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. But most recently we’ve dabbled in online real estate with Fundrise. Did their platform stand up to the hype? That’s what you’ll learn in this Fundrise review.
Real estate is both an essential part of our wealth-building strategy and something that holds particular interest for us. It’s a strategy that is, above all, focused on long-term growth.
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 ordinary people – we invested soon after. They’ve since scaled massively, paid me massive dividends, and relaunched their entire platform as “Fundrise 2.0“.
Not only did we interview them since then, but we’ve also invested over $30,000 of our own money.
So, I thought it was long overdue that I broke down what they are, why you should care, and what they do well (passive income). Let’s get nerdy!
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What is Fundrise?
Fundrise is a real estate crowdfunding platform that allows ordinary investors access to returns they couldn’t get on their own (or through a traditional REIT). They’re primarily focused on real estate deals overlooked by institutional investors and out of reach for most individuals.
Investing with Fundrise is available to non-accredited investors. Simply put, anyone can invest. Their service is no longer reserved for high net worth individuals.
And what is a REIT? A REIT, or Real Estate Investment Trust, 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.
Significant REIT investments often 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.
It seems like a flawed deal. There is little value added to it considering a REIT is much more expensive than only buying some of Public Storage yourself – for less.
The problem is that this is pretty common, and there just 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 distressing and expensive to manage 100 properties as opposed to 10. That’s why the vast majority don’t go down this road.
How Fundrise Works
Fundrise fits itself right in the middle.
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.
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Since Fundrise crowdfunds 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.
Fundrise Costs, Figures, and Annual Fees
Before we get into the details, here’s a high-level view of their investment platform. We’ll get into Fundrise’s returns, performance, and how it all works in the sections below.
|Assets Managed||$2.5 Billion|
|Number of Investors||500,000+|
|Fees||0.85% Annual Management Fee
0.15% Annual Advisory Fee
|Asset Types||Real Estate Debt and Equity|
You can open individual taxable or joint accounts, trusts, entity accounts, and self-directed IRAs through Fundrise. Because your earnings are taxed as ordinary income, placing real estate investments inside an IRA (as opposed to a taxable account) can serve as a tax shelter while lowering your tax bill.
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.
So, how has Fundrise performed?
Performance and Average Returns:
In terms of cumulative return, it’s going well.
Cumulative is a bit tricky because it’s also a factor of how much is 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 exceptional:
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 merely 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 four times throughout the year without a penalty.
Fundrise investments aren’t illiquid, but depending on when you withdraw, there may be additional costs. Shares fall into two categories: Introductory Shares and Non-Introductory Shares. Introductory Shares give you a 90-day window from the purchase date to liquidate without penalty.
Non-Introductory Shares are investments held greater than 90-days but less than five years. If your shares fall under this category and you want to liquidate, there are penalties.
|Age of Shares||Approximate Penalty
(%) of total share value
|90 days to 3 years||3%|
If you’re liquidating shares held longer than five years, 100% of the value should be returned to you, penalty-free.
Fundrise eREITs and eFunds
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 makes it all way easier.
Fundrise’s new platform focuses not on what type of return you’d like to see or where the properties are located but rather your financial goals. Those goals are categorized as supplemental income, balanced investing, and long-term growth.
You can also choose which kind of account level you want to open. Fundrise has four offerings:
The Starter Portfolio: Their most basic option consisting of 5-10 real estate projects and a $500 minimum investment.
Core Plan: Increased diversification with 40+ real estate projects and goal-based portfolio construction starting at $1,000.
Advanced: Superior diversification, 80+ real estate projects, and access to additional fund types for $10,000
Premium: $100,000 minimum with exclusive features like waiving your advisory fees for one year for every person you refer.
Once you’ve chosen your account level and investment plan, Fundrise allocates your funds across a diversified portfolio of residential and commercial properties.
eREITs vs eFunds: What’s the Difference?
Think of an eREIT like a mutual fund for commercial real estate. It’s a diversified portfolio spread across real estate assets like office buildings, hotels, and apartments, that’s professionally managed. It’s not publicly traded like regular REITs and carries lower costs by cutting out the middleman (no brokers or commissions). All eREITs go straight to you, the investor.
An eFund works like an eREIT except it invests in residential real estate like single-family homes, condos, and townhomes. It’s growth-focused, structured as a partnership, and avoids the double taxation of corporations.
Note: Fundrise eFunds are available at the Advanced account level.
Fundrise Investment Portfolios
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: 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 focuses on equity. Unlike the Income eREIT, this fund owns properties with an eye towards appreciation.
Its primary focus is on 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 purchase 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 can maximize consistent cash-flow while also reducing volatility over the term of the investment.
Both the Income and Growth eREITs are hyper-focused on either cash flow or appreciation. The regional eREITs provide a more balanced investing approach as well as a way for you to invest in sections of the US that are of particular interest. As such, they’re broken into three balanced funds: East Coast, Heartland, West Coast.
Three growth-focused eFunds are available at the Advanced account level ($10,000 minimum investment) offering more advanced investing strategies and potentially higher returns. They’re broken into the Washington DC, Los Angeles, and National eFunds.
TL;DR Fundrise Review Summary
Fundrise.com is the world’s first crowdfunded real estate investment platform. Through it, they provide access to an asset class normally unavailable to the ordinary investor. While they are considered a non-traded REIT, they are still subject to the same SEC requirements that an exchange-traded REIT must meet.
Any investment in their Income eREIT or Growth eREIT is spread across multiple properties, both reducing overall risk and increasing liquidity opportunities.
They boast annual returns of 12-14%, only require a minimum investment of $500, and you can liquidate any amount of your holdings quarterly.
- Higher Returns: Gain access to higher-yielding real estate deals than you could individually or other reputable crowdfunding sites.
- Hands Off Investing: Get the returns of sizable real estate projects without having to manage them.
- Supplemental Income: Much like a rental property, Fundrise offers supplemental income in the form of a quarterly dividend. This is easily one of the most appealing features for new investors.
- Low Fees: At a 0.85% asset management fee and 0.15% advisory fee, 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 stock market swings, commercial real estate is more insulated. Having access to this asset class helps further diversify your portfolio.
- Performance Incentives: If Fundrise doesn’t perform to their lofty expectations, they invest your money for free.
- Limited Liquidity: You can only withdraw your money quarterly, which forces a long-term approach to investments here.
- Riskier than traditional REITs: You’re closer to each deal, and there are fewer of them. This carries more risk.
An Interview with CEO Ben Miller
We’re just a little addicted to talking to the people to create companies like Fundrise.
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 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.