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Mortgage fraud involves lying or omitting information to fund or insure a mortgage loan. It results in billions of dollars in annual losses nationwide. In the second quarter of 2023, 0.75% of all mortgage applications were estimated to contain fraud, which is about 1 in 134 applications, according to CoreLogic. Rates of fraud were higher for two- to four-family properties than for single-family homes. The top states for mortgage application fraud in 2023 were New York and Florida.

What Is Mortgage Fraud?

The FBI, which investigates mortgage fraud, defines it as “a material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.” A borrower might apply for a loan saying they had received a gift of money to help purchase a home when in reality, the borrower simply used money borrowed from a family member to temporarily inflate their assets during the loan application process.

Sometimes those working in the mortgage industry are the fraudsters: In one recent case, employees of a New Jersey mortgage business misled lenders about the intended use of properties to fraudulently secure lower mortgage interest rates. They often submitted loan applications saying that borrowers would reside in a property when in fact the property was being used as a rental or investment property.

How Does Mortgage Fraud Happen?

Mortgage fraud happens when someone involved in the process of obtaining a loan for a property purchase makes false statements about their financial situation or the planned use of the property. It may involve falsifying documents, lying about the source of income, or even creating an entirely false identity.

Types of Mortgage Fraud

The FBI investigates two distinct areas of mortgage fraud: fraud for profit and mortgage fraud schemes used for housing.

Fraud for Profit

The FBI says that those who commit this type of mortgage fraud are often industry insiders. Current investigations and reporting indicate that a high percentage of mortgage fraud involves collusion by bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals in the industry. The FBI points out that fraud for profit is not about getting a home, but manipulating the mortgage process to steal cash and equity from lenders and homeowners.

Fraud for Housing

It’s not only industry insiders who can look to milk the system with mortgage scams. With fraud for housing, the perpetrators are borrowers who take illegal actions in order to acquire or maintain ownership of a house. They could do this by lying about income or presenting false information about assets on their loan application to get a good mortgage rate, for example. One area where fraud is on the increase in recent years is occupancy misrepresentation, in which an investor claims that an investment property is their primary residence in order to get a more favorable mortgage rate.


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What Are the Penalties for Mortgage Fraud?

Mortgage fraud schemes abound, and mortgage fraud is serious. In fact, it’s typically a felony. It’s usually the FBI who investigates mortgage fraud, and conviction for federal mortgage fraud can result in a federal prison sentence of 30 years; state convictions can last a few years. If the crime is a misdemeanor and the amount involved is less than $1,000, there can be a one-year sentence.

A conviction on a single count of federal mortgage fraud can result in a fine of up to $1 million. State fines can range from a few thousand dollars for a misdemeanor to $100,000 or more for a felony. Those found guilty can expect to pay restitution to compensate the victims and to be on probation following jail time.

9 Main Types of Mortgage Fraud

Mortgage fraud comes in many flavors so let’s get a closer look at exactly what is mortgage fraud. Scammers are big on creativity, particularly when it comes to scams targeting seniors. The FBI has a list of common mortgage fraud schemes and scams to watch out for. Here are a few of theirs and others to keep in mind.

1. Property Flipping

There’s nothing innately evil about flipping properties. In fact, adding investment properties to your portfolio can be a way to build wealth if you’re good at it. But then there’s the sinister side of flipping. It goes something like this: A property is purchased below the market price and immediately sold for profit, typically with the help of a shady appraiser who puffs up the value of the property. This is illegal.

2. Equity Skimming

The FBI explains how this works: An investor may use a “straw buyer” (a knowing accomplice), false income documents, and false credit reports to obtain a mortgage loan in the straw buyer’s name. After closing, the straw buyer signs the property over to the investor in a quit-claim deed, which relinquishes all rights to the property and provides no guarantee to title. The investor does not make any mortgage payments and rents out the property until foreclosure takes place several months later.

3. Asset Rental

It’s one thing to borrow something blue on your wedding day, and quite another to borrow or rent the assets of your best friend or loved one to make yourself look better in the eyes of a lender. You “borrow” the asset, maybe a hefty chunk of cash, and after the mortgage closes, you give it back to your partner in crime. Sounds harmless, but it’s a common and serious mortgage scam.

4. Inflated Appraisals

Appraisers have the keys to the kingdom. They state the fair market value of a home. Crooked appraisers can do a couple of things that are illegal: They can undervalue the property so that a buyer gets a “deal,” or more often, they overstate the value of the property. The goal is to help a buyer or seller, or a homeowner planning to refinance or tap home equity.

5. False Identity/Identity Theft

Identity theft is an epidemic. According to the Federal Trade Commission, in 2022, it received over 1.1 million reports of identity theft.

Scammers use financial information like Social Security numbers, stolen pay stubs, even fake employment verification forms to get a fraudulent mortgage on a property they do not own. If you’ve been a victim, report identity theft as soon as possible.

6. Foreclosure Scams

Talk about kicking somebody when they’re down. Predators seek out those who are in foreclosure or at risk of defaulting on their loan and tell them that they can save their home by transferring the deed or putting the property in the name of an investor. It can sound rational when you’re desperate.

The perpetrator cashes in when they sell the property to an investor or straw borrower, creating equity using a fraudulent appraisal and stealing the seller proceeds or fees paid by the homeowners. The homeowners are typically told that they can pay rent for at least a year and repurchase the property when their credit has improved.

But that’s not how the story goes. The crooks don’t make the mortgage payments, and the property will likely wind up going into foreclosure.

7. Air Loan

This may as well be in a movie, because nothing is real with this — it’s probably the most bizarre of the mortgage fraud schemes. The FBI describes an air loan as a nonexistent property loan where there is usually no collateral. Brokers invent borrowers and properties, establish accounts for payments, and maintain custodial accounts for escrow. They may establish an office with a bank of phones used as the fake employer, appraiser, credit agency, and so on, to deceive creditors who attempt to verify information on loan applications.

8. Inaccurate Income

A lie can be what you leave out as much as what you say. Given the nature of how self-employed people file taxes, some do not report their full income on their taxes. When it comes to a “stated income” loan, a borrower claims a certain amount of income, and an underwriter makes a decision based on that figure to give them a loan or not.

If the borrower tells a little white lie about their income, it’s not little at all. It’s mortgage fraud. One way lenders try to ensure the information a borrower provides is accurate is to request a letter of explanation about anything that might be concerning in a borrower’s application. This is also why a lender asks for bank statements for a mortgage application, and may ask for extra documentation if you are self-employed.

9. Repaying Gift Money

You can receive part of a down payment for a home, but the gift is not to be repaid. In fact, when you plan to use gift funds, you’ll need to provide a gift letter that proves the money is not a loan to be repaid. You may also be asked to provide documentation to prove the transfer of the gift into your bank account. This may include asking the donor for a copy of their check or bank account statement.

If that gift is to be repaid, it is mortgage fraud. It can also put your loan qualification at risk, as all loans need to be factored into your debt-to-income ratio.


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Why Is Mortgage Fraud Committed?

Borrowers who know they are not really mortgage-ready — perhaps because of a poor credit history, a low credit score, or a nothing-to-brag-about salary that would likely get them the thumbs down from a lender — may be driven to try to enhance their chances of getting a loan, even by illegal means.

As for industry professionals, be it appraisers, real estate agents, mortgage brokers, or anyone who has a role in the home buying and selling process, they could be motivated by the almighty dollar. If they can look the other way to get the transaction done, or manipulate facts so they get their piece of the action, they may do so. (Home improvement scams are widespread too, so exercise caution when commissioning work on your home as well.)

Avoiding and Preventing Mortgage Fraud

When it comes to buying or selling a house, there are a lot of moving parts and many cooks in the kitchen. It’s a good idea to, above all, be truthful about everything, and if anyone along the way seems to be pushing you in any other direction, you could pay dearly for taking that bad advice.

You can play the game straight, but what about all the others involved in the process? It’s smart to get referrals for companies and real estate and mortgage pros that you’ll be working with, and to check state and local licenses. Visit a home loan help center to familiarize yourself with the ins and outs of getting a mortgage before you start your home search.

Once you’ve found a home you love and begin the buying process, do your homework to ensure your property evaluation, or appraisal, is on target. It might be helpful to look at other homes that are similar to see what they have sold for, and recent tax assessments of nearby homes.

Guard your John Hancock as well. Be careful what you sign, and never sign a blank document or one containing blank lines.

Once you’re a homeowner, never sign over the house deed “temporarily.” This could be a set-up. Someone may be asking you to sign over your house deed as part of a scheme to avoid foreclosure. Know that chances are you’ll lose your house permanently.

Can You Accidentally Commit Mortgage Fraud?

Even if you didn’t set out to perpetrate a mortgage scam, you could commit fraud unwittingly by signing fraudulent documents presented by a clever thief, by guessing at your assets and writing numbers into your application without checking them, or by borrowing money for a down payment without disclosing the loan.

Victims of Mortgage Fraud

What do you do if you’re the victim of mortgage fraud? Your local police department may take a report. Your state attorney general’s office may be another good resource. The FBI, however, is the agency that handles most mortgage fraud investigations. You can go to tips.fbi.gov to report a crime. Other federal agencies also investigate mortgage fraud, but the FBI is likely the best first option.

The Takeaway

Mortgage fraud isn’t rare, and both industry insiders and borrowers can be involved. It’s smart to approach the process of getting a home loan with care. Do your homework to find a loan provider you trust and read everything before you sign.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

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FAQ

What is considered mortgage fraud?

Intentionally providing false information or omitting information during the mortgage loan application process is considered mortgage fraud.

What are common mortgage fraud tactics?

Mortgage fraud takes many different shapes but common tactics include borrowers falsely inflating assets or income; those involved in the mortgage lending process inventing fake borrowers; or appraisers artificially inflating property values.

What is the typical sentence for mortgage fraud?

The average sentence for mortgage fraud is 14 months, but prison time can extend to 30 years. Fines (of up to $1 million) and the payment of restitution — repaying the money that resulted from the fraud — are also usually part of the sentence.

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Photo credit: iStock/fizkes

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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SOHL-Q224-1945609-V1

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A common rule of thumb for renters states that no more than 30% of your income should go to rent and utility payments each month. This guideline dates back to housing initiatives introduced by the federal government in the 1960s.

Deciding what percentage of income should go to rent and utilities is central to making a realistic budget as a renter. The less you can spend on these items each month, the more money you’ll have to fund your financial goals. Read on for more about calculating a housing budget that’s right for you, as well as creative ways to cut your housing costs.

What Is the 30% Rule?

The 30% rule says that households should spend no more than 30% of their income on housing costs, including rent and utilities. This housing affordability advice dates back to the 1969 Brooke Amendment, which was passed in response to rental price increases and complaints about public housing services.

The Brooke Amendment capped rent for public housing at 25% of residents’ income. This measure was designed to offer financial relief to low-income households participating in public housing programs. In 1981, Congress increased the 25% threshold to 30%, where it has remained to the present day.

Recommended: Should I Sell My House Now or Wait

What Is 30% Based on?

The 30% rule for housing affordability considers two distinct categories of costs: housing and utilities. For renters, this generally means rental payments and basic utilities such as electric, water, and heating. Collectively, these expenses should total no more than 30% of a renter’s gross monthly income.

Gross income is what someone earns before taxes and other deductions are taken out. Net income, on the other hand, is what they actually take home in their paychecks. Basing the 30% rule on someone’s gross income versus their net income will result in a higher dollar amount that should be allocated to rent and utilities.

It’s also important to remember that the 30% rule isn’t set in stone. The average monthly expenses for one person will vary depending on your location’s cost of living, optional costs like renter’s insurance, and whether you have a very low or high income.

If you need help managing your finances, online tools like a money tracker can help you monitor spending, set budgets, and keep tabs on your credit score.

Calculating the Percentage to Go to Rent and Utilities

Figuring out what percentage of income should go to rent and utilities using the 30% rule is a fairly simple calculation. You’d multiply your gross monthly income by 0.30 to figure out the maximum amount you should be budgeting for rent and utility costs. How complicated this calculation is can depend on how often you’re paid and whether your paychecks are always the same amount.

If You Are Paid the Same Amount Every Two Weeks

If you’re paid biweekly and your paychecks are the same, you can calculate your target rent and utilities in one of two ways. First, you take the gross amount reported on one of your paychecks and multiply it by 0.30. You then double that result to find the monthly amount.

So, say your biweekly gross income is $2,500. Thirty percent of that number is $750 ($2,500 x 0.30). If you double it, then your rent and utilities budget should be no more than $1,500 per month.

This strategy doesn’t take into account the two months in a year that there are three biweekly paychecks, however. If you want to find the average amount to spend on rent and utilities each month, you can multiply your biweekly gross paycheck amount by 26 (for 26 paychecks in one year), divide by 12 (for 12 months), then find 30% of that amount.

So using the $2,500 figure once again, if you multiply that by 26, you’d get $65,000. Divide that by 12 to get $5,417 (rounded up), your monthly pay. Thirty percent of that is $1,625, the amount you’d allocate to rent and utilities per month.

If You Are Paid Varying Amounts Every Paycheck

Pinpointing what percentage of income should go to rent and utilities can be a little more challenging if your paychecks aren’t the same from one pay period to the next. That might happen if you’re paid hourly and work different hours each week, receive vacation or sick pay, or part of your income is based on commissions.

In that scenario, you’d want to look at your annual income in its entirety. You can do that by looking at all of your pay stubs for the previous 12 months or checking your most recent W-2 form. Again, you’re looking at gross income, not net pay.

You’d take the gross income for the year, then multiply it by 0.30 to figure out how much of your pay should go to rent and utilities overall. If your gross annual income was $70,000, then your target number would be $21,000 for the year. Divide that by 12 and you’ll find that you should be spending no more than $1,750 per month on rent and utilities using the 30% rule.

How to Reduce Your Rent to 30% or Less of Your Income

If you’ve done the calculations and you’re spending more than 30% of your income on rent and utilities, there are some things you may be able to do to reduce those costs.

Split the Rent With Roommates

Taking on one or more roommates could ease some of the financial load. Remember, it’s important to have a written agreement in place specifying what percentage of rent and utilities each roommate is responsible for.

Also, determine who will pay the rent and utility bills when everyone is chipping in. For example, one person may volunteer to collect payments from everyone else and then cut a check to the landlord or utility company. Consider using a budget planner app to keep track of household bills and payments.

Recommended: 25 Tips for Sharing Expenses With Roommates

Consider a New Location

Moving is another possibility for lowering rent and utility costs if you’re relocating to an area with a lower cost of living. Rent in rural areas may be cheaper than in a trendy urban center, for example. There can even be significant variation in rents in different neighborhoods within the same city.

Keep in mind that relocating can have its trade-offs. For instance, living in a less expensive area may mean giving up certain amenities you enjoyed in your old neighborhood, like walkability or convenient access to stores and restaurants. And of course, you’ll also have to budget for the costs of moving, which can average $1,250 for a local move or $4,890 for a long-distance move.

Work Remotely

Working remotely can have its advantages, including saving money on certain expenses. For example, you may spend less on gas, meals out with coworkers, or office attire.

That said, if you are on a computer all day, you’ll want to take steps to lower your energy bill, such as unplugging at the end of the day and buying energy-efficient lights.

Opting for remote work could also save you money on rent if you’re able to become location-independent. When you’re not tied to a particular city, that frees you up to seek out cheaper areas to live. You could even forgo renting altogether and become a digital nomad. That has its own costs, but you’re not locked in to paying rent to a landlord or utility payments long-term.

Negotiate With Your Landlord

The most effective way to reduce your rent may be to go straight to the landlord and negotiate your rent. Your landlord may be willing to offer a discount or reduced rental rate under certain conditions.

For example, your landlord might agree to reduce your rent by 10% or 15% if you pay six months in advance or agree to a longer lease term. The prospect of guaranteed rental income might be attractive enough for them to offer you a better deal.

You may also be able to get a rate discount by offering to take care of certain maintenance and upkeep tasks yourself. If your landlord normally pays for lawn care, for example, they may be willing to let you pay less in rent if you’re working off the difference by cutting the grass and maintaining the property’s landscaping.

Ask for a Promotion or Find a New Job

Instead of attempting to reduce your costs, you could try a different tactic: Making more money means you can budget more for rent and utility costs.

Asking your boss for a raise or promotion might boost your paycheck. If you hit a dead end, you may consider a more drastic move and look for a higher-paying job. Taking on a part-time job or starting a side hustle can also help you bring in more money to cover rent and utility payments.

What to Consider if 30% Doesn’t Work for You

As noted above, the 30% rule for housing is a somewhat arbitrary number and may not work for everyone. Spending more than 30% of your income on rent and utilities doesn’t automatically mean that you’re living beyond your means, for a variety of reasons.

There are, however, a few actions you can take to streamline your finances and determine what percentage of income should go to rent and utilities.

Try the 50/30/20 Rule

The 50/30/20 budget rule recommends spending 50% of your income on needs, 30% on wants, and the remaining 20% on savings and debt repayment. This budgeting method doesn’t specify an exact percentage or dollar amount to spend on rent and utilities. Instead, those expenses get grouped into the 50% of income allocated to “needs”.

You still need to keep track of your spending to make sure you’re staying within the 50% limit. Using an online budget planner can help you figure out if the 50/30/20 rule is realistic based on your income and expenses.

Pay Down Loans and Debt

Total U.S. household debt reached $17.69 trillion in the first quarter of 2024, according to Federal Reserve data. While a big chunk of that is mortgage debt, Americans also pay a sizable amount of money to credit cards, student loans, personal loans, auto loans, and other debts.

Working to pay off debts can free up more money to allocate to rent and utilities. There are different methods you can use, including the debt snowball method and the debt avalanche.

Look for Cost Savings in Recurring Expenses

One more way to make shouldering higher rent costs easier is to lower your other expenses. Making small changes at home can lead to lower electricity and water bills. Cutting out subscriptions you don’t use, looking for a better deal on car insurance, and eating more meals at home instead of dining out are all simple ways to lower your expenses.

The Takeaway

If you’re spending 30% of your gross (before tax) income or less on rent and utilities, pat yourself on the back. You may spend up to 50% on housing if you have no debt and a healthy savings balance. The important thing is to look at your entire financial picture, including your income, debts, and goals, to decide the figure that’s right for you.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

SoFi helps you stay on top of your finances.

FAQ

What is a good percentage of income to spend on rent?

The 30% rule says that renters should spend no more than a third of their gross income on rent and utility payments. The less you can spend on rent and utilities, the more money you’ll have to fund other financial goals, like saving for emergencies, paying off debt, and planning for retirement.

Is 30% of income on rent too much?

Spending 30% of income on rent may be too much if a significant part of your income is also going toward debt repayment. That may leave you with little money to cover other necessary expenses or discretionary spending.

How much of your monthly income should go to rent?

A common rule of thumb says that roughly one-third of your monthly gross income can go to rent. But if you have substantial savings and no debt, you may be OK with spending a larger percentage of income on rent. On the other hand, if you’re trying to pay off debt or build savings, you may prefer to spend less on rent payments.

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Photo credit: iStock/deliormanli

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SORL-Q224-1911201-V1

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As a type of alternative investment, real estate can add diversification to a portfolio and act as a hedge against inflation. Real estate investment trusts (REITs) and real estate crowdfunding offer two unique entry points to this alternative asset class.

Both allow you to invest in real estate without being required to own property directly. Comparing the pros and cons of real estate crowdfunding vs. REIT investing can help you decide which one makes the most sense for your portfolio.

Understanding Real Estate Investment Trusts (REITs)

Real estate investment trusts are legal entities that own or finance income-producing properties or invest in mortgage-backed securities. The types of properties a REIT may invest in can include:

•   Hotels and resorts

•   Office space

•   Warehouses

•   Storage space

•   Multifamily apartment buildings

•   Data centers

•   Medical facilities

•   Retail shopping centers

•   Single-family homes

The primary attraction of REITs is the ability to enjoy the benefits of property investment — namely, dividend income — without purchasing real estate directly.

REITs are also considered a type of alternative investment. As with many alternative investments, real estate-based assets don’t tend to move in sync with the stock market. For this reason, investing in REITs may provide portfolio diversification.

REITs may be publicly traded, meaning they trade on an exchange like a stock. REITs must pay out 90% of their taxable income to shareholders as dividends, though some may pay as much as 100%.

If you compare REITs vs. real estate mutual funds, dividends aren’t always required with the latter. Real estate mutual funds can invest in REITs, mortgage-backed securities, or individual properties. While you may have access to a broader range of properties, you may enjoy less liquidity with real estate funds.

Recommended: SoFi’s Alt Investment Guide for Beginners

💡 Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alts through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

Overview of Real Estate Crowdfunding

What is real estate crowdfunding? It’s a strategy that allows multiple investors to pool funds for property investment. In return, investors share in the profits generated by the investments. Regulation crowdfunding makes real estate crowdfunding possible, as entities can raise capital from investors without registering with the SEC, as long as they offer or sell less than $5 million in securities.

In terms of how it works, real estate crowdfunding platforms seek out investment opportunities and fully vet them before making them available to investors. Individual investors can then choose which properties they’d like to invest in.

Depending on the nature of the investment, you may collect interest payments, rental income, or dividends. Real estate crowdfunding can offer access to a variety of property types, including:

•   Multifamily housing

•   Industrial space

•   Build-for-rent projects

The minimum investment varies by platform — it is commonly upwards of $5,000, but may be $500 or even lower in some cases. Some real estate crowdfunding platforms require investors to be accredited, meaning they must:

•   have an income exceeding $200,000 (or $300,000 with a spouse or spousal equivalent) in each of the two prior years, with an expectation of the same income for the current year, OR

•   have a net worth exceeding $1 million, alone or with a spouse/spousal equivalent, excluding the value of their primary residence, OR

•   hold a Series 7, Series 65, or Series 82 license in good standing

Comparing REITs and Real Estate Crowdfunding

When choosing between a REIT vs. crowdfunding, it’s helpful to understand each option’s potential advantages and disadvantages.

Pros and Cons of REITs

Here are the main benefits of investing in REITs vs. crowdfunding.

•   Risk management. Alternative investments like real estate may help you balance risk in your portfolio. REITs and real estate in general have a lower correlation with the stock market.

•   Accessibility. Purchasing an actual investment property usually requires getting a loan and raising capital for down payments and closing costs. REITs can offer a much lower barrier to entry for investors.

•   Dividends. REITs must pay dividends to investors, which may be attractive if you want to generate passive income with investments.

•   Liquidity. Publicly traded REITs offer liquidity since you can buy and sell shares as needed, similar to a stock.

•   Returns. REITs can potentially generate significant returns in a portfolio compared to stocks or other investments.

Now, here are some of the drawbacks of REIT investing.

•   Fees. You’ll typically pay management fees to invest in REITs, as with any investment, but some may charge more than others. Paying attention to investment costs is key, as the more fees you pay, the less of your investment returns you keep.

•   Overweighting. You can choose which REITs to invest in, but you don’t have a say in the underlying properties. Investing in REITs that own similar properties could overweight your portfolio in a single sector (e.g., malls or office buildings) and thus increase your risk profile.

•   Interest rate risk. Changing interest rates can affect the value of REITs, which can influence the yield you might get. When rates rise, REIT values can decline, requiring you to adjust your expectations for a profit.

•   Taxes. REIT dividends are typically taxed as ordinary income, up to 37% (plus a 3.8% investment surtax). But investors may also see a short- or long-term profit from the REIT, which would be taxed as capital gains. There is also the potential for return on capital, which can be complicated. It may be wise to consult a professional.

Pros and Cons of Real Estate Crowdfunding

Here are the main pros of crowdfunding real estate investments.

•   Diversification. As with REITs, real estate crowdfunding allows you to diversify beyond traditional stocks and bonds.

•   Low minimums. Some, though not all, real estate crowdfunding platforms allow you to get started with as little as a few hundred dollars. That can make entering this alternative asset class or spreading your investment dollars out over multiple property types easier.

•   Geographic diversification. Real estate crowdfunding platforms can offer investors exposure to markets across the country. That can make it easier to target a specific region if you’re looking for the next “hot” market.

•   Returns. Crowdfunded real estate may generate above-average returns, or exceed the returns you could get with REITs.

•   Passive income. Owning a rental property can be time-intensive if you’re managing the property yourself. Real estate crowdfunding allows you to reap the benefits of rental income, without the typical headaches that go along with being a property owner.

And now, here are the cons.

•   Fees. Just like REITs, real estate crowdfunding platforms can charge fees. Fee structures can sometimes be complex, making it difficult to assess what you’ll pay to invest.

•   Illiquidity. Liquidity in the stock market is one thing, but when it comes to real estate crowdfunding, it’s an even bigger consideration owing to the length of time your capital may be locked into an investment. Once you invest in a property, you’re essentially committed to owning it for the duration of the holding period. It’s not unusual for real estate crowdfunding platforms to offer investments with holding periods of five years or more, making them highly illiquid.

•   Accreditation requirements. Some crowdfunding platforms only accept accredited investors. If you don’t meet the standards, you won’t be able to invest through those platforms.

•   Taxes. Income from crowdfunded real estate investments is taxable, though not always in the same way. You may be subject to different tax rates based on how dividends and interest are paid out to you. You may want to consult with a professional.

Which Investment Strategy Is Riskier?

It’s difficult to pinpoint which is riskier when comparing a REIT vs. real estate crowdfunding, as each one has different risk factors.

With REITs, the biggest risks may include:

•   Liquidity risk, which could make it difficult to sell your shares if you’re ready to leave an investment.

•   Changing market conditions or rising and falling trends, either of which could directly impact real estate values.

•   Interest rate sensitivity, which can influence REIT values.

The main real estate crowdfunding risks may include:

•   Platform risk, or the risk that the marketplace you’re using to invest could shut down before you’re able to withdraw your capital.

•   Poor vetting, which may allow unsuitable investments to make it onto the platform.

•   Changing regulations, which may affect the real estate crowdfunding space as a whole.

Whether you choose a REIT vs. crowdfunding, lack of education or understanding is also a risk factor. If you don’t understand the basics of how either type of investment vehicle works, you could be putting yourself in a position to lose money.

Due Diligence Considerations

REITs and real estate crowdfunding platforms should perform due diligence in vetting investments to make sure they’re suitable. However, it’s wise to do your own research to understand what you’re investing in, who you’re investing with, and the potential risks.

As you compare REITs or real estate crowdfunding platforms, keep the following in mind:

•   Minimum requirements to start investing, including accredited investor status

•   Range of investment options

•   Transparency concerning fees and investment selection

•   Holding periods

•   Performance track record

•   Overall reputation

Talking to other investors who have used a particular crowdfunding platform or invested in a certain REIT can offer perspective on the good and bad.

The Takeaway

Real estate can be an addition to your portfolio if you already have some experience in the market, and have an affinity for real estate. As a type of alternative asset class, investing in real estate can add diversification to your portfolio, and potentially act as a hedge against inflation. Both REITs and real estate crowdfunding enable you to invest in real estate without the hassle of actual property ownership and maintenance, but come with different risk factors than you’d find with traditional securities.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

What are the main advantages and disadvantages of investing in REITs?

Investing in REITs can offer the benefits of dividend income and portfolio diversification, without requiring you to own property directly. The disadvantages of REITs can include interest rate risk and market risk, both of which can affect the value of your investments.

How does real estate crowdfunding differ from traditional REIT investments?

Real estate crowdfunding allows investors to pool funds together to invest in property and collect interest, dividends, and/or rental income. REITs own and operate investment properties and pay dividends to investors. REITs and real estate crowdfunding can differ concerning the types of properties you can invest in, the minimum investment required, and the fees you’ll pay.

How are taxes treated for REITs and real estate crowdfunding?

REIT dividends are primarily treated as ordinary income for tax purposes (although you may face capital gains on any profits). Real estate crowdfunding returns may be subject to capital gains tax and/or ordinary income tax rates, depending on how they’re structured. Because the tax treatment of these two entities can be complicated, it’s probably wise to consult a professional.

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