The most important differentiators are liquidity and the value chain.
Firstly, the positive of REITs is that they are liquid and people can get in and out quickly. Crowdfunding, at the moment, doesn?t have a secondary market, so it is illiquid like any direct real estate investment. Some might see this as a bad thing, others see this as an advantage. Look at the stock market. In 1960, the average share was owned for eight years. Now, it?s less than five days. Real estate is like the stock market in 1960, but with the advent of technology, I guarantee that it too will become liquid.
Secondly, the harsh reality most people prefer to ignore is the shocking results. In the past 100 years of Western society, less than one percent of people have retired wealthy. The system is broken and the reasons being are all the fees of the middlemen, and understanding the value chain (right).
The first step is land rezoning, and generally, land developers aim to make 30-plus percent return on their money. The developer then buys the zoned land and creates something of value, aiming for 25 percent return on their money. The investor (often the same person as the developer) then buys the asset and looks to increase the value by tenanting the property, what is called ?seasoning the rents.? They aim for at least 20 percent return on their money. Once they have seasoned the rent, their payday comes by selling the asset to a fund or REIT that is incentivized by the amount of money they have under management. They are basically trying to spend their money and buy cashflow so that they can pay the monthly contributions. They aim to buy buildings with a cashflow of five to eight percent.
And then the last person in the value chain is you, the person who invests in the fund or REIT. You want to get wealthy, invest in this financial product (which you think is real estate) and are happy to just beat inflation. The problem is you never get wealthy as you are at the bottom of the value chain and you are susceptible to stock market volatility and sentiment, not property fundamentals. If you want to be wealthy you have to do what the top one percent are doing ? invest higher up the value chain.
Like Uber has done for taxis, crowdfunding has cut out the middleman, dramatically reduced the costs, and increased the accessibility. Before there were surmountable barriers to entry for the average person to be involved in development or investment; now, we all have access to cut out the middlemen and invest directly. This dramatically reduces the costs and as an example, rather than getting returns of 5 to 8 percent, like in most funds or REITs, our investors look forward to returns or 14 to 15 percent IRR through such platforms.
Author credit: Scott Picken, founder and CEO of crowdfunding platform Wealth Migrate