Real Estate Crowdfunding vs REIT: Key Differences for Investors

Investors seeking exposure to real estate have more options than ever, with real estate crowdfunding and Real Estate Investment Trusts (REITs) emerging as two popular choices. Each offers distinct benefits and drawbacks, making it essential for investors to understand their differences before committing capital.

While both provide access to real estate assets, their structures, risk profiles, and investor requirements vary significantly.

Structures

Real estate crowdfunding and REITs differ in structure, affecting investor rights, risk exposure, and regulatory oversight. Crowdfunding platforms operate under SEC regulations such as Regulation D, Regulation A+, or Regulation CF, which determine investor eligibility, fundraising limits, and disclosure requirements. These platforms allow individuals to invest in specific real estate projects, typically through limited liability companies (LLCs) or limited partnerships (LPs). Investors hold direct or indirect equity stakes in a property, meaning returns depend on that asset’s performance.

REITs, by contrast, are corporations that own and manage portfolios of income-generating properties. Publicly traded REITs are listed on major exchanges and must comply with SEC reporting requirements under the Securities Exchange Act of 1934. They also follow IRS rules requiring at least 90% of taxable income to be distributed to shareholders. This structure provides diversification, liquidity, and professional management.

Private REITs and non-traded REITs operate differently. These are not listed on exchanges, limiting liquidity and often requiring long-term capital commitments. Many private REITs operate under Regulation D exemptions, restricting participation to accredited investors. Non-traded REITs may also impose redemption restrictions, making it difficult to exit before a liquidity event such as a public offering or asset sale.

Minimum Investment Requirements

Investment thresholds vary widely. Crowdfunding platforms typically require minimum investments ranging from $500 to $25,000, depending on the platform and project. Regulation CF offerings have lower entry points, while Regulation D 506(c) deals—available only to accredited investors—demand higher commitments. Some platforms, such as Fundrise and RealtyMogul, offer entry-level options for non-accredited investors, while others, like CrowdStreet, cater exclusively to high-net-worth individuals with minimums exceeding $25,000.

Publicly traded REITs have no formal minimum investment beyond the price of a single share, making them accessible to retail investors through brokerage accounts. This allows for fractional ownership and dollar-cost averaging strategies, enabling investors to build positions over time. Many brokerage platforms also offer automatic dividend reinvestment, compounding returns.

Non-traded and private REITs require higher minimum investments. Many private REITs set thresholds between $25,000 and $100,000 and limit access to accredited investors—defined as individuals with a net worth exceeding $1 million (excluding primary residence) or an annual income of at least $200,000 ($300,000 for joint filers) in the past two years. Non-traded REITs, while sometimes open to non-accredited investors, typically require minimums between $1,000 and $5,000 and often charge upfront fees exceeding 10% of the investment.

Tax Reporting

Tax treatment differs significantly. Crowdfunding investments often generate pass-through income, meaning earnings flow directly to investors without being taxed at the entity level. Depending on the investment structure, investors may receive a Schedule K-1 or a Form 1099. LLC-based crowdfunding deals typically issue K-1s, detailing an investor’s share of rental income, depreciation, and other deductions. This allows investors to offset income with depreciation expenses, potentially lowering taxable liability. However, K-1s can complicate tax filings, as they are often delayed until late March or April.

REIT investors receive Form 1099-DIV, which categorizes distributions into ordinary dividends, qualified dividends, and return of capital. Ordinary dividends, taxed at an investor’s marginal rate, make up most REIT distributions since REITs do not pay corporate income tax if they distribute at least 90% of taxable income. Some dividends may qualify for the Section 199A deduction, allowing non-corporate taxpayers to deduct up to 20% of REIT dividend income. Additionally, return of capital distributions reduce an investor’s cost basis, deferring taxes until shares are sold.

For international investors, tax implications vary. Non-U.S. investors in REITs face withholding taxes of up to 30% on dividends, though tax treaties may reduce this rate. Crowdfunding investments may trigger obligations under the Foreign Investment in Real Property Tax Act (FIRPTA), leading to withholding requirements on gains from U.S. real estate sales. Debt-based crowdfunding deals also generate interest income, reported on Form 1099-INT, which is taxed at ordinary income rates and lacks depreciation benefits.

Liquidity Differences

Liquidity is a major distinction. Publicly traded REITs offer high liquidity, as shares can be bought and sold on major stock exchanges during market hours. This allows investors to adjust their positions in response to market conditions, interest rate changes, or shifts in real estate cycles. Large REITs, such as those in the FTSE NAREIT All REITs Index, have high trading volumes, ensuring minimal price impact when executing transactions.

Non-traded REITs and private real estate crowdfunding investments have significant liquidity constraints. Many crowdfunding deals require multi-year lock-up periods, often between three and ten years, during which investors cannot freely sell their stakes. Some platforms offer secondary marketplaces where investors can attempt to sell their positions before the project completes, but these transactions often occur at a discount due to limited demand. Private REITs may also impose redemption limitations, restricting withdrawals to quarterly or annual windows and capping the percentage of shares that can be redeemed, particularly during economic downturns.

Distribution Mechanics

How investors receive returns varies. Crowdfunding distributions depend on project-specific cash flows and whether the investment is structured as equity or debt. Equity-based crowdfunding deals generate returns through rental income distributions and eventual property appreciation, often paying investors quarterly or annually. These payments fluctuate based on property performance, occupancy rates, and operating expenses. Debt-based crowdfunding provides fixed interest payments on a set schedule, with principal repayment at loan maturity.

REITs follow a more structured approach, particularly publicly traded ones, which pay dividends on a regular schedule, often quarterly. The requirement to distribute at least 90% of taxable income ensures a steady stream of payments, making them attractive for income-focused investors. Dividend yields vary by sector—mortgage REITs often offer higher yields due to their exposure to interest rate spreads, while equity REITs provide more stable but moderate payouts. Non-traded REITs may also offer dividends, but these can be suspended or adjusted based on cash flow needs.

Diversification Approaches

The way investors achieve diversification differs. Crowdfunding allows for targeted investments in specific properties, enabling investors to build a customized portfolio across asset classes, locations, and risk levels. Some platforms focus on residential developments, while others specialize in commercial properties, industrial facilities, or niche sectors like self-storage and senior housing. This level of control appeals to those seeking exposure to particular markets or property types, though it requires active management and due diligence.

REITs provide built-in diversification across multiple properties and geographic regions. Large publicly traded REITs own hundreds or even thousands of properties, reducing the impact of any single asset’s underperformance. Sector-specific REITs, such as those focused on healthcare, retail, or logistics, allow investors to gain exposure to broader industry trends without selecting individual properties. Exchange-traded funds (ETFs) that track REIT indices further enhance diversification by bundling multiple REITs into a single investment vehicle, spreading risk across different real estate segments.