What Is an eREIT?

Learn about the advantages and disadvantages of eREITs.

You may have heard of a new type of real estate investment opportunity called an eREIT. This is similar to a traditional REIT (Real Estate Investment Trust). One of the ways is not similar is that it enables the average person to take a small amount of money (such as $500) and invest in real estate.

How Do eREITs work?

The various eREITS (such as Fundrise, MogulREIT, and RealCrowd) earn money by crowdfunding. You've probably heard of crowdfunding sites in other contexts, such as Kickstarter or Indiegogo. It involves someone who wants investors (or just cash for a particular need or purpose, such as an indie film or medical costs) pitching an idea and opening it up to the public via a website, then spreading the word via other social media and Internet-based marketing. An eREIT is just real-estate crowdfunding.

An eREIT gets its financial backers from people who, like those who read a business proposal on Kickstarter, believe it is a good project to place their money in. The founders of an eREIT raise money for developers of real estate projects by asking the general public to invest in projects; commercial buildings, construction loans and acquisition loans. Investors earn money on the rental and lease income and debt servicing. They get money in the form of regularly paid dividends (if it is an income REIT).

What to Consider Before Investing in an eREIT

Fundrise and eREITs like it are legitimate investment vehicles that are regulated by new funding rules (Regulation A+) allowing investors in the general public to place money in equity offerings. So you no longer have to be one of the financially elite to have this opportunity.

Another advantage of an eREIT like Fundrise is you do not have to use a broker to buy into it, so this means a reduction in third party fees which can be as high as $200 per transaction. However, fees still apply. There are fees associated with producing income on the investment that each investor will pay a percentage of. So carefully read the prospectus and investor reports.

With every investment, there comes a downside.

eREITS Are Less Liquid Than Some Investments

One important consideration is that eREITS are not necessarily completely liquid, because unlike REITs and other investment vehicles, they are not publicly traded; that is, shares are not being regularly bought and sold on the market.

This means that you cannot readily sell your shares in an eREIT. If you should decide that the eREIT is not for you, most likely you will have a grace period during which you can pull out the full amount of your investment. Otherwise, the period during which you can liquefy your investment and cash in your shares will be limited to certain times of the year (for instance, quarterly). And sometimes vesting periods apply, meaning that if you opt to liquidate your investment before a certain period of time, you will receive less than the full amount of what you initially put in.

eREITS Are a Relatively New Investment Vehicle

Since an eREIT is a relatively new investment vehicle (first started in 2015), it has not weathered the test of time. Something like this ordinarily needs to be around for several years before we can fully see how its value changes over financial cycles. We don’t have any historical data to show the trends in this type of investment. Furthermore, the managers of these funds tend to be younger than the senior management of traditional REITs and investment vehicles.

Your eREIT Dividends Will Likely Be Taxable Income

The dividends that you receive from an eREIT will in most cases be viewed as ordinary income or a nontaxable return of capital. The portion that is ordinary income will be taxed according to your applicable income tax bracket. Lower tax rates typically apply to dividends from stocks, which is not the case with eREITS unless the fund distributes a qualified dividend (one to which capital gains tax rates apply).

If you are looking to take a bit of a chance and are not looking to earn money overnight, an eREIT may be something to consider.

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