Real Estate Crowdfunding vs. Stocks: Risks and Returns

With plenty of options out there, choosing which investment opportunity is right for you is a potential minefield. You can look into the traditional market investments such as stocks and mutual funds, but there is also the burgeoning real estate crowdfunding market to consider. This method of investing describes a group of investors pooling their money to fund a real estate project.

Real estate crowdfunding allows you to invest in real estate passively, without having to worry about maintaining and managing the property. It has opened up avenues for people who can’t commit the whole price of the project by themselves, but are interested in investing. This makes it particularly attractive for millennials: According to UOWN, 54% of people who invest in property crowdfunding are between the ages of 18 and 30.

As an indication of how popular stocks and shares are, 2.2 million people in the United Kingdom were subscribed to stocks & shares ISA account in 2019. Investing in stocks is a process that requires more scrutiny and research, as the market is more volatile. The industries in which public companies are based can be very volatile, and more prone to price fluctuations due to external factors. This leads to much more activity in terms of buying and selling shares.

If you are looking to invest, but are unsure which investment type to pursue, here are some of the main advantages and disadvantages of real estate crowdfunding and stocks.

What Are the Main Advantages of Real Estate Crowdfunding?

The real estate market is traditionally a lot more stable than stocks, and the average sale price has seen consistent growth with a few exceptions, such as the 2008 financial crisis. This means that you are unlikely to lose the entire value of your investment, even if there is a significant market crash. Real estate crowdfunding enables you to retain a level of control with the process, as you don’t need to communicate with stockbrokers and seek the help of financial advisors. Instead, you can work directly with developers and have a voice in the decision-making.

One of the other main attractions of real estate crowdfunding is that it does not require a large amount of money as an initial investment. There are several platforms based in Europe, such as Crowdestate, EstateGuru, Crowdproperty, PropertyPartner, and Housers, which have minimum investments ranging from just 50 to 100 euros. Although real estate crowdfunding is a relatively novel concept, many platforms you can use are quite digitally-savvy. They prioritize accessibility so that you can set up a profile easily and start building a portfolio quickly. 

Depending on the potential of the property and the length of the holding period, the average annual yields can vary between 6-18%. Most investors will see the yields increase year-on-year, with the final year being the peak for income from the investment. For this reason, real estate crowdfunding allows for easy diversification into different property types, securing a steady passive stream from various projects.

Real estate crowdfunding is often criticized for being an illiquid market, but the emergence of the secondary market has challenged this notion. A secondary market allows investors who have purchased shares via crowdfunding platforms to trade them in the marketplace. It should be noted that not all real estate crowdfunding platforms have a secondary market available at this point, but more and more are offering this option to investors.

What Are the Risks and Disadvantages Associated With Real Estate Crowdfunding?

A disadvantage of real estate crowdfunding is that it undoubtedly offers less liquidity, despite the emergence of the secondary market. Real estate projects offered on platforms can have investment lengths of anywhere between 3 months and up to 5 years, which can be quite the commitment for some investors. Real estate crowdfunding requires more commitment to a single investment compared to stocks, which do not typically have required holding periods.

A large risk in real estate crowdfunding is due to how young the industry is. Many governments have been slow in implementing rules, oversight, and regulations for how these platforms should operate in a transparent, trustworthy way. The rules are still being written and are likely to change over time as the industry grows. Crowdfunding platforms are typically regulated by local government agencies who provide oversight to these platforms and can even cause changes to how platforms operate. This happened recently in the UK, where a new FCA regulation forced the closure of Igloo Crowd and several other UK real estate crowdfunding platforms. However, the regulations for crowdfunding platforms are generally not as stringent as they are for stocks, which means it is vital that you perform due diligence when conducting research. 

How Do the Benefits of Stocks Compare to Real Estate Crowdfunding? 

One of the most attractive features of stocks is that they offer higher liquidity.  Depending on the investment broker, stocks can often be bought and sold instantly. It is also much easier to keep track of your investment value, as you can view the live share price at any given time.

Whilst real estate crowdfunding does enable you to diversify your investments, doing it with stocks is even easier. Real estate crowdfunding offers more of a long-term financial commitment compared to the instant buying and selling of stocks, which may be a turn off for some investors. Stocks enable you to build up a large portfolio of shares in various companies across a range of industries.

As with real estate crowdfunding platforms, most trading accounts can be opened without a large minimum investment.  Depending on the broker, there can be little to no transaction fees for stocks, however, there are often no transaction fees for real estate crowdfunding too.

What Are the Risks and Disadvantages of Stocks?

One of the biggest risks in investing in stocks is price volatility. As millions of shares are traded every minute, prices fluctuate accordingly. They can move up and down to such an extent that you can earn or lose thousands of euros in the space of a single day. This can cause some investors to panic and make poor investment decisions.

It is possible that you could lose large amounts of money if a company is performing poorly or is affected by external factors, such as a global pandemic. For this reason, it is crucial to keep a close eye on your whole portfolio which can be quite stressful and time-consuming.

The Bottom Line

Both stocks and real estate crowdfunding provide the opportunity for additional income to the savvy investor. It comes down to what your financial situation is – you need to ask yourself how much of a risk you are willing to take and how much you are prepared to lose. Stocks are more suited to an investor who strives for potentially higher returns by buying and selling regularly which brings more risk attached to it. 

Real estate crowdfunding is a better option for someone looking for a modern and passive investment stream that provides consistent returns. That is not to say that there is no risk involved in investing through a real estate crowdfunding platform, but the nature of the real estate market and the shared burden of the investment allows for a more secure investment.

Jan Večerka is the CEO and Founder of BrikkApp, a Europe-based company, that connects investors with property investment platforms from all across the world helping them to make the right choice. He is an entrepreneur and expert in technology, financial and operational management, and commercial real estate. Before founding BrikkApp he co-founded Data4You, an organization dedicated to developing a digital society, providing programming education and developing startup ideas.

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