Rentals, REITs or Crowdfunding – Which One is Right For You?

aerial neighbourhood view

Before handing over too much money toward any type of investment, it is important to understand your investor personality which is a function of your budget, your short and long-term goals and your comfort level when it comes to risk-taking.  In real estate investing, many first-timers assume the best place to start is to buy a one or two-family home and rent it out. This entry into the world of real estate can be quite rewarding, but it means that you will have to locate, purchase and possibly renovate a property and then assume the part-time job of the landlord after closing.

The Lowdown on Being a Landlord

Landlords do more than just collect rent.  They pay mortgages, insurance, taxes and association fees and often remain responsible for major maintenance and repairs.  If the roof springs a leak in your two-family rental, rest assured that both tenants will be calling and texting. When the downstairs tenant turns out to be problematic,  the landlord will have to take time off work to go to court and possibly have to hire a lawyer. Once a bad tenant is evicted, it may take several months to complete repairs and painting, have the floors refinished and locate a new (and improved) tenant.

apartments

This is not to say that owning rental properties cannot be economically rewarding.  Many investors have built rental portfolios large enough to finance early retirements and much more.  If, however, you discover that you are more of a passive investor with little time to spend tending to landlord duties, then REITs and crowdfunding (or micro-investing) in real estate are probably better routes to take.  Both have their pros and cons, advantages and disadvantages. Everyone is working toward the same goal of making money through real estate and the trick is to find the right vehicle to get you there.

REITs vs Crowdfunding (or Micro-Investing)

On the upside, REITs offer simplicity, liquidity and diversity – all in one package.  With a REIT, you are not investing directly in real property, but in shares of an entity that invests in real property.  Selling shares is as easy as selling shares of stock. Since REITs pay dividends, they are often a good choice for retirees looking for supplemental income.  Fund managers do the hard work of choosing and acquiring assets – leaving the investors with little to do other than put up their money. On the downside, experienced fund managers need to get paid and management fees for REITs tend toward the high side.  The investors have little or no say in choosing properties – having delegated all control to management.

Investing through real estate crowdfunding has taken the world by storm in the last couple of  years. IMBY and other micro-investing platforms allow novice and casual investors access to projects which were previously out of reach.  Unlike REITs, micro-investors can customize their portfolio by picking and choosing the real estate projects that capture their imagination and ignite their enthusiasm.

urban apartment

When you invest money through IMBY, you choose the property that matches your interests, budget and goals – properties that suit your unique real estate personality.   IMBY offers transparency that you will not find in a REIT in that you will always know precisely where your money is going. Investing in IMBY allows you to study and learn the business while still enjoying the comfort of knowing a seasoned real estate pro is steering the ship.  REITs are subject to the whims of market fluctuations and the accompanying risk. Crowdfunding investments are more insulated from the whims of fickle markets. IMBY is one of the few crowdfunding options available to non-accredited investors. And since IMBY and other real estate micro-investing platforms charge lower fees and allow investors in with little money down, it is not only a great choice, but often the only choice for young people with limited budgets looking to invest in their futures.

Think of it this way.  Investing in real estate through IMBY will afford you all the potential for income and appreciation that you can find in a REIT, but with the added excitement of choosing your own property, watching a project develop and evolve and seeing it through to the end without all the hard work.  Most importantly, you don’t need to be an established investor with a large sum of money in order to get in the game. While your rewards will be shared with other investors, so will the risk. And that is about as good as it gets.

 

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