Comparative Analysis: Real Estate Crowdfunding vs. Traditional Real Estate Investment


Jeremy BiberdorfBy: Jeremy Biberdorf

June 30, 2023June 30, 2023

Investing in real estate has always been considered a sound financial move, providing opportunities for generating stable income and capital growth. With the advent of technological innovations, real estate crowdfunding has emerged as a disruptive force, challenging the traditional paradigms of property investment.

As these two real estate investment options – traditional real estate investment and real estate crowdfunding – vie for the spotlight, it is essential to understand their unique advantages and challenges to make an informed choice. This comprehensive guide will delve into the intricacies of both options, providing a comparative analysis that should inform your real estate investment strategy.

Traditional Real Estate Investment

Traditional real estate investment involves the direct acquisition of physical properties, such as residential houses, commercial buildings, or land. It’s a time-tested investment strategy that has been used by investors for centuries.

1. Direct Control

The most notable advantage of traditional real estate investment is the control it provides. When you purchase a property directly, you are in charge of everything related to the property – from choosing the location, managing renovations and maintenance, setting the rent, to selecting tenants.

2. Tangible Asset

Real estate, being a tangible asset, can provide a sense of security not typically associated with other investments. No matter what happens in the stock market, a piece of property will always retain some intrinsic value.

3. Potential for High Returns

Through appreciation and rental income, traditional real estate investment offers the potential for high returns. The value of real estate generally increases over time, and if your property is in a desirable location, this appreciation can be quite significant.

4. Tax Benefits

In many jurisdictions, there are significant tax benefits associated with owning real estate, such as mortgage interest deductions and depreciation.

Traditional Real Estate Cons

1. Capital Intensive

Investing in real estate requires a substantial amount of capital. The upfront costs include the property’s purchase price, along with closing costs, repairs, and maintenance expenses. Additionally, securing financing can be a lengthy and complex process.

2. Requires Active Management

Owning and managing a property requires time and effort. From maintenance tasks to tenant management, real estate ownership is not a passive investment.

3. Market Volatility and Risk

Just like any other investment, real estate is susceptible to market fluctuations. Values can decrease due to a multitude of factors, such as economic downturns or changes in the local real estate market.

Real Estate Crowdfunding

Real estate crowdfunding has gained considerable traction in recent years, thanks to technology and changes in legislation. It allows individuals to invest in real estate projects alongside other investors via online platforms.

1. Lower Investment Threshold

Unlike traditional real estate investment, crowdfunding allows investors to get started with much less capital. This democratization of real estate investing opens doors for those who might not have the financial resources to purchase a property outright.

2. Diversification

Real estate crowdfunding platforms often present a variety of investment opportunities, ranging from residential properties to commercial projects and real estate debt instruments. This diversity allows investors to spread their risk across different types of real estate investments.

3. Passive Investment

Investing via a crowdfunding platform typically involves less hands-on management compared to owning a property directly. The crowdfunding platform or the project developer will generally handle all the property management duties.

Real Estate Crowdfunding Cons

1. Lack of Control

When you invest through a crowdfunding platform, you have very little control over the property. Decisions about property management, renovations, and tenant selection are made by the platform or the project owner.

2. Liquidity Issues

Real estate crowdfunding investments can be less liquid than other types of investments. You may have to wait for a property to be sold or for the project to be completed to recoup your investment.

3. Platform Risk

Investors are also exposed to the risk of the crowdfunding platform itself. If the platform goes bankrupt or runs into legal issues, it could affect your investment.

Notable Real Estate Investment Platforms

As real estate crowdfunding continues to grow, an array of platforms has emerged, each providing unique opportunities for investors. Here, we’ll briefly discuss some notable platforms that could help you navigate the landscape of real estate crowdfunding.

1. First National Realty Partners

First National Realty Partners

First National Realty Partners is a renowned platform known for its focus on commercial retail properties. The company employs a strategy of purchasing underutilized, high-quality grocery-anchored commercial properties, providing accredited investors with unique opportunities. As an investor, you get the chance to directly invest in these kinds of properties alongside a seasoned professional team.

Learn More

2. CrowdStreet

CrowdStreet

CrowdStreet offers a marketplace that allows accredited investors to directly invest in a wide array of commercial real estate. CrowdStreet provides an avenue for investors to diversify their portfolios with institutional-quality real estate investments.

Learn More

3. Fundrise

Fundrise

Fundrise is a leading platform in the real estate crowdfunding industry. They offer eREITs (electronic Real Estate Investment Trusts) and other diversified portfolios, providing opportunities for non-accredited investors to invest in the real estate market with a relatively small initial investment.

Learn More

4. RealtyMogul

RealtyMogul

RealtyMogul allows investors to get involved in commercial and rental real estate through their platform. They offer REITs and private placements for accredited and non-accredited investors, focusing on cash flow and diversification.

Learn More

5. Arrived Homes

Arrived Homes

Arrived Homes offers a unique approach to real estate crowdfunding. They allow investors to buy shares of rental properties, earn rental income, and benefit from potential appreciation. This model is designed to be easily accessible, even for investors who are new to real estate.

In addition to these companies above, click here for a list of the best real estate investing platforms.

Learn More

Final Thoughts

Choosing between traditional real estate investment and real estate crowdfunding boils down to your financial goals, risk tolerance, and investment style. Traditional real estate investment offers greater control and the potential for significant returns but requires substantial capital and active management. On the other hand, real estate crowdfunding provides an accessible and diversified entry point into the property market, though it comes with its own set of risks.

Remember, a well-diversified portfolio often includes a mix of different asset types. Depending on your circumstances, you may find that a combination of both traditional real estate investments and real estate crowdfunding fits best with your overall investment strategy.

While this comparative analysis offers a foundation, always consider seeking advice from financial advisors or real estate investment professionals before making any major investment decisions. Understanding your unique financial circumstances and future goals is crucial in navigating the dynamic world of real estate investment successfully.

Related Links

Jeremy Biberdorf
Jeremy Biberdorf

About the Author:

Jeremy Biberdorf is the founder of Modest Money. He's a father of 2 beautiful girls, a dog owner, a long-time online entrepreneur and an investing enthusiast.

Leave a Comment

Your email address will not be published. Required fields are marked *