What’s the difference between investing in a crowd-funded deal and buying shares in a REIT?

Today, instead of writing a post from scratch, I answered the following question on Quora, a Q&A site that I like very much:
Can see the difference in projected returns but what makes them different from one another?


Pay attention, because this is really important: By far the largest difference between the crowd-funding platforms and traditional, publicly-traded REITs is liquidity.

If you own shares in a publicly-traded REIT and you decide, for any reason, to get out of the investment, you can sell your shares quickly and easily. Sure, you may take a loss if you’re selling during a down-cycle in the market, but you can sell.

That is emphatically not the case with almost all private real estate deals*, whether syndicated through a crowd-platform or via a more traditional real estate sponsor (like me!). In a private deal, it’s very difficult or impossible to get your money until the earlier of: (1) the sponsor deciding to sell the underlying properties and distribute the cash to the investors; or (2) the liquidation deadline written into the documents (usually 5–10 years) forces the sponsor to sell.

This difference in liquidity is a big deal. You never know when you’ll experience some life event that will require a lot of cash (divorce, disability, etc.). So, think very carefully before tying your funds up for a long time in a private deal… and make sure you’re being fairly compensated for the lack of liquidity.

*Note: There are some syndicators of private who will guarantee to buy your investment back, usually at some discount to its worth at the time you sell it back to them. This is a helpful option, but you need to make sure that the syndicator has the financial wherewithal to actually deliver if you and/or the other investors actually utilize the option.


If this topic interests you, check out the discussion on Quora, for a bit more discussion.