Investing Simple is affiliated with Fundrise. This relationship does not influence our opinion of this platform.
It seems like the American dream today is to make money by investing in real estate. One of the biggest obstacles to achieving this dream is the amount of money you need to buy a single piece of real estate. The upfront cost for an individual to purchase a piece of residential or commercial real estate can be astronomical. On top of that, home prices are on the rise. Since you need more money upfront, it is becoming increasingly more difficult to invest in real estate. The good news is, there are other ways to invest in real estate outside of direct ownership such as crowdfunded real estate investing platform Fundrise. Here is our official Investing Simple Fundrise Review.
Fundrise Real Estate Investing Platform
One of these new real estate investment options is Fundrise. This is a new platform for investing in real estate that was founded in 2010. Fundrise is a new online investing platform that gives everyday investors the power to invest in commercial and residential real estate at a very low cost. The minimum investment to start with Fundrise is just $500.
Fundrise offers investment plans to invest in different types of real estate such as income producing rental properties or growth oriented real estate developments. Fundrise offers different investment plans based on your investing goals. Since you only need $500 to start, it has never been easier to invest in private real estate deals.
Fundrise pools money from investors and separates the investments into different plans based on your investment objective. You can invest in a growth oriented plan, an income oriented plan or a blended plan. Fundrise takes this money and invests it in a variety of different real estate projects. This could be new construction or renovation of existing real estate.
Fundrise vs Traditional REIT
Traditionally, investors have been able to overcome these barriers by investing in REITs (real estate investment trusts) or other investment vehicles offered on public exchanges. These investment vehicles are large pools of real estate split up into millions of shares. These products allow common everyday investors to gain access to real estate markets.
This video provides a great explanation of what a REIT is.
The downside of this publicly traded real estate investment is that these products traditionally have high upfront fees, and you may need a minimum net worth or income to participate in the investment. Another downside to this is a bit more complicated, but it is worth explaining. These REITs trade on a public exchange like the NYSE and NASDAQ. You buy and sell them just like a stock.
One way that investors look to achieve diversification is by investing in different asset classes. Typically, these are assets like stocks, bonds, real estate and even precious metals. While publicly traded REITs offer the ability to easily diversify asset classes and own real estate, these investments are heavily correlated with the overall market.
Generally speaking, if the markets are doing well the publicly traded REIT investments are as well. If the markets are performing poorly, the publicly traded REIT investments are as well. The point of investing in different asset classes is to have assets performing in different ways at different times. Maybe the stocks in your portfolio are performing poorly, but the value of the gold in your safe is soaring.
Take the Charlotte, NC townhome renovation project for example. This is a renovation project taken on by Fundrise where they will be modernizing 46 townhomes in a desirable location in North Carolina. These townhomes have a dated look, and they will all look like the newly renovated home on the right upon completion.
Each project has a website where you can learn about the project as well as the investment opportunity. This investment has a Debt Rating of C, giving it a higher projected return. The Projected Return of this project is 10% at a Total Investment of just over $4.1 million. Collectively, Fundrise investors have funded this renovation.
Fundrise Investment Vehicles
Fundrise allows you to invest through the eREIT and the eFund. The short explanation of these investments is that they are non traded, meaning they are not available on a public exchange like a traditional publicly traded REIT. The eREIT and eFund are also investments you purchase directly from Fundrise. This cuts out the middleman and reduces the overall fees.
Fundrise eREIT: An electronic non traded REIT built to provide income to the investor.
High Fee REITs
When Fundrise created the eREIT, they had one goal in mind. That goal was to minimize fees for investors. eREITs have no broker fees and no front end load fees. Many traditional REITs have 7-15% front end load. Fundrise charges a 1% asset management fee annually (0.85% annual asset management fee and 0.15% annual investment advisory fee).
Take the Delaware Global Real Estate Fund for example. This investment has a front load fee of 5.75% and an expense ratio of 1.4%! eREITs are non traded REITs offered by Fundrise. Non traded REITs are highly illiquid, so understand what you are investing in before you decide to commit.
Fundrise eFund: A professional portfolio of real estate assets.
An eFund is setup as a partnership instead of a publicly traded corporation. This allows the fund to avoid the double taxation that corporations are subject to. You will pay tax on capital gains and dividends as they are incurred. Where eREITs are designed for income, eFunds are designed for growth.
eFunds also cut out the broker in the transaction and helps maximize the investors return on their capital. eFunds also have quarterly redemption periods, so you will not be able to liquidate your position on an immediate basis.
Fundrise Fees Explained
Fundrise charges a fee of 1% per year. They do not charge any other hidden fees and there is no front load fee with Fundrise.
One of the biggest advantages to investing with Fundrise is the extremely low fee structure compared to other real estate investment trusts. As we mentioned above, a front load of 7 to 15% is not uncommon in the REIT industry.
If you were investing $10,000 in a REIT with a front load of 15%, you would be paying $1,500 in fees on Day 1!
Traditionally, investors have been able to gain access to some of these real estate markets using non traded REITs. These are real estate investment trusts that are not offered on public exchanges. These non traded REITs carry the same benefit discussed above, having less correlation with the overall stock market.
To invest in a non traded REIT, you must purchase it through a broker or investment advisor. Most brokers will charge 5 to 8% commission on the total amount invested. Be careful when investing in non traded REITs through a broker or investment advisor. Often times, they will tell you they are not being paid any commission. Ask a lot of questions and understand the likelihood of hidden fees!
Beyond the front load fee associated with a non traded REIT, you also pay an annual management fee. This is typically around 1%, which is exactly what Fundrise charges. When you invest with Fundrise, you pay a 0.85% annual asset management fee and a 0.15% annual investment advisory fee for a total of just 1%. There are no other hidden fees with Fundrise and there is no front load fee.
Is Fundrise Safe/Legit?
Fundrise files with the SEC and is audited on an annual basis. These financial statement audits are disclosed on the Form 1-K. Beyond that, Fundrise offers a 90 day satisfaction guarantee. Some limitations do apply, but if you are unhappy with your investment in the first 90 days, Fundrise will buy it back at the original price you paid. Fundrise is for United States investors only, however international investors can invest through some US based entities. The minimum investment to get started with is $500.
An asset has high liquidity if it can quickly and easily be converted into cash. Assets like stocks are highly liquid, as you can sell them on a stock exchange in a matter of seconds. Real estate is a low liquidity investment. This is because real estate does not change hands as easily as a stock.
When Fundrise invests in a real estate project, it is typically a long term investment of five years or more. It is important to understand that as an investor, you should be ready to leave that money invested for the long term. Fundrise has stated this platform is for investors who have a minimum time horizon of five years. If you are a short term investor, Fundrise is not for you!
Fundrise offers a monthly redemption plan where investors have the opportunity to cash out each month following a minimum 60 day waiting period. It is important to understand however that Fundrise does not guarantee liquidity.
In order for Fundrise to generate the greatest return for investors, they need to remain as fully invested as possible. If Fundrise holds 20% of the fund in cash for redemption, that means 20% of the fund is earning a return of 0% or close to it. This is the cash drag of an investment fund. Idle cash is not always a good thing when it comes to an investment fund. In order to achieve high returns and keep investors satisfied, Fundrise remains as fully invested as possible.
Fundrise Investment Options
The Fundrise Starter Portfolio is for new investors who would like to give Fundrise a shot. The minimum account requirement is only $500 to begin investing. This portfolio consists of 50% growth and 50% income-oriented holdings. If you want to upgrade to an advanced plan down the road, it is completely free!
Next, we have the Fundrise Supplemental Income Portfolio. This portfolio holds income producing real estate. Investors will earn returns primarily through dividends from cash flow producing real estate. Fundrise generates dividends through rental and interest payments in proportion to your share of the fund.
The Fundrise Balanced Investing Portfolio offers a blend of 50% growth and 50% income-oriented investments. The balanced investing portfolio invests in a blend of eREITs and eFunds offered by Fundrise. The goal for this portfolio is for a balance of income-generating real estate, as well as real estate that is appreciating in value.
Long Term Growth
Finally, we have the Fundrise Long Term Growth Portfolio. The goal of this portfolio is to generate returns primarily from asset appreciation. This portfolio aims to purchase high growth potential real estate and generate returns mostly from the sale of the underlying properties. This includes buying property and performing renovations in order to sell the asset for a gain later.
How To Make Money With Fundrise
Fundrise is a 100% passive investment. You simply invest your cash and it is immediately put to work. With Fundrise, you make money in one of two ways; asset appreciation and dividends or distributions.
Your eREITs within Fundrise will pay quarterly dividends or what Fundrise calls distributions. These dividends consist of interest payments from loans and rental payments. The amount of your investment in the entire eREIT determines the amount of your dividend payout.
If you buy into an eREIT, the first quarter your dividend will be prorated based on the amount of days you owned it during that quarter. After that, you will receive your dividend based on the amount of share ownership you have in the eREIT.
Investors can expect to receive dividends from Fundrise on a quarterly basis, but it is important to remember that Fundrise does not guarantee these dividends. It is important to remember that there is no guarantee with dividends in the stock market either. Fundrise can increase, decrease or cancel dividends at any time, just like a publicly traded company.
In terms of asset appreciation, Fundrise will purchase properties with a high potential to grow in value. Often times this is a property in a booming area where population growth is exceeding the national average. The goal is to buy property ahead of a major trend and capitalize on the growth of the neighborhood. Once they purchase a property, Fundrise will often renovate the real estate and make improvements to increase the sale price and the value of the property. As a result, investors make money from the sale of the property primarily.
Fundrise Los Angeles Renovation Project
Consider the North Los Angeles Renovation project. The city of Los Angels has the nation’s second largest economy and a massive housing shortage. On top of that, environmental and zoning regulations make it difficult to build more density. There is a massive shortage of housing in this booming area, and Fundrise has identified this as a huge opportunity. They expect a return of 8.7% for investors. This is a perfect example of a growth strategy where a return is coming primarily from asset appreciation.
If your goal is to receive mostly dividends from Fundrise, your best bet is to invest in the Supplemental Income Plan which aims to maximize income through dividends. Fundrise also offers a Balanced Investing Plan which aims to give you a mix of asset appreciation and dividend income.
Fundrise will automatically deposit dividends or distributions into your bank account on file unless you opt in to the dividend reinvestment program. If you want to maximize your returns with Fundrise and earn compound interest, you need to opt in to the dividend reinvestment program or DRIP. Fundrise provides this dividend reinvestment program free of charge as a courtesy for investors.
Compound interest is the effect of earning interest on top of your interest. By reinvesting dividends, you are able to earn more dividends because you have a larger investment. Over time, the compounding of these dividends will result in exponential growth of your portfolio.
Consider the above Fundrise portfolio. This is an investment of $1,000 in the Balanced Investing Plan, so returns will come from both income producing properties and asset appreciation. Earnings to date is $6.42 and the next distribution is in mid October of 2018. On the right, you can see that dividend reinvestment is enabled.
Fundrise Historical Returns
Past performance does not guarantee future returns. All investing involves risk, including the potential loss of principle.
Pros Of Investing With Fundrise
- The minimum to invest with the Starter Portfolio is $500
- Since this is a non traded REIT, there is less correlation with the overall market
- Small retail investors are able to access private real estate investments
- Fundrise has a transparent fee of 1% per year
- They do not have a minimum net worth or income requirement like most private investment funds do
- Fundrise gives you diversified exposure to real estate
- This investment allows you to earn compound interest, with the option of automatically reinvesting quarterly dividends
- Fundrise supports some retirement accounts
- This is a 100% passive real estate investment
- Monthly redemption periods eliminate the temptation for panic selling
Cons Of Investing With Fundrise
- Fundrise cannot guarantee liquidity
- There is no guarantee of dividends or distributions
- Distributions (dividends) are taxable as ordinary income
- This platform has a limited operating history
Fundrise vs Rich Uncles
In our Fundrise vs Rich Uncles review, the key difference we point out is the minimum investment. Fundrise has a minimum opening balance of $500 for the Starter Portfolio while Rich Uncles allows investors to buy into the Student Housing REIT for as little as $5. Another key difference is at this time Rich Uncles only offers investments in commercial real estate, while Fundrise offers both commercial and residential real estate projects. A final difference is the fee transparency. Investors will pay 1% account fees when investing in Fundrise. Rich Uncles, on the other hand, takes 40% of the profits above 6.5%.
Fundrise vs Realty Mogul
When comparing Fundrise vs Realty Mogul, it is important to consider the minimum balance to start investing. With Fundrise, the minimum is just $500. With Realty Mogul, the minimum is $1,000. In addition, we also noticed a difference in fees between Fundrise and Realty Mogul. Fundrise has a very transparent fee structure, displayed directly on their website. Realty Mogul fees are more complex and dependent on the specific investment. In some cases, fees might be lower on Realty Mogul, but not in all cases.
Fundrise vs Vanguard
In our Fundrise vs Vanguard review, we compared the new school Fundrise investment to the old school Vanguard REIT. The main difference is that a Vanguard REIT trades and behaves like a stock. One of the many benefits of a private real estate investment is less correlation with the overall stock market. In addition, the illiquidity of Fundrise eliminates panic selling.
Fundrise Review: The Verdict
Fundrise is a perfect platform for passive investors who are looking to gain access to private real estate markets. This is also great for investors who are looking to diversify asset classes and have less correlation to the overall stock market.
Since you can only liquidate your positions quarterly, you may be less tempted to actively trade in and out of positions. You can also automate your dividend reinvestment plan, allowing compound interest to build up in your account.
Fundrise is best for investors with a 5 year time horizon. Real estate is not a highly liquid investment and inexperienced investors need to take this into consideration. While Fundrise does offer a 90 day satisfaction guarantee, you should not invest if you have a short term investing mentality.
There are countless ways to invest in real estate. Fundrise is just one of the many options. These may not be the best fit for you based on what you are looking for out of the investment. Check out our comprehensive guide on real estate investing to learn more and explore other avenues!