Because more than 60% of Americans invest in real estate and more than 44% of American households invest in REIT stocks, you might be curious about what all the hype is about and how you can get in on some of the action.
Real estate investing is a great way to earn residual and sometimes even passive income, and there are several ways to get started. The two ways most people are investing in real estate include REITs and fractional real estate. In this post, we’ll outline the two so you can make the most informed decision about which one to invest in.
What are Real Estate Investment Trusts (REITs)?
REITs are no new concept and have been around for decades, allowing investors to make real estate investments without the need to buy any actual property. How is this possible? The Real Estate Investment Trust buys the properties, from condos to large apartment and office buildings and hotels to storage centers, shopping malls, and more, and rents or leases them to tenants. Investors purchase shares in the Real Estate Investment Trust and the rent that’s collected through the REIT is then distributed to investors via dividends.
How it works
Real Estate Investment Trusts are tax breaks for corporations, which is also good news for investors because REITs are required to distribute at least 90% of their profits to their investors in the form of dividends. This is done to help the corporation pay lower taxes while also helping investors get a bigger slice of the dividend pie.
Investing in REITs
REITs differ from traditional real estate in that most of them are traded publicly on the stock market, which provides incredible liquidity for investors who are looking to maintain the freedom to buy or sell shares as they please. It also creates a low barrier to entry as the average investor can buy as few as one REIT share for a much lower capital contribution than expected with traditional real estate investing.
You can purchase the REITs listed on the stock exchange directly, just as you’d buy any other stock. You can also buy shares of REIT through mutual funds or exchange-traded funds (ETF).
There are private REITs that are not available on an exchange. These private REITs may be less accessible to retail investors.
Benefits of REITs
The most significant benefits of REITs include:
- Liquidity. Buy and sell shares when you want, with the click of a button.
- Access to real estate assets. Diversify your portfolio with endless REIT investment options.
- Lower risk. Limited exposure means limited risk.
- Management expertise. REITs are managed professionally by experienced brokers.
What is fractional real estate?
Fractional real estate is also not a new concept but as fintech has enabled companies to fractionalize assets, its popularity is growing. In the case of raising funds for real estate, fractional real estate broadens the pool of potential investors so that these properties can reach far beyond friends and family. All profits related to the real estate, including rental income and value adds, are passed on to the investors.
Benefits of fractional real estate
People love fractional real estate investing because of its:
- Direct ownership of properties that otherwise would have been unattainable with REITs.
- Minimal investment required to start.
- High returns.
- Low correlation with stock market volatility and fluctuations.
Differences Between REITs and Fractional Real Estate
The biggest differences between investing in REITs and fractional real estate are
- Portfolio of assets vs. an individual asset. When you buy a REIT, you buy shares in an organization that owns a portfolio of properties. Fractional real estate investors have a lot more choice about which property to choose and have access to all of the data about each property before they purchase shares.
- No ownership vs. direct ownership. REITs do not offer ownership in the properties due to the fact that the REIT itself owns the portfolio. Fractional real estate, on the other hand, features direct ownership of the property without a broker in the middle.
REITs vs. fractional real estate—which one to choose?
Both REITs and fractional real estate share a similar principle that allows investors to have access to a piece of the dividends pie without too much risk. REITs are great for people just getting started in investing or real estate investing in particular as they can help diversify a portfolio and generate returns without a large down payment or upfront investment.
One of the most significant advantages of fractional real estate investing is the ability to invest in single properties with a lower amount of capital. If you browse around Ark7, you can find projects as cheap as $5.40/share, meaning an investment of $1,000 or even $250 can go a long way! Fractional real estate investors also don’t have to worry about investment fees or other costs associated with traditional real estate transactions like closing costs, realtor commissions, and upkeep and maintenance.
There are some downfalls of this kind of investing, including the fact that some properties or platforms require their investors to be accredited, meaning there are Securities and Exchange Commission (SEC) requirements that must be made before you can invest and many people don’t meet them.
Real estate has the potential to be a stellar investment and many people have made tons of money through real estate investments. What deters most people from real estate investing is maintaining the property, which is a full-time job in itself. REITs and fractional real estate are here to solve that problem by making real estate investing accessible to all without the constant stress of tenants and all of the problems that come with it. Fractional real estate is an emerging trend in fintech that has the possibility of disrupting the current REIT market.