Whether you are a new investor or an experienced trader, determining how to invest your hard-earned capital is never easy.
In this article, we will look at two different ways you can invest: through the stock market and through a real estate investing platform known as Fundrise.
Both options have their pros and cons and both will appeal to different types of investors.
In most cases, it makes sense to diversify your portfolio into both stocks and real estate, as well as other asset classes like bonds. When it comes to investing in real estate, there are several different forms of investment. Recently, crowdfunded real estate investing has become a very popular option.
|$10 Minimum, Private Commercial Real Estate Portfolios||View Investments|
|$10 Minimum, Short Term Real Estate Debt Investments||View Investments|
|$100 Minimum, Buy Rental Property Shares||View Investments|
|$1,000 Minimum, Private Commercial Real Estate Portfolios||View Investments|
|Marketplace, Buy/Sell Single Family Rental Properties||View Investments|
Fundrise is a crowd-funded real estate investment platform where users are able to dedicate certain sums of money to pre-built real estate portfolios. This allows investors to be in the game of real estate investing without having to deal with tenants, repairs, utilities, and the like. This is best for long-term investors who have a time horizon of at least 5 years.
The stock market is where ownership of companies is bought and sold publicly. Anyone can invest in the stock market by purchasing ownership of a company, or a mix of multiple companies. The stock market is accessible through exchanges and trades are executed by brokerages on behalf of their clients.
One of the most common ways average people build wealth is through real estate investing. While this asset class is typically difficult to break into because of the large amount of upfront capital required, Fundrise makes a foray into real estate much easier. With Fundrise, you can get investing with as little as $10.
Fundrise is an online real estate investment company that brings the ability to invest in this asset class to the common investor; not just those with large sums of money.
The company has been around since 2010 and has since grown to over 500,000 members. With those members, Fundrise has invested more than $5 billion!
Fundrise works by allowing its users to pool their assets together in order to make investments. This enables them to offer an investment minimum of only $10. A significantly smaller sum than purchasing real estate solo.
This type of investing is known as crowdfunded real estate investing. Much like traditional investing, this allows investors to combine their assets in order to purchase a large investment.
Fundrise offers investments in REITs or real estate investment trusts, which they call eREITs. These trusts generally invest in income-generating or growth-focused real estate.
Unlike traditional REITs you buy on a stock exchange, these are non-traded REITs.
Investors will have the opportunity to invest at one of these levels:
Fundrise investments are considered long term and investors should be prepared to hold their investment for at least 5 years.
If you would like to sell your investment before 5 years, you may be subject to redemption fees. They also reserve the right to suspend redemptions if the market becomes erratic.
Fundrise is open to all investors who meet standard eligibility requirements such as being age 18 and a US resident.
The minimum to invest with Fundrise is $10, and you don’t have to be an accredited investor.
Many, if not most, online real estate platforms require that their investors be accredited. This means they have a net worth of over $1,000,000 not including their home value. Or, that they have an annual income of $200,000 individually or $300,000 jointly.
This cuts out a large group of investors that do not meet these criteria. Fundrise does not come with these limiting factors.
If you are interested in learning about other platforms that don't require accreditation, click on this article.
One important factor to understand about investing in real estate is the lack of liquidity or the ability to sell. Because these are meant to be long-term investments, users will not be able to come and go as they please without facing penalties.
To put it simply, it is not as easy to sell a piece of real estate as it is a share of a stock or ETF.
With Fundrise, you do have the availability to redeem your shares, however, this may come at a fee. This fee will depend on how long you have held the asset. The redemption fee is applied as a reduction of the sale price. Fundrise can also suspend redemptions as they see fit.
Less than 90 days: 0% reduction
Between 90 days and 3 years: 3% reduction
3 to 4 years: 2% reduction
4 to 5 years: 1% reduction
5 years or more: No penalty for selling
Investors should understand that Fundrise investments are long term and are not meant for frequent buying and selling like day trading.
Fundrise also reserves the right to suspend redemptions at their discretion. For instance, in March of 2020 at the beginning of the coronavirus outbreak, Fundrise announced that they would be suspending their redemption services for the foreseeable future. Normal operations resumed on July 1 of that same year.
Fundrise made this decision to protect their investors from panic selling. If all the investors were to redeem their shares, then Fundrise would eventually be forced to liquidate the underlying real estate investments. By limiting redemptions during difficult times, Fundrise aims to reduce the risk of panic selling.
The Fundrise interface is ideal for beginners as it is simple and intuitive. The portfolio model of investing means you do not have to actively pick and choose properties to invest in.
This takes a lot of thinking out of the process for beginners who want to automate away this part of the investing process. You leave the real estate analysis up to the team of experts.
The Fundrise platform has a few different fees for acquiring, managing, and advising the underlying investments.
Fundrise charges a 0.85% asset management fee and a 0.15% advisory fee totaling 1% annually.
There are also additional fees with Fundrise depending on the deals that you end up investing in.
These acquisition fees can add up to 2% of the investment.
Beginner investors typically choose the stock market as one of their first investments. This is a common first step because investing in stocks is accessible to both small and large investors.
For those just starting out, it will be important to understand a few of the basics about stock market investing before you dive in.
To keep it as simple as possible, the stock market is a marketplace to buy and sell (a.k.a. trade) ownership of companies in the form of stocks and ETFs (exchange-traded funds).
Stocks are sold on exchanges such as the New York Stock Exchange "NYSE" or the National Association of Securities Dealers Automated Quotations "NASDAQ."
These exchanges are marketplaces where investors can find buyers and sellers of securities. Most investors will use a stock brokerage to purchase stocks for them. It is the job of the brokerage to find the best price for you on the exchange.
For example, if you would like to purchase a share of Apple stock (AAPL), then you could place a buy with your broker. Your broker would then find the best price for the share of Apple stock available on the open market. Though complicated, this process is fully autonomous for most investors and few people actually call their broker to personally make the trade.
The main reason investors choose to participate in the stock market is to generate a return on their investment. The average return of the S&P 500 (the largest 500 public companies in America) over the last 50 years is approximately 12%. While this is a great return on your investment, remember that this is an average and not a consistent annual rate.
There are multiple ways investors can earn a return on their investment. The two primary ways are capital appreciation and dividends.
An important principle to understand is that returns are never guaranteed. Investing in stocks can be risky and you can potentially lose your entire investment if you take on too much risk. However, passive investing in index funds allocates that risk amongst many stocks. Increasing your chances of success over picking individual stocks.
Certain stocks pay out dividends, a distribution of profits the company generates. Dividends are paid out when a company chooses to distribute earnings to shareholders.
Much like returns, dividends are not always guaranteed and not all companies pay out dividends. For example, a company that is in the growth phase may choose to reinvest profits back into the business rather than paying it out to shareholders. This way the company can grow even more and potentially generate more profit in the future.
The other way an investor can generate a return in the stock market is through capital appreciation. When you purchase a share of a company and the stock appreciates, you will realize a capital gain after you sell the stock. Capital gains are realized when you successfully buy a stock at a certain price and sell it at a higher price.
Nowadays, it is also very easy to begin investing in the stock market.
Investors can sign up for a number of free trading apps in a matter of minutes and can begin investing. In the old days, investors needed a stockbroker or human advisor to buy stocks for them. Now investors can purchase stocks from the comfort of their homes.
Investing in the stock market has many risks. Stock market returns are never guaranteed and you could lose your entire investment if you are taking on a lot of risk. Remember, stocks are just shares of companies and companies can easily go out of business or hit rough times.
It is also easy to follow the 'hype' of other investors or allow emotions to make your investment decisions.
One of the most important stock market principles to understand is diversification. A well-diversified stock portfolio can greatly reduce your risk.
Ideally investors will want to diversify their stock portfolio with a handful of stocks that are uncorrelated. Uncorrelated stocks may be in different sectors or sub sectors that do not have direct relationships.
This way you diversify your overall portfolio risk across different types of companies and industries. As a result, your portfolio will not be concentrated in any one sector or industry.
Choosing between investing in the stock market or using the Fundrise real estate investing platform is a unique decision. Ultimately, it will come down to your goals and investment strategy.
If you’d like to invest in real estate in a relatively passive manner, then Fundrise may be a good fit for you. Fundrise offers a variety of investment portfolios and will manage the underlying investments for you. This way you can sit back and invest in real estate without managing a property or tenants. Though it is important to remember that Fundrise can charge redemption fees should you sell earlier than 5 years.
If you are more interested in investing in individual companies, sectors or industries, then stock market investing may be a better fit. Stocks have the potential to grow and generate returns over time just like real estate. However, the stock market offers a better chance at diversification. Stock market investing is not easy and can take a long time to realize success. There are many different types of stock market investing strategies.
Both stock market investing and using a platform like Fundrise have the potential to generate returns for every investor. It's important to understand that returns are never guaranteed in either Fundrise or the stock market. Investors must figure out the strategy that best fits their preferences and financial situation.
In most cases, both real estate and stocks should be considered in a well-diversified portfolio.