One of the newer real estate investing industries that has emerged over the past decade are crowdfunding platforms. Some of the common real estate crowdfunding platforms are Fundrise, RealtyMogul, Rich Uncles and Yieldstreet just to name a few. The vast majority tout their experience, highlight customer testimonials, and brag about the venture capital firms who have invested in their business model. This influx of venture capital isn’t surprising given the benefits that real estate provides to your investment portfolio.
Unfortunately for the average investor, it is difficult to tell the difference between these platforms, and it’s only getting worse as there are now more than 100+ real estate crowdfunding marketplaces online today.
Each platform offers different types of deals, raises funds for different purposes, and has vastly different goals and investment strategies. The most common model is using private eREITs or electronic real estate investment trusts, which are very different from your traditional REITs which are publicly traded.
Our belief is that real estate syndications provide investors with much better investment opportunities than these real estate crowdfunding platforms. Here are the 4 reasons why:
1. Greater Transparency
The way eREITs are structured, investors are largely left in the dark. Investors aren’t provided details about the specific asset, asset class (Class A, Class B, Class C), or the exact location of the investment. The eREIT may target an asset class generally, such as retail or multifamily apartments, or they might target a specific region, like real estate in the Northeast, but otherwise there’s no detail about the type or quality of investment you’re buying.
This lack of transparency is a huge problem as it prevents investors from doing their own due diligence which limits their ability to vet an opportunity prior to investing. You’re essentially putting blind faith in the crowdfunding investment team.
On the other hand, real estate syndications are much more transparent than these eREITs. You can fully vet the sponsor, their track record, and the specific deals in which your money will potentially be invested.
2. Higher Quality Investment Opportunities
The highest quality real estate opportunities have no difficulty attracting equity directly from investors which is why those deals never appear on crowdfunding platforms. This means that investors using these crowdfunding platforms are reviewing second-tier opportunities. The returns investors are promised are a projected rate of return, such as 6% to 8%, but that’s just a guess, because the actual investments have not yet been identified.
Contrast this with investing in a real estate syndication, where investors are guaranteed a certain rate of return which is based on the specific property, market and business plan for that investment. Interests between the investor and deal sponsor are much more aligned as well since the sponsor isn’t paid their profit until investors receive their promised rate of return.
3. Lower Fees
Most eREIT offering packages cite a range of fees (e.g., an acquisition fee of 0% to 3%). In reality, eREITs can assign any fee to the deal that’s most advantageous to the platform, not its investors. To make matters worse, on top of the fees associated with the actual deal, there are also fees charged by crowdfunding platform for managing the fund. These platforms typically charge a 0.85% asset management fee in addition to a 0.15% (or more) advisory fee.
Fees are unavoidable in real estate investment, however, real estate syndications only charge fees associated with the investment opportunity. Avoiding the additional fees charged by fundraising platforms immediately boosts the return of your real estate investment.
4. Superior Tax Advantages
The biggest issue with these crowdfunding platforms is the way your investment income is treated. All income generated through real estate crowdfunding platforms is considered ordinary income (similar to your normal paycheck) from a tax perspective. Investors who thought they would be experiencing tax benefits from investing in real estate are caught completely off guard when they end up receiving a larger tax bill because of these crowdfunding investments.
This is where real estate syndications significantly outperform eREITs as there are various tax write-offs such as depreciation, mortgage interest, and other related expenses that can help investors offset their investment gains. In fact, many investors can show a “paper loss”, while being cash flow positive, which can lead to real estate investors completely eliminating the taxes on their real estate income. If that wasn’t enough, you may also be able to use those paper losses to offset the income from your paycheck, further reducing your taxes each year.
If you agree that no-hassle, hands-off real estate syndications are better investments than crowdfunding platforms based on the 4 reasons discussed, don’t hesitate to reach out to discuss your investing goals and subscribe to our blog for future content!
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