Real estate crowdfunding is a form of direct ownership of commercial real estate. Investors typically are locked into an investment for a predetermined period of time, perhaps three to five years. Most sponsors impose penalties or fees for early exits. Unlike the liquidity premium in REITs that costs the investor more, the illiquidity premium for real estate crowdfunding reflects the additional benefits investors receive from tying up their capital in an illiquid investment. By committing to a longer term investment than via a REIT that can be traded at the click of a button, investing in crowdfunded real estate provides investors the potential for substantial returns that no REIT can offer.
The flip side to the illiquidity premium is, of course, that investors must accept that once they invest in a project, their money will likely be tied up for months or years before they can access it again. Most crowdfunding deals require investors to make a capital commitment of at least a year or more. Some require investors to commit to a three, five or even 10-year time horizon. This makes real estate crowdfunding inherently less liquid than investing in a REIT. That said, there are usually provisions to allow investors to exit crowdfunded deals early, even if doing so results in a penalty or fee.