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Fundrise Review: Diversify with Online Real Estate using eREITs

Fundrise Review: Diversify with Online Real Estate Investing

Fundrise allows individuals to invest in commercial real estate online through an eREIT (Real Estate Investment Trust). Their crowdsourcing model sets them apart from a traditional REIT allowing the average investor to participate in deals for as little as $1,000. Since the eREIT is sold directly to investors cutting out middle-men, they can have fees lower than 90% of the competition.
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When it comes to real estate, breakaway success is often found at scale and Fundrise’s goal is to scratch that itch. Does the Fundrise platform stand up to the hype? That’s what I was determined to find out.

I’ve always been a do-it-yourself investor – especially when it comes to real estate.  My wife and I own three rental properties and the condo that we live in is the result of a successful fix and flip over two years.

It goes without saying that real estate is both an important part of our wealth building strategy and something that we’re particularly interested in.

Over the past one and a half years we’ve interviewed Ben Miller the CEO, twice. First, when Fundrise just started and was only available to accredited investors and a second time after they opened up their platform to normal people – we invested soon after. They’ve since scaled massively, paid me a ton of dividends and relaunched their entire platform as “Fundrise 2.0“.

So, I thought it was long overdue that I broke down what they are, why you should care and what they do well. Let’s get nerdy!

What is Fundrise and why should you care?

Fundrise is a crowdfunded platform that allows average investors access to real estate returns they could not access on their own or through a traditional REIT. Their bread and butter are real estate deals that are normally overlooked by large institutional investors and out of reach for most individuals.

And what is a REIT? A REIT is a company that owns or finances income-producing real estate.

Most REITs are similar to Fidelity’s FRESX in that they manage many billions of dollars in assets and thus have to invest a significant amount of money. So, to be able to invest in new deals and manage the fund’s existing investments they typically need to make larger bets. They simply don’t have time to chase smaller properties.

Often large REIT investments aren’t even directly in real estate assets but companies like Public Storage. Because what’s even easier than going out and finding real estate deals worthy of investing in? Investing in companies that do that already. Such is the case with FRESX whose largest holding is just the Public Storage company. Sounds like a shitty deal as there is

Such is the case with FRESX whose largest holding is the Public Storage company. Sounds like a shitty deal as there is little value added here considering a REIT is so much more expensive than just buying some of Public Storage yourself – for less. Problem is that this is actually pretty common and there simply aren’t many REITs that are strong picks if you’re looking to buy into the rental market.

Individuals, on the other hand, are mostly investing in smaller properties ($100k – $200k in value) that are in higher demand making it harder to generate a reasonable profit. It’s also more difficult, and expensive, to manage 100 properties as opposed to 10. That’s why the vast majority don’t go down this road.

fundrise review - competitive advantage

 

Fundrise fits itself right in the middle as shown above with their fancy illustration.

First, they don’t look at single large properties or baskets of many properties (like Public Storage) and instead focus entirely on deals that run in the low millions. The return on these deals is higher because there is less competition for them. The problem then becomes how difficult and expensive it becomes to work with banks to acquire funding for these deals. That’s where the Fundrise platform fits in.

fundrise web based platform

(I want to hire their designer.)

Since Fundrise crowd funds capital ahead of acquiring a property, they can move quickly providing a large amount of cash to invest in a short time window. This allows them to focus entirely on senior debt and ownership positions that dramatically reduce the risk of the investments.

A senior position means that in the event of a failed project or investment, Fundrise gets paid ahead of other lenders/owners. That’s the power of investing with a crowd, you are the bank.

The Facts and Features on Fundrise

Before we get into the details, here’s a high level view their investment platform. We’ll get into Fundrise’s returns, performance and how it all works in the sections below.

Year Founded2012
Assets Managed$1.2 Billion
Number of Investors140,000+
Minimum Investment$1,000
Fees0.85% a year
Accredited InvestorNo
Asset TypesReal Estate Debt and Equity

Historical Returns and Liquidity

Whenever we talk about investing we usually discuss the average return. The reason is that we can’t predict the future – year to year things may not work out as planned.

When you visit their homepage, this is the first thing you see:

fundrise_real_estate_return

Ok fine but that’s quite a large time-horizon and this is for all REITs, how has Fundrise specifically done?

Performance and Average Returns:

In terms of cumulative return, it’s clearly going exponential.

fundrise cumulative total returns

Cumulative is a bit tricky because it’s also a factor of how much is actually being invested. If exponentially more people invest but their returns are increasingly small, this graph might not look all that different.

The averaged annualized returns of Fundrise are equally awesome:

YearReturn
201412.25%
201512.42%
20168.76%
2017 - Q110.59%

 

Liquidity:

Unlike publicly traded REITs that often hold other publicly traded assets, all of Fundrise’s capital is invested in properties they pick. As a result, they can’t simply pull out money from a deal without selling the actual property.

However, to provide better liquidity they have quarterly windows where they allow existing investors to cash out. So, while you can’t withdraw your cash whenever you’d like – you can do it at four times throughout the year without a penalty.

Fundrise 2.0 and the Blending of eREITs

I think it’s important to understand what you invest in so I’ve gone to great lengths to explain how it all works in the main sections below. That said, Fundrise 2.0 just make it all wayyy easier.

Similar to how Betterment provides a smart allocation of multiple Index Funds helping their service cater to your specific needs, Fundrise 2.0 seeks to do the same.

Fundrise’s new platform focuses not on what type of return you’d like to see or where exactly the properties are located but instead on your financial goals. There are three options – I’ll let a pretty picture explain:

fundrise ereit blending plans

Understanding the Fundrise Income, Growth and Regional eREITs

Income and Growth

The Income eREIT is focused on investing in debt, not all that different from how a bank collects an interest rate on a mortgage. Thus the fund is all about cash flow.

It invests using the following three core principles:

  • Small Assets: We believe targeting assets that fall under the radar of big banks and investment funds allow us to achieve higher relative returns.
  • Regulatory Inefficiencies: Increased banking regulations as a result of the 2008 financial crisis have opened up new opportunities for more flexible lenders to expand into the market.
  • Urban Infill Location: Generally real estate assets located in the core of large cities benefit from higher demand, and higher pricing, due to the relative lack of supply.

The Growth eREIT is focused on equity. Unlike the Income eREIT, this fund actually owns properties with an eye towards appreciation.

Its main focus is around multi-units and it also follows three core principles:

  • Workforce Housing: There is a growing need for affordably-priced apartments, referred to as “workforce housing”. However, there is a limited supply of existing apartments that meet that demand. The result is that affordably priced apartments face little competition from newly built apartments. We believe this growing demand and lack of supply will result in existing “workforce housing” increasing in value over time.
  • Low-Cost Basis: The Growth eREIT seeks to acquire properties below their replacement cost, a strategy known as “value investing”. In other words, the price paid to acquire a property is less than what it would cost someone else to build a similar property in the same location today.
  • Long-Term Fixed Financing: Interest rates on loans for acquiring apartment buildings are at historic lows. By securing long-term, fixed rate debt today, the Growth eREIT is able to maximize consistent cash-flow while also reducing volatility over the term of the investment.

Reginal REITs

Both the Income and Growth eREITs are hyper-focused on either cash flow or appreciation. The regional eREITs provide a more balanced approach as well as a way for you to invest in sections of the US that you’re particularly interested in. As such, they’re broken into three balanced funds: East Coast, Heartland, West Coast.

TL;DR Fundrise Review Summary

Fundrise is the world’s first crowdfunded real estate platform. Through their online platform, they provide access to an asset class not typically available to the average investor.

Any investment in their Income eREIT or Growth eREIT is spread across multiple properties both reducing overall risk and increasing liquidity opportunities.

They boast returns of 12-14% through and only require a minimum of $1,000 to invest, and you can liquidate any amount of your holdings quarterly.

Fundrise Positives:

  • Higher Returns: Gain access to higher yielding real estate deals than you could individually.
  • Hands Off Investing: Get the returns of real estate without having to actually manage it.
  • Low Fees: At 1% they are price competitive with most traded REITs, and among their non-traded peers they are lower than over 90% of them.
  • More diversification: Unlike residential real estate investments which are more likely to be affected by market swings, commercial is more insulated. Having access to this asset class helps further diversify your portfolio.
  • Performance Incentives: If Fundrise doesn’t perform to their own lofty expectations your money is invested for free.

Fundrise Negatives:

  • Limited Liquidity: You can only withdraw your money quarterly which forces a long-term approach to investments here.
  • Riskier than traditional REITs: With Fundrise you are closer to each deal, and there are fewer of them – as a result, it carries more risk.


An Interview with the CEO Ben Miller

We’re just a little addicted to talking to the people to create companies like Fundrise. Often we have a ton of questions that we selfishly want to be answered but we also hope a bit of their smarts rub off on us.

Our interview with Fundrise CEO Ben Miller. We cover everything discussed in this “Fundrise review” plus quite a bit more. We even dive into a bit of controversy the company had recently to find out what really happened. You know we’re not shy.

If you’re interested in hearing the early concepts of Fundrise and our interview with Ben before they were open to average investors, check out our episode Crowd Sourced Real Estate Investing.

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