When it comes to investment options, the private real estate market has consistently performed well over time. Unfortunately, average investors often don't have the large amounts of capital needed to invest in real estate, leaving them out of one of the best ways to diversify their investment portfolio.
This Fundrise review will explain how the company is trying to change that dynamic by lowering the barrier to entry. We'll let you know how the platform works and tell you when it makes sense to consider the platform as part of your overall investment strategy.
Fundrise helps beginners get started investing in real estate, with additional options that can help higher net worth individuals diversify their portfolios. The offers found on the platform are ideal for investors with longer time horizons, as not all investment opportunities offer short-term liquidity.
Fundrise Review: The Basics
Fundrise is the first private marketplace platform for real estate investing. Simply put, it's a crowdfunding real estate investment option.
The company invests in commercial and real estate properties such as office buildings, shopping centers and apartment buildings. Occasionally, it also invests in certain residential real estate projects, such as single-family homes and individual rental properties.
Fundrise has two main investment products: eREITS and eFunds.
Fundrise eREITs are similar to traditional real estate investment trusts (REITs), with the big difference that they are not available for purchase on a public exchange. These eREITs contain a combination of debt (i.e., loans to the real estate developer) and equity (i.e., total ownership of the property).
In contrast, Fundrise's electronic funds only contain stocks.
How your investments in eREITs and Fundrise eFunds are allocated depends on your specific investment plan. The company offers goal-based plans that include a startup plan, an additional income plan, a balanced investment plan, and a long-term growth plan. We'll cover this in more detail later in the article (or you can skip that section for now).
Minimum Investment Requirements
Fundrise allows you to invest in real estate as a non-accredited investor. US residents 18 and older can access the Fundrise platform through the Starter Portfolio with an initial investment of just $10.
This is part of what makes the Fundrise platform such an attractive investment opportunity. In the past, the types of real estate investments Fundrise has provided have generally been limited to accredited investors (individuals or companies specifically authorized to invest in assets that are not registered with the SEC).
The requirements to become an accredited investor (as an individual) are quite strict. In general, you must meet one of two requirements.
- Net worth. Your net worth must exceed $1 million, individually or jointly with your spouse.
- Income: Your annual income for the last two years must be more than $200,000 annually individually or $300,000 jointly with your spouse. In addition, you should expect to earn the same amount or more in the current year.
Why are the lows so high? The SEC believes that investors with sufficient assets or income are better able to bear the risks of unregulated investments. In other words, it's a way to protect ordinary people from gambling their money on high-risk properties (or being scammed by scammers).
However, the Jumpstart Our Business Startups Act of 2012 changed federal regulations to open up many new options for unaccredited investors. This is largely due to the rise of crowdfunding platforms like Kickstarter, which has created a realistic and relatively safe way for people to buy businesses and projects with small amounts of money.
Fundrise is the result of that regulatory change.
How You Make Money
As a Fundrise investor, you are not investing in specific real estate projects. Invest in the company's eREITs or eFunds instead. As mentioned above, eFunds contain only equity, while eREITs contain a mix of debt and equity.
You can earn money from your investments in two ways: dividends and appreciation.
Your dividends consist of interest income from rental properties and mortgages. These dividends are calculated based on the total rental and interest income received by Fundrise, not the value of your shares.
Fundrise pays quarterly dividends, which are a great source of passive income. You can have Fundrise transfer your earnings to your bank account or reinvest them in your portfolio using their Auto Invest Dividend Reinvestment Plan (DRIP).
Advanced tip: Fundrise uses a first-in, first-out (FIFO) stock redemption system. So if you decide to reinvest your dividends, it doesn't reset your entire investment holding period each quarter. As you'll learn below, this is important because Fundrise shares held for less than five years carry an early withdrawal penalty.
Real estate not only generates rental income, but also appreciates in value. As the value of the individual properties of an eFund or eREIT increases, so does the net asset value per share of the eFund or eREIT.
For example, let's say you invested $1,000 in an eREIT at the beginning of the year. If your net worth was $1,100 at the end of the year, your account has increased by 10% due to appreciation.
You don't have to sell your shares to make a profit. If Fundrise sells a property that was part of a fund you own, it pays you a certain amount of the proceeds based on the number of shares you own in the fund.
However, the main way to benefit from appreciation is to sell your shares when their net asset value increases.
Debt can also contribute to valuation, albeit to a lesser extent. For example, Fundrise may return a portion of your interest income to the applicable eREIT, increasing the overall value of the eREIT.
How You Take Profits
Keep in mind that Fundrise eREITs and eFunds are not publicly traded, which means your Fundrise investments are less liquid than other investment options. As a result, cashing out your holdings for profit is not as easy as selling stocks.
The period required for an understanding is five years. Fundrise shares that you have held for more than five years can be sold back to Fundrise without an early withdrawal penalty. An exception is the Interval Fund, which has no early withdrawal penalties regardless of how long the shares have been held.
There is a 1% commission on redeeming shares held for less than five years.
Fundrise also limits the number of shares you can redeem at one time (each offering circular details these limits).
For example, Heartland eREIT, which pays a 3.5% dividend and invests in commercial real estate in Austin, Chicago, Dallas, Denver and Houston, limits share redemptions to 5,000 shares or $50,000 per redemption request, whichever is less. is
You can request a redemption at any time, but you must give Fundrise 60 days to process your request. Once that waiting period is over, Fundrise pays your earnings within three to five business days. You can find the expected payment date in the Transactions section of your dashboard.
One important thing to note is that when you sell shares, you will receive their value at the time the order is executed, not at the time the order is placed.
In theory, it is possible to lose a significant amount of money if the share price declines during those 60 days.
Additionally, you are not guaranteed the ability to liquidate your shares. Fundrise reserves the right to further limit its liquidity if too many investors attempt to sell at once. Otherwise, Fundrise would be forced to sell the assets at a steep discount, hurting other shareholders.
Fundrise Auto Invest (DRIP)
Fundrise offers a Dividend Reinvestment Plan, also known as a DRIP, which allows you to automatically reinvest your dividend income into the offerings of your choice.
Reinvesting your dividends allows for compound returns. When you reinvest your dividends, your principal grows, which in turn entitles you to a larger dividend payment next time.
Shares purchased through a car investment must be held for at least five years to avoid the 1% early withdrawal penalty, but electing a DRIP does not reset the five-year holding period for shares you already own.
Fundrise updates real investor performance on its website daily. Here is his story as of July 2022:
This chart plots time-weighted cumulative returns that take into account both appreciation and dividends.
Fundrise Vs. REITs
Let's take a closer look at Fundrise vs. a traditional real estate investment trust (REIT).
A traditional REIT works like this. The REIT owns the real estate asset as a whole, but individual investors own shares in the REIT. Investors then receive dividends from those shares in addition to any potential appreciation in the share price.
Most REITs are publicly traded, making them very liquid investments. It also allows you to place orders and stop orders, which can help protect against a downturn. You can also invest in a REIT fund such as the Vanguard Real Estate ETF (VNQ, whose price trend is shown below).
Publicly traded REITs operate much like publicly traded stocks. Much of the valuation is based on investors' expectations of future performance. Like stocks, their prices rise in good times and fall when investor sentiment is low.
With Fundrise, there is no publicly traded share price, so there is much less short-term price volatility (meaning more stable returns). In fact, as someone who invested with Fundrise at the start of the COVID-19 pandemic, there was no fluctuation.
However, one thing Fundrise did during this period was suspend redemptions and freeze new investments. So, if liquidity is one of your main concerns, you may be better suited for a REIT.
Keep in mind that if you sell when the real estate market crashes, you could take a big loss because the REIT's share price has likely fallen.
Another difference between REITs and Fundrise is their expense ratios.
Vanguard VNQ has an expense ratio of just 0.12%. And at first, it seems much lower than the common Fundrise fee of 1%. But each of the REITs Vanguard invests in also has its own costs. Although they are not included in the ETF's expense ratios, these expenses reduce your returns.
These expenses include the operating expenses of each of the REITs in which Vanguard invests, which may include marketing expenses, financing fees, construction management, executive compensation, and more. In one of the most egregious examples, Simon Property Group's REIT expenses equal 50% of gross income.
Fundrise's advantage is that it cuts out many middlemen, allowing you to invest directly in the property. You can read more about Fundrise's fee structure compared to Vanguard's here.
Another advantage of Fundrise is its size.
The world's largest REITs need to close a lot of big real estate deals to move the needle. This severely limits what they can invest. Fundrise, on the other hand, operates on a much smaller scale and is therefore able to invest in much smaller commercial real estate deals.
These smaller deals typically fetch higher rewards compared to the type of deals in which REITs invest.
Fundrise Account Levels
Fundrise offers five account levels. At each of these levels, investors have access to different options (including different investment “plans,” which we'll cover in the next section).
There is no additional cost to upgrade your account to a higher level. you just need to meet the minimum investment requirements.
The beginner account level, designed for new investors, can be accessed with a deposit of just $10. However, your only investment option at this level is a starter portfolio of about 20 different properties. 50/50 between debt and equity investments.
Beginning investors can upgrade to one of the basic plans (described below) at no additional cost once their Fundrise account reaches $1,000.
This account level gives you access to Fundrise's automatic investments and dividend reinvestment, investment goals, IRA investments, and IPO investments (ie, investing in Fundrise itself).
Note that “IPO” in this case means “Internet Public Offering” and not “Initial Public Offering”. You can learn more about Fundrise's IPO offering here.
With a minimum fundraising investment of $5,000, the basic account level opens up plans for balanced investing, long-term growth and additional income.
Alternatively, mainstream investors can invest directly in individual eREITs, allowing for a greater degree of portfolio diversification and personalization.
With $10,000, a Fundrise investor can upgrade to the Advanced level, at which point they unlock the Plus version of each of the basic plans.
Plus plans follow the same strategy as their respective Core counterparts. However, advanced investors also get access to three growth-focused e-funds, each 100% equity-owned and paying no dividends.
These three foundations are:
- Washington DC eFund
- Los Angeles eFund
- National eFund
Advanced investors can also invest directly in the eFunds.
In the Balanced Investing Plus and Long-Term Growth Plus plans, eFunds make up 30% of the portfolio. In the Supplemental Income Plus plan, they make up 25%.
One of the advantages of these e-funds, which contain more equity than debt, is the tax advantage. You can take a larger depreciation tax deduction. If you decide to invest in an eFund, Fundrise will send you a Form K-1 for taxes in mid-March.
Advanced investors can also request that Fundrise waive fees for 180 days for each new user they refer to the platform. (You can learn more about company fees and penalties in this section.)
Premium is open to investors with a Fundrise investment of at least $100,000. At the time of publication, the only benefit of the Premium level compared to the Advanced level is access to special offers, which are private funds that Fundrise makes available periodically. These funds are typically highly illiquid, specialized equity funds with varying risk, return profiles and time horizons.
Fundrise Investing Plans
As explained above, Fundrise has a starter program for those with as little as a $10 investment. Once you reach $1,000, you can enter the Basic Level and choose additional income, balanced investments and long-term growth.
Supplemental Income Plan
An extra income plan prioritizes income over growth. The portfolio is weighted towards debt investments that pay interest income, but also contains equity investments that provide consistent rental income.
However, growth is not completely excluded. Fundrise works to improve property values, but mainly so they can increase rental income.
Less aggressive investors will find that of the three basic plans, the Permanent Dividend Supplemental Income Plan best suits their needs.
Balanced Investing Plan
A balanced investment between ancillary income and long-term growth, aiming to provide a combination of appreciation and dividend income. This portfolio leans slightly towards debt investments, but has a debt-to-equity ratio of about 50/50.
Balanced investments will be your best option if you want to maximize investment diversification. It generates more income than a supplemental plan without experiencing as much fluctuation in value as you might see in a long-term growth plan.
Long-Term Growth Plan
A long-term growth plan is a growth-oriented strategy. This portfolio is weighted toward equity investments, which are riskier than debt investments but tend to appreciate more.
Therefore, you will receive less dividend income if you invest in this portfolio. Instead, a significant portion of your income will come from the appreciation of the property.
Fundrise says it tries to capture the maximum growth potential by buying before significant cultural or demographic shifts, as well as by gaining insight into emerging neighborhoods. You can then build new townhouses in the locations you predict
A long-term growth plan is more suitable for more aggressive investors such as young investors. Young investors have a long-term horizon, so they can afford more risk if it means higher returns over time.
How Fundrise Chooses Investments
Each real estate that Fundrise adds to one of its eREITs or eFunds must go through a rigorous selection and placement process.
Fundrise begins by delving into the credentials and experience of the sponsor, which is the person or company that acquires and manages the real estate that Fundrise is seeking to add to its portfolio.
Fundrise looks at a backer's finances and credit history, but they also want backers with a strong track record.
In general, Fundrise looks for companies with large capitalization and the ability to perform well in key US markets.
Initial Project Due Diligence
If a sponsor passes the first step, Fundrise evaluates the sponsor's specific real estate project to make sure it meets several criteria. He reviews each project from a very conservative perspective, making pessimistic projections for the worst-case scenario.
Fundrise then proceeds with the placement if it believes these valuations are good enough.
Once Fundrise determines that the sponsor and real estate project meet their requirements, the placement process begins. The underwriter takes a close look at the project to see if its potential risks and returns match what Fundrise is looking for, seeing if the project passes 350 data points on its underwriting checklist.
The underwriter then presents their findings to the Fundrise Investment Committee.
The Investment Committee's job is to consider the potential risks and downsides of undertaking a project, and to determine whether those risks are worth taking. In addition, the committee considers ways to reduce or eliminate risks where possible.
Finally, Fundrise is moving into the closing process. When you close, try to negotiate other rights that may protect your investment, such as foreclosure rights.
From time to time, Fundrise learns new information about a particular project during the closing process. If he gets more information that makes his original analysis moot, he'll still get out of the deal.
Fundrise And IRAs
IRAs allow you to invest money in a tax-efficient way. Traditional IRAs generally only allow for stocks, bonds, mutual funds, and similar investments. To invest in real estate, you must have a “self-directed” IRA (IRAs that allow you to invest in assets prohibited by regular IRAs).
Fortunately, Fundrise investors have access to self-directed IRAs through Fundrise partner Millennium Trust Company.
Fundrise Fees And Penalties
Traditional IRAs. Contributions are made before taxes, while withdrawals are taxed as ordinary income.
IRA Roth. Contributions are made from after-tax income, but withdrawals are tax-free.
SEP IRA. SEP IRAs are designed for small business owners and self-employed individuals. Contributions are made before taxes, while withdrawals are taxed as ordinary income.
IRA accounts are not compatible with eFunds (eREITs only). You can invest your IRA directly into an eREIT or one of Fundrise's programs.
Further reading: Roth v. Traditional IRAs. which one is right for you?
Fundrise Fees And Penalties
Fundrise charges a total of 1% fees on your investment portfolio. This 1% figure comes from two separate fees: an advisory fee and an asset management fee.
Fundrise charges a 0.15% advisory fee to manage your investment portfolio as well as provide the Fundrise eDirect investment platform. Compared to traditional services that tend to charge between 0.25% and 1.45% per year, Fundrise keeps the advisory fee low.
In addition, Fundrise charges an annual asset management fee of 0.85%.
Fundrise does not charge commissions or transaction fees, nor does it charge you for features like the DRIP plan.
However, there are some other fees to be aware of.
Development and liquidation commissions. Fundrise reserves the right to charge development and settlement fees, but says it rarely does. Fundrise collects those fees to cover the costs of managing the development of homes for sale.
IRA payment. Millennium Trust Company charges $125 a year to administer the IRA.
Origination/acquisition fee. Origination/acquisition fees allow Fundrise to acquire new real estate for its eREITs and eFunds. Fundrise charges the borrower a 0-2% commission on the purchase price of new investments. At the foundation level, Fundrise charges investors 0%.
Four Benefits Of Investing With Fundrise
There are several reasons why investors might want to check out Fundrise.
- This is an easy way to learn about the intimidating field of real estate investing, a proven strategy that has helped many people build great fortunes.
- Dividend income is paid quarterly.
- It allows you to participate without a lot of money. Fundrise is one of the few crowdfunding real estate investment options available if you are not an accredited investor.
You can invest in an IRA account. Your dividends will be taxable, but if you roll them over to a Fundrise IRA, you'll get a tax shelter.
The Three Biggest Disadvantages Of Fundrise
- Lack of liquidity. Like any investment vehicle, Fundrise has its drawbacks. The biggest one is the lack of liquidity. Fundrise is illiquid compared to a public REIT. With Fundrise, you won't have immediate access to your money if something goes wrong in your life and you need to cash out your investment quickly. Considering this, it should be considered as a long-term investment.
- The possibility of losing money by selling your shares. Because there is a 60-day delay between the time you request to sell your shares and the time the order is processed, you may suffer a loss if the value of your investment declines during that window.
- It did not survive a crash like the one in 2008. Since open collaboration platforms didn't exist during the housing crash of 2008, we don't have any experience to draw on to show how a company like Fundrise would perform in another crowdsourcing event. event “black swan”.
Who Should Invest In Fundrise
Fundrise is not the right investment option for everyone. That's not because it's not a good place to park your money and watch it grow, but because there are a few other basics you should consider before adding this to your portfolio.
Let's see who should consider investing in Fundrise.
- Those who have a defined emergency fund. Because you'll need access to fully liquid cash in case of an emergency, you should make sure you have enough emergency savings before investing in Fundrise.
- Those whose debt is paid with high interest. It doesn't make financial sense to start investing in vehicles like Fundrise if you still have high-interest credit card debt. The rate of return you earn with Fundrise will be less than what you pay on your credit card balance. Before you start investing with Fundrise, you must pay off your credit cards and any other consumer debt (except your mortgage).
- Those who max out their 401(k). First, you must max out your 401(k) for the company's total match. If you don't, you're leaving free money on the table (which is never a good strategy for building wealth).
- Those who want to use Fundrise as a learning tool. Where Fundrise really shines is by providing motivated individuals with a relatively safe way to learn and hone their craft as a real estate investor.
Those looking to diversify their IRA or taxable investments.
- There are a number of real estate platforms that have followed in Fundrise's footsteps.
Some worth noting include:
- Arrive at home. Arrival focuses on investing in single family homes rather than commercial real estate and debt. Read our Arriving Homes review to learn more.
Cadre.is an alternative for accredited investors looking to diversify their portfolio into real estate. Minimums start at $50,000. Read our scope review to learn more.
Crowd Street. For accredited investors, CrowdStreet provides the opportunity to invest directly in specific commercial real estate projects in partnership with developers in the US. The minimum amount to invest in any single project is $25,000. Read our CrowdStreet review to learn more.
DiversyFund. It allows non-accredited investors to buy multi-unit residential real estate with investments as low as $500, but the platform has one major drawback: there is no liquidity as early withdrawals are not allowed and there is no market to sell your shares. That means your funds are locked in for a target period of at least five years. Additionally, the investment does not pay cash dividends. Read our DiversyFund review to learn more.
Is Fundrise safe?
Yes, Fundrise is safe in the sense that it is a legitimate company with over a billion dollars in assets. However, fundraising assets come with risks. Please note that your investment is backed by physical real estate, so in the event of a default, your investment may not be completely lost.
Can you buy shares of Fundrise stock?
Yes. Fundrise's IPO (“Internet IPO”) is available to Fundrise customers with a Basic account or higher. Users can invest in the IPO directly through the platform. Admission is limited and there is currently a waiting list.
How much does Fundrise pay in dividends?
Fundrise pays quarterly dividends that vary depending on what's invested. Annual dividend payments for 2021 ranged from approximately 1.5% to approximately 6.5%.
Who owns Fundrise?
Although Fundrise allows customers to purchase shares in a company, it is not a true mutual company. The company is owned by Rise Companies Corp. Please read their offering circular for more information on their corporate structure.
Fundrise Review: Final Thoughts
The first question with Fundrise is that you plan to invest for at least five years. While a 1% early redemption fee may seem small, a publicly traded REIT doesn't have that fee, and neither do non-real estate investments like a stock index fund.
For non-accredited investors, I like Fundrise as a way to diversify a portfolio while learning about real estate investing. Its low initial investment (only $10) allows the non-accredited investor to invest in the real estate market with little money without jeopardizing their savings.
There are many good options for those who decide to increase their exposure to real estate assets as they become more experienced. If you're interested in real estate and think you might get into it at some point in the future, this can be a great way to learn the language and methodology in a fairly safe way. Because Fundrise selects properties, you're less likely to make a bad decision or get scammed.
Additionally, their detailed annual reports and circulars are also a great way to learn how to understand potential offers.
For higher net worth investors, Fundrise is a valuable option for those looking to earn regular dividends or diversify their portfolios. In particular, a traditional 60/40 portfolio can diversify their bond allocation with some real estate where Fundrise can fit.
One thing that makes Fundrise stand out compared to many other alternatives is that you don't invest in individual properties and projects. This diversification reduces your risk compared to alternative real estate platforms where you invest directly in a specific project.
At the same time, it is not suitable for everyone. Although real estate is one of the best alternative investment classes and has a strong track record of returns, I would still recommend that most people put most of their investments in index funds (which have consistently proven to be among the best investments, safer and more). effective). opportunities).