4 min read
The 21st century has brought about quite a few developments in the real estate industry. As with most industries, technology has played a huge role in propelling the real estate industry forward. Two have jumped to the forefront within the real-estate industry: Crowdfunding and Real Estate Investment Trusts (REITs). These two innovations – particularly as they relate to hotel crowdfunding, are alternatives to the traditional investing methods. Now, many investors wonder how to best utilize hotel crowdfunding and REITs for their investment or capital raising needs.
What’s so Special about Crowdfunding for Hotels?
With the passing of the Jumpstart Our Business Startups Act of 2012 (JOBS Act), online platforms such as EquityRoots can now solicit the sale of real estate backed securities to prospective investors by registering Form D with the SEC—the Security and Exchange Commission, or qualifying for an exemption. When using general solicitation, all purchasers of the public offering (in this case hotel assets) must have accredited investor status. The JOBS Act has also paved way for non-accredited investors to participate. More recently, and under newer offering types like Title IV Regulation A+, unaccredited investors can participate under certain limitations. This opens up the possibility for online platforms to extend investment opportunities to everyone, not just accredited investors anymore.
Under these circumstances, hotels are a great asset class to crowdfund because of its existing large and loyal customer bases associated with each of the top Hotel chains such as Marriot, IHG, Hyatt and Hilton. In most cases, commercial real estate like hotels yield investors a greater rate of return than residential real estate investments. Equity crowdfunding investments can easily exceed the typical returns from residential real estate, often seeing a rate of return above 20% when factoring 5-year holding periods and including the disposition proceeds. The cash flow performance of hotel assets can also impress investors, especially when the development is backed by a strong reservation system and strong brand. Crowdfunding is not limited to equity, you can also crowdfund a mortgage or a business loan.
What’s the infatuation with REIT(s)?
Real Estate Investment Trusts (REITs) didn’t start to matriculate in the investment marketplace until the 1960s—when Congress introduced this investing tool into the U.S. economy. What is a REIT? By definition, it is a corporation that owns and operates income producing real estate. More specifically, it joins the capital of several investors and investors earn a share of the income produced, yielding a 8.8% rate of return averaged over the last 10 years.
A REIT offers investment flexibility at a reasonable entry price. REIT(s) can invest in multiple asset classes such as retail, residential, healthcare, offices. and for each of these asset classes, investors can earn a share of the income produced. Many people find REIT(s) an attractive investment because of it’s liquidity, meaning you can wake up and sell it if you need the cash. Be weary, certain REIT’s often have restrictions on when and how much you can sell.
Conclusion & Comparison
After comparing the two investment tools, it’s clear that each has their pros and cons. A REIT’s ability to earn a reasonable rate of return and the liquid nature of the investment may be a good fit for some people. But for the savvier investor that can decipher between good/bad markets and good/bad flags, they have multiple options on what they can invest into. It is not uncommon for online investors to yield a higher rate of return through a variety of equity and debt instruments via crowdfunding, and outperform their REIT counterparts. Real estate and hotel crowdfunding may allow people to diversify their portfolio by personal preferences that are strategically better than a giant pool of assets accumulated over time.
The same cannot be said of REIT(s). Essentially, a REIT is a pool of multiple properties that you are investing into. Sometimes the REIT picks good apples and sometimes it picks bad apples, and sometimes the good ones go bad over time, you’re essentially investing into the average. REIT(s) do not allow the investor to pick and choose which investment type they would like to fund, whereas crowdfunding gives control back to the investor and allows them to choose investments that may be most suitable for them, sorting by debt, equity, brand, flag, geographic market, hold period, etc.
Remember, that all investments come with risk. Investing is inherently taking on some form of risk for a potential reward. And although people have 24/7 internet access to crowdfunding platforms, they should consult an attorney or financial advisor prior to investing. Crowdfunding platforms like www.equityroots.com enable its online investors to easily share due-diligence documents and investment contracts with their attorney prior to investing. Past performance is never a guarantee of the future.