Over the last decade, crowdfunded real estate investing has emerged as a popular method of real estate investing. Thanks to developments in technology, new online platforms have made gaining access to private real estate investments extremely simple.
But with such a new investing platform investors must ask themselves what are the risks involved? Many investors have concerns about the safety of a platform where you invest entirely online. They are also wondering about the legitimacy of a newer investing site that is not time tested.
We feel that the Fundrise investment platform is subject to risks such as liquidity, hidden fees and track record.
Before discussing the potential risks, we should first define this investment.
Real estate crowdfunding is just another word for a real estate partnership. Rather than a single investor putting down a large sum of cash, crowdfunded investments are groups of investors putting down smaller sums of cash.
This structure gives smaller investors an opportunity to invest in private real estate deals without needing a significant amount of cash.
Technology plays a large role in real estate crowdfunding platforms. Most platforms will now allow you to stay up to date on individual projects and offer easy to use platforms that track your investment.
The online platform gives the investor the feeling of a more hands-on experience. Visually being able to see these properties and track the progress of each investment is a relatively new approach to traditional real estate investments.
The following risks are associated with all crowdfunded real estate platforms, including Fundrise:
Liquidity - Most crowdfunded real estate platforms are illiquid in nature. This means you do not have a promise to be able to sell your investment and get your cash. Depending on the platform, there may be lockout periods or redemption fees for selling your investment before the original term of the investment.
Fees - Fees tend to be higher for crowdfunded real estate platforms. Depending on the platform, you may need to do your due diligence to make sure you understand all the fees involved. Certain crowdfunded real estate platforms are clever at hiding fees such as front end load and early redemption fees.
Track Record - Crowdfunded real estate investing does not have a long track record or history. Most of these platforms have been released in the last decade so there is no data available as to how this investment will perform during a downturn.
One of the most popular crowdfunded real estate investing platforms today is Fundrise. Fundrise allows investors to gain exposure to real estate investments throughout the United States. They offer a starter portfolio as well as 3 advanced portfolios.
Starting with as little as $500, investors can purchase shares of real estate partnerships managed by Fundrise and owned by individual investors.
Fundrise curates private real estate deals. With some of these deals, you are an owner who has equity in the property. In others, you serve as the bank earning interest on a loan. Equity investments are growth investments, as you can capitalize on asset appreciation. Debt investments are income investments, as you aim to receive interest payments from the loan.
There is a flat annual fee of 1% on the Fundrise platform. This 1% fee is broken down as a 0.15% investment management fee to manage your portfolio. And a 0.85% asset management fee to manage the underlying properties held in your portfolio.
Fundrise also has an asset origination/acquisition fee. This is a one time fee that can range from 0-2% of the initial investment. This is a fee for establishing real estate partnerships and the origination and negotiation of the underlying real estate assets.
There are also early redemption fees for taking distributions out of your account before the 5 year period.
Here's our full article on Fundrise fees for more information.
Fundrise was founded in 2010 with the goal to make investing in private real estate available to individual average joe investors. However, investors must understand all the risks involved before they jump into this type of investment.
Here's the main 3 factors to consider:
Crowdfunded real estate has yet to experience a recession or market downturn.
It is not clear how well these non-traded REITs managed by Fundrise will perform in a recessionary market. If the economy falls into a downturn like the great recession of 2008, it may be difficult to understand how Fundrise and other crowdfunded real estate investments will fair.
Since this is brand new technology, it is not a time tested investment.
Fundrise investments are illiquid in nature.
This means investors are not guaranteed a redemption of their shares. In a downturn, liquidity may not be guaranteed due to a lack of demand as well as protecting existing investors from panic selling. Fundrise reserves the right to suspend redemptions as they see fit based on market conditions.
Fundrise also charges fees for early redemptions. Investors should expect to hold their positions in Fundrise for a minimum of 5 years.
Before investing, you should understand all of the fees you pay Fundrise:
The redemption fee is 0% if in the first 90 days.
A 3% discount if the shares were held at least 90 days but less than three years.
A 2% discount if shares held at least three years but less than four years.
A 1% discount if shares held at least four years but less than five years.
After holding the investment for 5 years, there is no early redemption fee.
Fundrise is a relatively new investing platform offering many benefits to investors.
Determining whether or not it is safe or legitimate is based on the fees, track record and liquidity. If you are comfortable with the fees, which are straightforward, and you understand that it should be a minimum 5 year investment, it could be a good option for you.
I have personally invested $5,000 in Fundrise over the last 2 years and I plan on adding more.
Overall, it is not a good fit for everyone. Those who have a priority on investment liquidity should avoid this investment entirely.