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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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Did you know that investors with 20% allocated to real estate outperform those who only invest in stocks and bonds? Fundrise wants you to diversify without the dramatics of owning the properties yourself.

In this Fundrise Review, we’re going to dive into their product in detail and answer a few key questions. Namely, how their eREIT product stands out from the pack.

What is Fundrise?

Fundrise is a crowd funded 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.

Most REITs are similar to Fidelity’s FRESX in that they manage many billions of dollars in assets and thus have to invest a large 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.

Often large investments aren’t even directly in real estate assets but companies like Public Storage with own their own portfolios of real estate (FRESX’s largest holding). There is little value add here as you could just invest in these publicly traded companies yourself – for less.

Individuals on the other hand are mostly investing in smaller assets that are in higher demand making it more difficult to generate a reasonable profit. It’s also more difficult to manage 100 properties than 10 properties.

fundrise review - competitive advantage

 

Fundrise fits itself right in the middle (as shown above) and are able to do so very successfully due to the crowd funding model.

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 are higher because there is less competition for them and banks tend to be overly expensive to work with.

Since Fundrise crowd funds capital ahead of acquiring an asset they are able to 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 investments risk. A senior position means that in the event of a failed project or investment, Fundrise gets paid ahead of other lenders/owners.

Understanding the Fundrise Income and Growth eREITs

In order to keep things simple, Fundrise only has two funds: Income eREIT and Growth eREIT. The income fund is focused on debt while the growth fund is focused on equity.

 

Bold Accountability, Less Liquidity

Whenever we talk about investing we usually discuss average return. The reason is because we can’t predict what will happen – year to year things may not work out as planned.

Fundrise doesn’t want to just get paid for their service, they want to get paid (and known) for performance. As a result they are bucking the trend and allowing themselves to potentially make no profit on the service if there is poor performance. Both of their eREITs have accountability clauses that reduce fees and amp your returns if they don’t happen to hit lofty return benchmarks.

Income eREIT Accountability: You pay 0% in asset management fees unless you earn a 15% annualized return.

Growth eREIT Accountability: Fundrise will pay a penalty of up to $500,000 to investors if the eREIT earns less than a 20% average non-compounded annual return.

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, in an effort 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 Returns

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

fundrise_real_estate_return

TL;DR Fundrise Review Summary

Fundrise is the worlds first crowd funded 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 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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