Real estate is one of the best performing alternative asset classes for investors who would like to diversify their portfolio or for anyone who simply doesn't enjoy the volatile nature of the stock market. Contrary to popular belief, one doesn't need to be extremely wealthy to have interests in property.
In the past, investing in real estate, especially large commercial properties, was something that was only reserved for high net worth individuals (HNWI). But the rise of online real estate crowdfunding platforms and publicly-traded real estate investment trusts (REITs) have made it a lot easier for the average investor to get access to real estate investments. Fundrise is one of the many online crowdfunding marketplaces out there that have pooled relatively small sums of money from everyday people and used that money to assist property developers to finance their projects. But is this the right kind of investment for you? Keep reading to learn more about this platform and whether it fits into your investment strategy and goals.
- Fundrise is an online crowdfunding financial technology company that invests in the real estate market.
- The company offers a starter plan for a $500 minimum investment and three core plans for a $1,000 investment minimum.
- Fundrise's investments returned 9.11% to investors in 2018, but charge 1% annually in upfront fees.
- Investors should remember that Fundrise's offerings are illiquid as they are traded on the private market.
- Investing with Fundrise may come with higher risk because the company is still relatively new and because it has no experience with housing market woes.
What Is Fundrise?
Founded as a startup in 2012 by two brothers named Benjamin and Dan Miller, Fundrise is an online crowdfunding financial technology company that invests in the real estate market. It was the U.S.'s first real estate crowdfunding project. According to the company's website, Fundrise has invested in more than $2 billion worth of real estate across the United States. Crunchbase reported that the company has raised $55.5 million in funds as of November 2019.
Like any other real estate crowdfunding platform, Fundrise is great for people who want to invest in real estate, but don't want the headache or hassles that come with owning property. Instead, Fundrise does all the research and underwriting before investing in specific properties.
The company's investment offerings are not traded on the public market, meaning they're all private market real estate vehicles. These include several online REITs, or as they call them eREITs. The first eREIT, the Fundrise Real Estate Investment Trust, was launched on Dec. 3, 2015. The company continues to launch new investment products including seven eREITs. These invest both debt and equity in a series of different real estate types including commercial properties. The company's three eFunds put investors' money into residential real estate development and sales.
Investments are aimed at both accredited and unaccredited investors. Accredited investors are those who have a net worth of more than $1 million—not including the value of their home. Unaccredited investors are average investors. Fundrise offers several different portfolio options:
- Starter: This is Fundrise's most basic plan. Investors can get into the market with a minimum $500 investment. This is a good option for anyone with a little money to invest or for anyone who just wants to test out the market. Investors can upgrade to a core plan at no cost once they reach a $1,000 investment.
- Supplemental Income: This account helps investors put their money into cash-flowing real estate. It promises dividends each quarter with less appreciation. This portfolio has 52 active projects as of November 2019. This plan, as well as the next three, require a minimum $1,000 investment.
- Balanced Investing: Investors who use this plan can take advantage of real estate that generates cash-flow and growth. It promises a combination of both dividends and appreciation with 63 active projects.
- Long-Term Growth: Through this portfolio, investors can reach their goals through the investment of real estate with high-growth potential. Investors trade some of their dividend income for share value. The long-term growth account has 41 active projects.
Even though the company's been around since 2012 and the first eREIT was launched in 2015, Fundrise is still a relatively new player to the game. But the yearly returns may be fairly exciting to investors. Overall, Fundrise's investments, according to the site, returned 9.11% to investors in 2018. Compare that to the retail REIT industry, which returned an average of -4.96% to investors in 2018.
Because Fundrise does all the investing directly, it saves investors money on broker and placement fees. But it does charge a high asset management fee of 0.85% as well as an advisory fee of 0.15% for unaccredited investors for a total of 1%. So, for every $1,000, Fundrise charges investors $10 each year—$8.50 in asset management fees and $1.50 for advisory fees. The company says it uses the fees for operating expenses.
Although the Fundrise eREIT may seem like a very promising investment, it certainly isn't for everyone. Here are three important things to ask yourself when determining whether or not an equity stake in Fundrise's eREIT makes sense in your investment portfolio.
Do You Mind Investing in an Illiquid Asset?
One of the main differences between Fundrise's eREIT and a traditional REIT is the level of liquidity. Traditional REITs are traded on a stock exchange and are given a mark to market (MTM) valuation every minute of a trading day. This gives investors the ability to sell a portion, or all, of their REITs within a couple of minutes if needed.
Fundrise's eREIT, on the other hand, are not listed on an exchange and are deemed to be illiquid assets. These are investment vehicles that can't be easily sold or traded for cash without a big loss in value. They may be hard to sell because there aren't enough investors willing to buy the asset. As a result, units can only be redeemed at the end of each quarter. This can help to force an investor to take a long-term position. It can also be a problem if an investor needs immediate access to cash for an emergency.
Do You Need the Income?
Federal law requires that all REITs distribute no less than 90% of their annual income to their unit holders. Fundrise’s eREITs are not excluded from this requirement. As a result, the company intends to make a high yield cash distribution at the end of every quarter. This can be great for investors who want to create an additional revenue stream. However, Fundrise's offerings may not be ideal for investors who do not immediately need investment income. Unlike corporate dividends that are taxed at a low rate, REIT distributions are taxed at the normal income tax rate. This is why REITs are often called tax-inefficient investments.
In some cases, an investor may end up realizing higher net returns and a lower tax bill by investing in a stock that reinvests the majority of earnings instead of distributing it to shareholders.
How Risk Tolerant Are You?
Before you invest your money, you should develop your risk profile. Your age, income, and goals all factor into how much risk you're willing to take on. Fundrise may promise great returns, but it may not be suitable for your investment portfolio if you consider your tolerance for risk to be low or fairly moderate. Still a relatively new company—and despite its returns—Fundrise still has some growth to go through before becoming established.
One important thing to note about the company and its offerings. The company came about after the financial crisis, and has no experience with any significant downturn in the economy, especially pertaining to the real estate and housing markets. There's no telling how investors may react to negative news if they try to cash in their holdings in the company at the same time.
Fundrise has yet to experience any downturn in the housing and real estate markets.
When compared to the management teams of publicly-traded REITs, the management of Fundrise’s eREIT lacks many years of experience. In the company’s initial offering circular filed with the Securities and Exchange Commission (SEC), it was disclosed that the eREIT's initial management team consisted of four members, the oldest of whom is only 39-years-old.
Depending on your age and overall goals, an investment in the eREIT might be worth the speculation. On the other hand, other investors might not feel comfortable with the risk associated with the nature of the eREIT. Publicly-traded REITs may be a much more suitable alternative for conservative investors like retirees, who want a reliable flow of income while protecting their principal.
The Bottom Line
REITs and property crowdfunding platforms have made it extremely easy for the average investor to include real estate investments in his or her portfolio. Like traditional REITs, Fundrise’s eREIT gives its unitholders the opportunity to benefit from income-producing properties. While eREits resemble traditional REITs in this way, there are a number of differences between the two. Shares in Fundrise’s eREIT can only be redeemed at the end of each quarter. Additionally, the eREIT may be tax-inefficient for young investors who could benefit much more by realizing capital gains rather than investment income. Conservative investors should also note that Fundrise is a relatively new player in the REIT business, and as such may be riskier than other REITs because of its track record.