Is Crowdfunding a Sensible Option for Florida Real Estate Investors?
As a mechanism for investing and raising capital, crowdfunding is no longer a novel and exotic idea but one which has attracted billions of dollars for start-ups and other businesses through online platforms like Kickstarter, CrowdStreet, Indiegogo, and GoFundMe. But investing in an early-stage business is one thing, investing in real estate is quite another. Crowdfunding hasn’t yet gained the traction in real estate investing as it has in business investing, which begs the question: is crowdfunding a viable and sensible option for Florida real estate investors?
Traditional Real Estate Investing Through REITs
Crowdfunding should be viewed in contrast to the well-established way those seeking to invest in real estate without the burdens of ownership or management have done so: Real Estate Investment Trusts (REITs). A REIT owns and manages a portfolio of income-producing properties such as office buildings, apartment buildings, shopping centers, or hotels. Some REITs are privately held and some are publicly traded. Combined, REITs in the U.S. hold total assets worth over $400 billion.
REITs typically own multiple properties, so the investment isn’t in one piece of real estate as much as it is in the entity which owns the various properties in its portfolio. Investments in REITs keep the risks spread out among many investors, and lay investors often acquire interests in REITs through mutual funds.
What Makes Crowdfunding Different?
The advent of crowdfunding has created another avenue for investors seeking to add real estate to their portfolios without making a substantial investment or incurring significant risk. One of the key distinctions between a REIT and real estate crowdfunding is that the latter typically involves an investment in one specific piece of property. Whereas a REIT investor has little if any say in what properties the trust chooses to invest in, a crowdfunding investor knows exactly where his or her money is going and can do their own due diligence on a specific piece of property before deciding to commit their hard-earned money to it.
Of course, the upside to investing in a single property is offset by the fact that your entire investment rises or falls based on the performance that single property. In a REIT, the risk is spread over many properties, so if one property underperforms, those losses can usually be cushioned by the positive performance of other parcels owned by the REIT.
Since investing in a REIT is similar to investing in a mutual fund, you can sell your shares in the REIT fairly easily and at a time of your choosing as there is a robust secondary market for such investments. The same can’t be said for a crowdfunding investment. Once you’re in, you are in for a while. If you anticipate the possibility of needing your capital back in the not-too-distant future, crowdfunding may not be the best avenue for your real estate investing.
As with any investment, you should give serious thought to your goals, needs, and risk threshold before you make an investment in real property whether through a REIT or a crowdfunding platform. There is no right path for everyone, and what is the best avenue for you depends on your individual circumstances.
If you would like to learn more about investing in real estate in Northwest Florida, the attorneys at the Destin real estate law firm of McDonald Fleming Moorhead have extensive experience with all aspects of Florida real estate transactions. To discuss your issues and concerns, please call our Downtown Pensacola office at (850) 477-0660 or tell us about your needs online.