A company called Fundrise invests in real estate online. In order to reach the average investor, they aim to eliminate the need for tens of thousands of dollars to enter the real estate market.
Your money goes directly to the properties when you invest in direct investment REITs. With one investment, you are able to gain exposure to dozens of assets.
However, should crowdsourced real estate investing be a part of your investment portfolio if you are considering it?
An Overview of Fundrise
Minimum balance: $500
Fee for Management: 0.85%
In the world of real estate investing, Fundrise is the only platform designed solely for crowdsourced investments. Investing in the fund offers diversification, access to investors who can answer questions, and options for balanced investments, long term growth investments, and supplemental income investing. As well as being open to accredited investors, it is also open to non-accredited investors.
Pros:
- Investors who are not accredited are welcome to participate
- A low minimum investment requirement
- Returns have historically been strong
Cons:
- Liquidity constraints
- It’s not entirely clear how fees are calculated
- A strong market downturn has not yet been tested with the methodology
With Fundrise, you can diversify into real estate without committing a great deal of capital if you have a long-term investment outlook.
Fundrise is not a good fit for those who aren’t prepared to see steep price drops during economic downturns, due to the newness of crowdsourced real estate investing generally.
BBB Reviews for Fundrise
The Better Business Bureau has given Fundrise an A+ rating. Fundrise has been accredited by the Better Business Bureau since 11/23/2016, and they have been in business for 7 years.
Fundrise: what does it do?
Let’s first discuss what Fundrise is before we get too deep into our review. The Fundrise company was founded in 2012 to raise funds for real estate. This company specializes in eREITs and eFunds. As a result, the average investor has access to a wider portfolio of real estate assets through the purchase of shares.
A starter portfolio of private real estate deals can be invested in with just $500 at Fundrise.
Real estate investment trusts that focus on private commercial properties are known as eREITS. There are two types of REITs: those that purchase income-producing commercial properties and manage them, and those that offer mortgages on such properties.
The eFunds are portfolios of single-family rental properties or developments in areas where housing is in short supply.
There are two ways in which investors make money with Fundrise:
- The earnings from the property management, rent, or mortgage payments of the assets are distributed on a quarterly basis.
- An increase or decrease in the value of a property.
Among Fundrise’s unique features are these REITs. The majority of crowdfunding platforms require you to invest individually in each project, rather than purchasing a portfolio of projects that is more diverse.
The Fundrise App
Fundrise has not yet released an app for their service, so there are questions about the “Fundrise app”. The entire process is conducted through the Fundrise website (which is mobile-friendly), rather than through a dedicated app. It is still possible to use Fundrise on your mobile device, as long as you go directly to their website to log in.
Fundrise: How Does It Work?
A total of over $1.4 billion has been invested by Fundrise in over 150 real estate assets located across the United States. With a range of risk profiles and investment goals, these assets are divided into five eREITS and three eFunds.
In terms of investment returns, Fundrise aims to provide improved returns to average investors. In order to achieve this, they take advantage of the premium returns typically associated with private markets.
Stocks and bonds traded on an exchange have a greater level of liquidity and transparency, which increases demand and raises prices. According to Fundrise, one-third of your long-term returns are sacrificed as a result of this liquidity.
As a result, the average investor is not able to invest in private equity on their own. In order to conduct private transactions, you usually need hundreds of thousands of dollars, if not millions of dollars.
In order to gain a seat at the table, Fundrise leverages the collective power and assets of thousands of investors.
In addition to finding and acquiring midsize real estate on behalf of investors, Fundrise also specializes in financing. A company then makes improvements to an asset to increase its yield through property management fees, rents, or eventual sale.
A large commercial project can also be financed with a mortgage loan through the company. The interest payments from mortgages compensate the investors in these cases.
Once the assets have been acquired, they are divided among five eREITs and three eFunds.
Investing in Fundrise does not involve investing in a specific asset, or even in a specific eREIT or eFund.
Depending on your investment objectives, you can choose from three main portfolios: Supplemental Income, Balanced Investing, or Long-Term Growth.
Four Options for Fundrise
The 4 main Fundrise options are as follows:
Growth over time
- Invest in shares with fewer dividends in order to earn returns through appreciation in share value
- Make investments in growth-oriented real estate private equity
- A higher proportion of equity real estate assets is allocated to the portfolio
Investing with a balanced approach
- Dividends and appreciation should be combined to earn returns
- Make sure your investments are balanced between income and growth
- Real estate assets are allocated across both debt and equity portfolios
Income supplement
- Consider dividends, rather than appreciation, as a means of earning returns
- Private equity investments in real estate with an income-oriented strategy
- Real estate debt constitutes the majority of the portfolio
Portfolio for Beginners ($500 minimum)
- Multiply your real estate portfolio across 36+ projects instantly
- Among new investors, this is the most popular choice
- All 3 advanced plans are free to upgrade
Fees, Facts, and Figures for Fundrise
Inauguration Year: 2012
Amount Managed: $1.4 billion
Involved Investors: +80,000
The minimum investment is:
- Portfolio Starter Plan: $500
- If you plan to invest in long-term growth, balance investing, or supplement income, you will receive a $1,000 contribution
Fees for Fundrise:
1% annual fee, including 0.85% asset management fee and 0.15% advisory fee. There may, however, be other fees (see FAQ below).
Investing Potential:
Fundrise funds generated an annualized return of 11.44% in 2017. Fundrise calculates this based on property appreciation over the period, not necessarily reflecting investors’ realized returns.
Types of assets:
Equity and debt in real estate.
Amount of liquidity:
If you wish to redeem shares on a quarterly basis, there may be a fee associated with the sale. Additionally, Fundrise cannot guarantee that it will be able to fulfill all redemption requests in a given quarter based on the cash set aside for redemptions. In the event of a recession, this could pose a concern.
Markets in the secondary market:
There are none. The purchase and sale of shares between investors is not permitted.
Fundrise Frequently Asked Questions
There are a number of questions that arise when investing in new types of assets. Even though we could make this section pages long, we will focus on the top questions to which you should give particular consideration.
Can Fundrise offer me a return on my investment?
That million dollar question needs to be addressed in our Fundrise review.
In order to estimate potential future returns, we can look at historical returns, however, no one is able to predict the future.
In spite of this, Fundrise has shown some promising results so far.
Three out of the last four years, Fundrise’s historical returns have either exceeded or been around the high end of its projected long-term returns.
In order to help investors reach their target returns, Fundrise and other asset managers provide projected annual returns. It is not in their interest for you to be floating out in space expecting a 200% return when they were only aiming for a 10% return.
Over the course of a 20-year period, Fundrise’s Balanced Investing Plan is projected to have an average annual return of 7.8% to 11.5%. As far as the other two plans are concerned, they both fall within a very similar range. The Long-Term Growth plan targets a slightly higher return than the Supplemental Income plan, whereas the Supplemental Income plan targets a slightly lower return.
It is important to note that these projections for the future are simply an attempt by some (very) intelligent people to predict the future. There is a possibility that they might be wrong. There is a possibility of seeing better returns, as well as a possibility of seeing much worse returns.
In addition, if you want to take out your money within 5 or 10 years – for example, if you want to take your money out in 5 or 10 years – the range of potential returns will also become wider as you change your timeline. The reason why real estate investing is designed to be a long-term investment strategy should be evident from the fact that it is a long-term investment strategy.
Wouldn’t it be better to buy a publicly traded REIT?
Both yes and no.
In addition to providing exposure to commercial and residential real estate, a publicly traded REIT offers lower fees and greater liquidity. It is important to keep in mind a few fundamental differences.
It is more likely that publicly traded REITs will follow the same pattern as the broader real estate market, because the investor base is more likely to be stock market investors, so they will behave in the same way.
The majority of publicly traded real estate investment trusts are much larger than Fundrise and thus have more time to do larger deals. Small deals won’t have a major impact on their overall returns, so a small deal isn’t going to matter. Investing in midsize commercial and residential real estate with Fundrise gives you access to different classes of properties.
Non-traded REITs tend to yield higher returns over the long-term than publicly traded REITs. The above method has not yet been tested on Fundrise, however. The company has only been around for six years, and for the average investor it is a whole new concept when it comes to crowdsourced real estate investing.
Can I sell my shares if I need to?
Shares of Fundrise are expected to be held by investors for a minimum of five years.
In the event that you need to sell shares before then, you have the option of doing so if necessary.
On a quarterly basis, Fundrise allows investors to request redemptions of their shares. There is only a 90-day guarantee window during which sales are based on the current market price, except for the guarantee window.
As far as selling before a five year holding period is concerned, we should keep in mind that there are fees associated with doing so.
- Your shares will be bought back by Fundrise within 90 days of your initial investment.
- An additional 3% discount to the current price is applied to shares held for 90 days to three years.
- There is a 2% discount on the first three to four years.
- There is a 1% discount available for orders of four to five years.
- The sale of shares held for more than five years is free of charge.
You should always keep in mind that this is a request to sell your shares, not a guarantee that they will be sold. In order to handle share redemptions, Fundrise sets aside a certain amount of cash each quarter. It is possible that the company will not be able to honor all requests if the number of requests exceeds that limit.
Having said that, we have never seen Fundrise perform in a downturn, and that is something that is important to note. It is likely to cause a bank run on the platform if investors all request redemptions at the same time.
Despite the fact that you will still have the asset value of the real estate backing your shares, if Fundrise is forced to sell an asset quickly or at an inopportune time to satisfy redemptions, the impact on your returns will be significant.
In the past, hedge funds and private equity funds have been shut down because of a sudden influx of redemption requests, and it is a risk that we face here as well.
Are there any hidden fees I should be aware of?
Yes, unfortunately. If we failed to disclose all fees involved, our Fundrise review wouldn’t be complete.
It is important that Fundrise be upfront about the 0.85% asset management fee and 0.15% advisory fee that they charge. Is it true that there are other fees as well? It will take you some time to find them in the filing cabinet in which the offering circulars are filed.
As a private non-traded REIT, Fundrise is quite complex, and with their underlying fees that come up during the course of their business, they are very prone to intrigue. As a result of the fact that the impact of these fees depends on the activities of the fund over the course of time, quantifying their impact is hard to do.
New eREITs or eFunds can be set up for as little as 0% to 2% of the money raised from investors.
There is a possibility that in eFunds that are building new properties, there may be development fees that could be up to 5% of the total cost, excluding land. It is also possible that Fundrise may charge a fee in the event an eFund sells property to Fundrise.
It is estimated that Fundrise’s fees are roughly 10% of those charged by similar non-traded REITs that are not publicly traded. In spite of that, this is somewhat comforting, as the SEC has demonstrated that up-front fees for non-traded real estate investment trusts can often consume as much as 15% of an investor’s initial investment in a non-traded REIT.
To gain a better understanding of the fees and risks associated with Fundrise, or any non-traded REIT for that matter, we recommend that you read the Offering Circular and the SEC’s Investor Bulletin.
Fundrise: Who Should Invest?
If you have a long-term outlook and are comfortable tying up your investment for several years, Fundrise may be a great choice for you. Although you may sell your Fundrise shares within the 5-year holding period, there will be fees associated with the sale.
In addition, this type of investment is perfect for investors who want to diversify beyond stocks and bonds without becoming involved in the hands-on nature of real estate investing. You don’t even have to worry about choosing assets with Fundrise’s eREITs and eFunds.
Last but not least, you need to be comfortable with risks. You should keep in mind that this platform and investment methodology have not yet been tested in an economic downturn similar to the housing crisis of 2007-2008.
Summary of the Fundrise Review
With Fundrise, investors have easy-to-use access to private real estate investing, and potentially higher returns.
There is a possibility that some investors may overlook the higher risks associated with this investment due to the simple packaging and optimistic future return projections prominently displayed on the site.
For each of their nine investment plans, the Securities and Exchange Commission has filed a 200+ page offering circular that lists these risks in detail.
Risks associated with higher potential returns are also associated with higher potential returns. I highly recommend that you do not invest in Fundrise without taking the time to understand the long-term commitment you will be making.
You should review your asset allocation to determine whether you require more exposure to real estate. Don’t forget to include your home and any publicly traded real estate investment trusts.
Those who are risk-averse and uncomfortable watching the ups and downs of the stock market should probably stay away from this.
In addition, Fundrise is an easy-to-use and well-developed offering for investors who are confident about the long-term prospects for commercial real estate and urban housing, wish to diversify beyond stocks and bonds, and are willing to take on the associated risks in order to achieve higher long-term returns.
Signing up for Fundrise’s Starter Plan and testing the platform for your own needs is risk-free as a result of Fundrise’s 90-day guarantee.
Hopefully in our complete Fundrise review, we have addressed all of the burning questions you may have. But if you think we have missed anything, please feel free to leave a comment below with any questions you may have for us.
