REITs can be an outstanding investment if you understand how they work and why they’re beneficial. This article discusses the best REITs in 2023 (Fundrise vs Crowdstreet vs Yieldstreet), what REITs are, why they’re useful, and some of the best ways you can get started investing in REITs today.
Understanding REITs
A REIT, or Real Estate Investment Trust, is a company that manages income-producing real estate properties. These companies often manage commercial properties like multifamily properties, offices, shopping districts, and hotels, but do not develop the properties themselves.
REITs make it possible for average investors to invest in the real estate market without owning or managing physical property. You can invest in REITs the same way you would invest in stocks, and the value of the REIT can change over time. However, the best REITs are typically very stable investments due to their consistent returns and regular cash flow.
REITs are heavily regulated and must meet IRS standards, such as:
- They must have 100 or more shareholders upon the completion of the first year in business
- REITs must receive 75 percent or more of gross income from real estate, including mortgage interest, real property rents, or the sale of real estate
- No more than 50 percent of the companies shares can be held by five or fewer people during the last half of the year
- A minimum of 90 percent of the company’s taxable income is in the form of annual shareholder dividends
While REITs are often safe investments, they carry risks that can vary depending on the type of REIT you invest in.
Why invest in REITs?
Unlike owning physical property, the best REITs can be highly liquid since they are often traded on public stock exchanges. This means that investors can easily pull their investments if they feel that a market crash is coming or in other situations where they need to sell their investments quickly. With traditional real estate, you’d have to go through the process of listing your home, finding a buyer, and finding a new place to live for yourself before you receive any returns on the sale of the house.
These trusts also have the potential for higher yields than common equities. Their unique tax structure and ownership of cash-flowing properties make the potential for high yields possible for REIT investors.
The best REIT investments provide an effective way for investors to diversify since these trusts follow the real estate cycle. Real estate cycles last ten or more years, which means REITs have been a stable investment over the past several decades.
REITs typically provide a safe way to diversify an investment portfolio. However, they also come with some risks you should be aware of before investing in REITs.
Risks with Real Estate Investment Trusts
Some REITs can be illiquid. Non-traded and private REITs often make it difficult to pull your investment quickly. You’ll normally need to hold on to these REITs for several years to see consistent returns.
Excessive debt. Since REITs buy and sell commercial properties, they accumulate a lot of debt. However, REITs continue to generate consistent cash flow through leases and rentals, and dividends are still paid to shareholders even though REITs carry debt.
Taxes. REIT companies don’t pay taxes on gains, but investors do. Investors must pay taxes on all dividends unless they’re held in a tax-advantaged account.
Low capital appreciation. One of the biggest downsides of REITs is that most of their profits go to paying dividends to shareholders and don’t have much growth and capital appreciation. In economic downturns, investors may not be interested in buying new shares of stocks and bonds which stifles the growth of the trust. REITs tend to grow in times of bull markets when investors are more likely to buy stocks and bonds.
Real estate market risk. While REITs tend to be more stable investments than stocks, they run the same risks and follow the same cycle as the housing market. This means that during housing market downturns, REITs are also more likely to see losses.
Geographic issues. Some REITs focus on a particular area which means environmental factors may impact your investments. Events like floods, tornados, and hurricanes are natural events that could affect REITs in the same geographic area.
Types of REITs
There are two main types of REITs that investors use: equity REITs and mortgage REITs. Continue reading to learn more about the differences between these two types of REITs.
Equity REITs
Equity REITs pool together companies that manage income-producing properties into one fund. The returns on equity REITs are generally provided by the income produced for the properties in their portfolio. Some equity REITs have a broad scope of commercial properties, while others focus on one segment in particular.
Since equity REITs are comprised of income-producing properties, these investments tend to be the most stable. Investors can predict their income and take advantage of the gradual increase in rent that most commercial properties experience over time.
Mortgage REITs
Mortgage REITs (or mREITs) are mortgage-backed securities and other mortgage-related assets that generate revenue from interest on commercial loans. Most of the profits of mortgage REITs are paid back to their shareholders as dividends.
The Best REIT Investing Platforms: Fundrise vs. Crowdstreet vs. Yieldstreet
Fundrise
Fundrise is widely known as one of the best REIT platforms. This real estate investment trust is geared toward the average investor who wants to get started in real estate investing. They offer REITs that invest in both equity funds and mortgage-backed securities. Their product is called eREITs and eFunds which pool several investors’ money together to buy and sell land.
Fundrise makes it easy for everyday investors to invest in REITs with a low minimum investment of only $10. Other advantages of Fundrise include:
- They are accessible to investors of all experience levels
- They have an intuitive website that’s easy to use for average investors
- Fundrise’s offerings include investment options for non-accredited investors
- They have an easy-to-understand fee structure
Fundrise is one of the companies we’ve found with the highest returns based on historical data. They have seen a return of 13.5 percent across all its account levels.
While Fundrise can be useful for some retail investors, there are some downsides to consider before choosing Fundrise over some of its competitors. Some of the downsides of using Fundrise include:
- Fundrise investments are highly illiquid
- You need to conduct your own due diligence before investing
- Investments may require an extended hold period
- Limited options for investments in the secondary market
- The minimum investment may be misleading; it only grants access to the Starter Portfolio, while the Basic account requires a minimum investment of $1,000
If you’ve still decided to invest with Fundrise, you should know that it’s not for everyone. Fundrise is best for:
- Non-accredited investors
- Investors looking for low buy-in REITs
- New investors who want to get their feet wet with real estate investing
- Investors who want a passive source of income
CrowdStreet
CrowdStreet is an online platform that makes it easy for people to invest in commercial real estate with the potential for high returns. CrowdStreet is not a REIT and can’t be traded like a stock on the public exchange. In fact, CrowdStreet is known for being a highly illiquid investment that makes it difficult for investors to sell.
CrowdStreet has a different business model than most REITs. They connect potential investors to project developers across the US who are hand-vetted by CrowdStreet. CrowdStreet also has an option where you can buy into CrowdStreet-backed funds that act like mutual funds and are comprised of various commercial real estate projects.
Some of the benefits of CrowdStreet include:
- Easy access to commercial real estate deals
- Hand-vetted project developers to work with
- Potential for passive income
- Intuitive website
CrowdStreet has a minimum investment of $25,000 for most projects on the website. Additionally, you must be an accredited investor to use the service. This means you must have a net worth of at least $1 million and a yearly income of $200,000. Unfortunately, this makes CrowdStreet inaccessible for most average investors.
CrowdStreet is also best for long-term investors since you can’t easily pull your investment on short notice. You should expect to invest with CrowdStreet for several years before seeing your money substantially increase in value.
Yieldstreet
Yieldstreet differentiates itself by being the intermediary that crowdfunds your debt to finance commercial real estate investments instead of allowing investors to purchase a piece of the commercial property itself. Much like CrowdStreet, most deals on Yieldstreet are exclusively available for accredited investors and have a $10,000 minimum.
However, the main selling point for Yieldstreet is that they have a variety of different investments available for their accredited investors. They have investments spanning various assets like fine art, litigation deals, marine and aquatics, and other types of real estate.
While most of the deals on Yieldstreet are for accredited investors only, Yieldstreet established the Prism Fund and other short-term notes that are less popular but have a minimum investment of only $2,500.
Below are some additional benefits of using Yieldstreet:
- Your investments are backed by tangible assets
- You have the ability to invest in privately structured credit deals
- You have access to investments most other funds don’t have
Yieldstreet has a targeted 7 to 12 percent return on its investments and has been relatively stable throughout the years. Yieldstreet’s fee structure is comprised of an annual management fee as high as 2.5% on average. Yieldstreet also has flat fees on other types of investments–ranging from $100 to $150 per year.
Yieldstreet may be suitable for some, but we don’t think they are the best option for serious investors. The Yieldstreet investments are highly illiquid, so investors must have a long-term approach. Once you’ve committed to a deal on Yieldstreet, you should expect to see the investment through to the end.
DiversyFund
DiverseyFund’s primary offering is its DF Growth REIT, a public real estate investment trust that non-accredited investors can access through the platform. Unlike CrowdStreet and Yieldstreet, DiverseyFund’s customers can get started investing in REITs for as little as $500. However, these investments also tend to be illiquid and take at least three years to see returns.
DiverseyFund reinvests all profits into building its portfolio, and investors don’t see a significant return until the company sells its properties in the future. It’s an option for non-accredited investors who want to start taking advantage of the benefits of investing with REITs but don’t want to pay a premium for Yieldstreet or CrowdStreet.
Realty Mogul
Realty Mogul is another popular REIT for both accredited and non-accredited investors. This platform is ideal for people who want to invest in real estate beyond just public REITs. Account minimums for Realty Mogul start at $5,000, which may dissuade most average investors from getting started.
RealtyMogul has a solid track record and claims to have invested in 400 properties worth over $4 billion in property value. Their membership base is up to 219,000 as of 2022, and they also have access to private investments.
Open Door Capital
Open Door Capital was founded by former Bigger Pockets podcast co-host, Brandon Turner. Brandon is also a best-selling author and social media influencer for his success as a real estate investor. His fund, Open Door Capital, is a newer venture for Brandon but has already garnered notoriety because of Brandon’s fame.
Investment opportunities include mobile home parks, multi-family apartment complexes and self-storage facilities. Depending on the offering, investors can expect to receive monthly or quarterly returns on their investments. Unfortunately, all of Open Door Capital’s offerings are 506c meaning you must be an accredited investor to invest. Many of Brandon’s followers claim this fund to be one of the best REITs in 2023.
Final thoughts
Getting started investing in REITs isn’t too difficult for most people. The hard part is finding a fund with low minimums, low fees, and high upside with consistent returns. That’s why Fundrise is a great place to start your real estate investing journey. They’re the best option for beginner investors who want to get their feet wet before moving on to bigger and better projects in the future.
Serious investors who want the potential to make outsized returns should look into using CrowdStreet or Yieldstreet. They are the two best options for investing in commercial real estate, but they are long-term investments and you shouldn’t expect to see a return for at least several years.
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