Downside Risk on RE Investments

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This topic contains 4 replies, has 2 voices, and was last updated by  Andrew Savikas 4 months, 2 weeks ago.

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  • #3838

    James
    Participant

    I really enjoyed reading Baby Steps: Getting Started with Crowdfunded Real Estate. I’m drawn to investing in real estate through means besides owning a publicly traded REIT or going all in and buying a property outright, so the options described are right on target for me.

    What draws me to such investments is two-fold. First, owning an REIT stock not only ties me to the RE market(s) but also the stock market as whole (in general). I’m invested in both growth and dividend oriented stocks already and want to diversify outside of the market, especially at a time where the market is running hot. Second, living up to it’s name real estate is one of the few investments I feel has inherent value and thus less downside risk than a stock. Sure, you can over pay for a house but it’s less likely to take the fall or hit zero as some risker growth stocks may over a reasonable period of time.

    That said, how does the risk/reward of crowdfunded options compare to the risk/reward of publicly traded REIT stocks? Both seem to offer the opportunity of owning a piece of a pie, or many pies, just through a different vehicle. Is that inherent value, and thus the downside risk, reduced or wiped out because of that?

    #3857

    Andrew Savikas
    Keymaster

    Thanks @jamesdensmore and welcome! Although I have some publicly-traded REIT holdings via ETFs and index funds, I don’t have much experience with them directly. But my understanding is that the main tradeoff you’re making on a public REIT is to accept the volatility of market movements in exchange for high liquidity. The crowdfunded options are much less liquid than a pubicly-traded REIT, and while some do offer limited redemption options (say, quaterly), your principal is quite locked up compared to something listed on an exchange.

    By definition, a big publicly traded REIT has to deploy a lot of capital, so is likely going after relatively large projects, whereas with some of the crowdfunding options you’re getting into smaller deal sizes — that seems to be the sweet spot right now for the crowdfunded sites, connecting smaller investors with small and and medium-sized projects. And theoretically, those smaller projects (at least within certain markets) will be less susceptible to sudden macro-economic changes. On the other hand, if a smaller project goes south, it’s not clear how effective a crowdfunding portal will be at recovering principal though foreclosure or a workout.

    Another factor is the fees and expenses — again, theoretically a smaller online player like Rich Uncles has a lower cost structure than a publicly traded REIT that’s not only larger, but also has all of the reporting and regulatory burden that comes with being public.

    What kind of a time horizon are you looking at? How important is regular income for you? That may help narrow your choices.

    #3866

    Andrew Savikas
    Keymaster

    @jamesdensmore as a bit more perspective on the public vs private REIT question, @audrey_savikas pointed me to this helpful post from White Coat Investor (there seem to be a lot of doctors blogging about investing).

    I think some of the downsides to crowdfunding he lays out are legitimate, but seem aimed at individual deals vs. the Reg A+ REITs that invest in multiple properties.

    #3881

    James
    Participant

    Thanks! All very helpful.

    I like the idea of getting some real estate exposure in a different way. And like you said, getting in on smaller projects is something I’m not getting with REITs. I’ll take a look at some funds.

    #3882

    Andrew Savikas
    Keymaster

    @jamesdensmore Coincidentally I just came across another crowdfunded REIT option today, “streitwise“. Haven’t yet added it to the database, but will ASAP.

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