Real estate investing has various forms. Among the most common, for instance, is putting your money on REITs or real estate investment trusts. This means investing in large portfolios of income-producing commercial real estate assets, such as hotels, apartments, and shopping centers. And the good thing is that it’s a hands-off investment.
REITs have three different types, namely: publicly-traded REITs, public non-traded REITs, and private REITs. Today, a new sub-category of REIT is becoming popular, and this is eREIT.
Most probably, the question hovering in your mind right now is what’s eREIT and how it differs from other types of REITs. Read on below to learn more.
Real Estate Investment Trust (REIT): Explained
Real estate investment trusts are companies that own, invest, and operate real estate assets. However, before becoming a certified REIT, a company must meet certain criteria, such as the following:
- At least 75% of the company’s assets must be invested in real estate investments. Owning properties isn’t necessary, but many REITs hold ownership over some types of real estate while some only purchase mortgages and other real estate financing investments.
- The company must have no less than 100 shareholders. To reach this required number, most REITs establish themselves as general corporations and partnerships. Another requirement is that five shareholders can’t own assets exceeding 50%.
- The company must distribute no less than 90% of its taxable income to shareholders. In this case, a REIT serves as a pass-through entity, which means that the company isn’t taxed at its corporate tax rate. Since almost all of the company’s taxable income is paid to its owners, a personal tax rate is imposed.
The Three Types of REITs
Any person who wants to invest in REITs must know the three common types of REITs by trading status: publicly-traded REITs, public non-traded REITs, and private REITs.
- Publicly-Traded REITs. These REITs trade on a public exchange like ETFs and stocks and investors can buy and sell them on the open market using an ordinary brokerage account.
- Public Non-Traded REITs. These REITs aren’t available on major stock exchanges but they’re registered with the SEC and available to all investors. One can invest in these REITs directly through a third-party real estate broker or management company.
- Private REITs. These REITs aren’t registered with the SEC or publicly listed on a major stock exchange. In this case, they are more risky and difficult to evaluate.
What are eREITs?
Fundrise, a platform designed for real estate investors, owns the trademark for the term “eREIT.” Fundrise’s eREITs are under the category of public non-traded REITs, which means that they are available to all investors but aren’t traded on stock exchanges.
However, eREITs are different from public non-traded REITs because the former aren’t sold through third-party investment brokers, but rather Fundrise directly sells them.
Investors can pick from a variety of eREITs, and the good thing is that each of these eREITs focuses its investments on a particular location. If you want to invest in real estate projects through crowdfunding, Fundrise’s eREITs are an excellent option.
Investment Portfolio Options Offered by Fundrise
You can choose from the four portfolio options offered by Fundrise. Each of these portfolios invests in diversified eREITs.
- Starter Plan. This plan is perfect for people who are just starting in real estate investing. It invests 50% of its money in Fundrise’s income-focused eREITs and another 50% to growth eREITs. An investor can put in a minimum investment of $500 to avail of the Starter Plan.
- Supplemental Income. This portfolio generates stable and high returns, with the secondary objective of long-term equity appreciation. There are 27 active eREIT investments in this plan, mostly debt assets.
- Balanced Investing. The goal of this plan is to have a stable balance between income-generating and growth-oriented real estate assets. It also targets allocation across different types and structures of investments.
- Long-Term Growth. This plan’s objective is to generate growth in the long-term with the secondary focus on dividend yield. It targets allocation on equity investments, such as development projects.
Advantages and Disadvantages of eREITs
Every type of investment has its upsides and downsides, and eREITs are no exception. Here are the advantages and disadvantages of eREITs.
Pros
- No third-party brokers mean no sales commissions. So, you can get more from your investment returns.
- Fundrise’s eREITs have affordable fees compared to other types of REITs. Typically, the initial and ongoing management fees only make at least 4% of your invested capital.
- Investing in eREITs has a higher income and return potential than other types of REIT investments.
Cons
- You can’t sell your shares whenever you like, and there are restrictions when it comes to redeeming your shares.
- Due diligence is required of the investor as investments in eREITs are quite complex.
Takeaway
Now you know the difference between REITs and eREITs. While the latter is a new form of real estate investment, it promises affordable investment fees and excellent returns. Make sure to do your research and learn the pros and cons before investing your money in any type of investment.
