the assets) actually IS acceptable if one ignores the fees that go straight to management.

The current appeal of crowdfunded REITs is that investors are buying into an enlightened path to financial success that "Wall Street" is trying to obscure. People I know who buy into it also buy into conspiracy theories about "Wall Street", 9/11, see BTC as the future of finance, and praise Tesla even though they drive German cars because they prefer something safer.

The reality is that "Wall Street" (publicly traded stocks) is a fine-tuned money making machine for investors. "Wall Street" actually protects investors by demanding clarity, accuracy, liquidity, and low fees that "Main Street" investors get to share in with more or less equality.

Now if these enlightened crowdfunding experts could host their own REITweek show or join one, and justify their platform, I would likely consider joining them. What is unlikely is seeing them actually justifying their own platform.
Hoya Capital profile picture
Couldn't say it any better, @King Rat!
07 Jun. 2019
Your fee comparison is very misleading. ETFs are comprised of public REITs, which have significant overhead, expenses, etc. You make no mention of this in your chart. It’s certainly not 0% real fee load.
Hoya Capital profile picture
Strongly disagree here. As I note, Fundrise doesn't include it in their chart either. And I'm going to venture to guess that the largest, most efficient public REITs in the world have better overhead margins than a $50 million portfolio of a handful of properties.

Fundrise misleadingly tries to compare that their "asset management" fee at the fund-level to the property management fee at the REIT-level.

As I note, there's nothing wrong with high fees. Sometimes the performance is worth it. But to market non-traded REITs to inexperienced investors as "low-fee" is simply wrong.
But those expenses are present for both the publicly traded REITs and the crowdfunded eREITs. So they don’t need to be “mentioned “.
Hoya Capital profile picture
Correct, thank you @Mark Schell.

Looking at the annual report, page F-14, these expenses are incurred at the subsidiary-level. The "eREIT" is a holding company that throws on another level of G and A at the fund level.

Jussi Askola, CFA profile picture
"Interestingly, many crowdfunding platforms directly cite the performance of publicly traded REITs while simultaneously bashing publicly traded REITs as purportedly inefficient and overvalued investment vehicles. "

This is just hilarious to me. Borderline unethical. Lies after lies. All about making a profit from unsophisticated investors who do not know any better.

Thank you @Hoya Capital Real Estate
Hoya Capital profile picture
@Jussi Askola It really is rather incredible.

I didn't even touch on many of the structural issues that you noted in your report:

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