Fundrise is a new investing platform that allows everyday investors to invest in private commercial and residential real estate projects through crowdfunding. While this platform is new, the concept of passively investing in real estate is not. People have been investing in traditional publicly traded and private REITs since their invention in the 1960’s.
Today, over 145 million people in the US alone invest in REITs.
In fact, VNQ is one of the most popular REITs available on the market today!
In this article, we will be comparing the "new school" investment which is Fundrise to the "old school" investment which is Vanguard REITs.
Vanguard Brokerage Review 2021: Best Investing Platform?
||Invest With Vanguard|
Fundrise Review 2021: Best Passive Real Estate Investment?
||Open A Fundrise Account|
|Minimum Investment||$500||Cost Of 1 Share|
|Private Real Estate Investment||Yes||No|
|Stock Market Correlation||Low||High|
|Suspended Redemption||Possible||Not Possible|
|Best For||Long Term Investors (5+ Years)||Short Term Investors Who Value Liquidity|
A Real Estate Investment Trust (REIT) is a company that purchases real estate assets and then issues thousands or millions of shares of the company to investors. This gives retail investors the ability to invest in real estate investments they may not have been able to before often due to high costs or exclusivity of the investment.
REITs can allow you to invest in real estate that you would not typically be able to buy directly. For example, consider American Tower Corporation. This is a REIT that owns cell towers. Your average investor would not be able to go out and buy a cell tower, but it is possible through a REIT.
REITs are attractive investments because of the relatively high dividend yields along with the ability to provide passive exposure to real estate.
In order to be classified as a REIT, at least 90% of the taxable income needs to be passed along to shareholders in the form of dividends. REITs allow investors to gain diversified exposure to thousands of real estate assets throughout the world.
Before the invention of the REIT, investors would have to purchase real estate themselves or in syndicates, which were limited to wealthy and accredited investors. REITs have opened up real estate markets to common everyday investors, providing more liquidity and an explosion of investment into real estate.
There are two core types of real estate investment trusts; publicly-traded REITs and non-traded REITs.
Most of us are familiar with publicly-traded REITs, these are investments that trade on public security exchanges and offered to everyday investors.
Non-traded REITs are investments that are bought and sold privately. This means you must have a buyer or seller willing to conduct a transaction to provide liquidity as there is no secondary market. These REITs are less common because of their exclusivity, liquidity and often high front-end load fees.
Front-end load fees are commissions you pay to brokers on the purchase of your investment.
So, why do investors buy these REITs? Non-traded REITs have the advantage of giving you exposure to private real estate and offering higher distributions, on average, than publicly-traded REITs.
Another advantage is that non traded REITs are less correlated to the overall stock market, as they are not traded on an exchange.
Publicly traded REITs also hold liquidity premiums, making them more expensive compared to non traded REITs.
Fundrise has created a new investment called the eREIT, which is a non-traded REIT offered on the platform.
eREITs are unique to Fundrise, and they offer a number of benefits that are not typically offered by a traditional non traded REIT or publicly traded REIT.
Fundrise released many of its eREITs over the last few years under a new provision of Regulation A.
This new provision in the securities act allows unaccredited investors to purchase up to $5 million worth of a security over a 12 month period. This new provision has allowed crowdfunded real estate platforms like Fundrise to emerge, creating more investment opportunities and a new concept to the non traded REIT structure.
Before this change in regulation, you had to be an accredited investor to invest in private real estate deals like this.
In the United States, to be an accredited investor you need to have a net worth of $1,000,000 or more excluding your primary residence or an income of at least $200,000 for the last two years. In the past, these accredited investors were the only ones that had the ability to invest in these private real estate investments.
Publicly traded REITs trade on a major exchange like the NYSE or the NASDAQ.
These investments change hands just like stocks, and as a result, the performance of the asset is heavily correlated with the overall stock market.
Publicly traded REITs are very similar to dividend stocks.
If you have done your research, you have come across the Vanguard Real Estate Index Fund.
This is a low fee REIT that gives you exposure to a diverse collection of real estate. This REIT has an expense ratio of 0.26% compared to the 1% fee associated with Fundrise.
Is this Vanguard REIT a better investment?
It is important to understand the difference between Fundrise and other publicly traded real estate investments like this Vanguard REIT. Fundrise is a unique real estate investment, where most traditional REITs contain real estate that has already been purchased.
With an eREIT you're able to access a growing portfolio of real estate projects by pooling your money with other investors. Then Fundrise is able to scout out new deals and add them to the portfolio.
Let’s take a look at the performance of these investments over the last few years.
In 2014 and 2019, the Vanguard REIT significantly outperformed Fundrise.
However, in all other years, Fundrise has had significantly better performance than the Vanguard REIT. Historically, Fundrise has less return volatility when compared to Vanguard.
One con with investing with Fundrise mentioned in our full review is the limited operating history. We only have a few years of returns to go off of, and that is not a large amount of data.
It is certainly possible that Fundrise will continue to outperform the Vanguard REIT, but they cannot guarantee returns.
Fundrise takes a venture capital approach where they are constantly purchasing and selling real estate assets and debt. This unique approach could give Fundrise an edge in terms of returns.
Fundrise eREITs offer a variety of features not typically seen in traditional non-traded REITs.
These features include:
This eREIT focuses on purchasing commercial real estate equity and debt along the East Coast of the US.
This is primarily in Massachusetts, New York, New Jersey, North Carolina, South Carolina, Georgia, Florida, as well as Washington D.C. and Philadelphia, PA. Investments in this eREIT focus on fixed rates of return and assets that have a high potential for value creation.
This includes assets that have high potential for redevelopment, brand new ground up projects, and income producing debt.
This eREIT focuses on acquisition of real estate in the Midwest of the US.
Specifically, Houston, Dallas, Chicago, and Denver metro areas. This eREIT invests primarily in real estate debt and equity investments, that will provide fixed rates of return as well as aiming for long term value creation.
This eREIT focuses on debt and equity commercial real estate investments in the West Coast region of the US with a focus on certain cities and metro areas.
Specific cities include Los Angeles, San Francisco, San Diego, Seattle, and Portland. This strategy focuses on renovation and value adding opportunities for redevelopment, as well as investing in completely new development projects.
The primary objective of this eREIT is cash flow generation from purchasing real estate debt on commercial properties.
This eREIT focuses on real estate in urban areas where there is limit of the supply and high demand. The income eREIT follows the strategy of acquiring smaller assets that fall out of the scope of larger investment banks.
This eREIT focuses on acquisition of commercial real estate assets with a goal of value appreciation over time.
The growth eREIT looks for opportunities in affordable housing complexes. This eREIT also aims to buy properties below their replacement cost. The growth eREIT is also taking advantage of historically low interest rates by financing its acquisitions using long-term fixed-rate loans.
In addition to pioneering the eREIT, Fundrise has also created another real estate crowdfunding vehicle called the eFund.
An eFund is similar to an eREIT in that there is a pool of real estate investments that are split up and sold to investors. however, there are some important differences between the two investment vehicles.
The primary distinction between the two is that instead of paying out dividends like a REIT or eREIT, eFunds are structured as partnerships and pay out distributions to investors. This allows the investment to avoid the double taxation that C Corporations face. However, this will likely cause your gains to be taxed at your normal income tax rate instead of your capital gains rate.
One of the main advantages of eFunds is that they allow investors to get more granular in their holdings. Even though you can't individually pick and choose which projects you want to be invested in, an eFund will allow you to restrict your investments to a particular market.
If you're optimistic about a particular area, taking advantage of an eFund can provide you with significant concentration there while still diversifying your investment across dozens of different projects.
Currently, Fundrise's eFunds are only available to investors with Advanced Level Accounts. This requires an account balance of $10,000 or greater on the platform.
The Washington DC eFund is one of two market-specific eFunds currently offered by Fundrise. The fund currently holds 25 projects in the DC Metro in close proximity to Amazon's HQ2.
This fund's objective is to create appreciation by purchasing distressed houses, fixing them up, renting them out, and then selling the home at a higher price. Therefore, investors in the fund should have a longer time horizon to allow adequate time for the fund to acquire, fix, and sell the properties.
Started in mid-2017, the fund is still in the ramping up phase and the projects within the fund are expected to generate returns in the 6% - 20% range.
Fundrise's second eFund contains 31 active projects in the Los Angeles area.
Similar to the DC eFund, this fund aims to generate returns through appreciation rather than income. This is done through both new home constructions and renovating existing homes. The fund was also started in mid-2017 and is ramping up as constructions and renovations are currently underway.
For investors looking to capitalize on the large millennial population in LA migrating from apartments to owning their own homes, the Los Angeles eFund could provide an effective way to do so.
With so many different investment options offered by Fundrise, investors can buy into different types of real estate in all kinds of locations. By leveraging technology, Fundrise has taken a new approach to the non-traded REIT.
Thanks to changes in legislation, average everyday investors now have access to an investment that was traditionally reserved for accredited investors only.
While we don't have a lot of operating history to go off of, aside from 2014, from 2015 to 2018 the returns from Fundrise far exceeded the returns of the Vanguard VNQ REIT.
However, investors need to be familiar with the liquidity of Fundrise before investing. Since this is a private real estate investment, there is no secondary market. Fundrise has a quarterly redemption period, but they cannot guarantee liquidity. You should only invest if you are comfortable with this liquidity and have a minimum time horizon of 5 years.