Investing Simple is affiliated with Fundrise and LendingClub. This relationship does not influence our opinion of these platforms.
As investors, we are always trying to diversify our portfolios. Diversification can be a key factor in long term success as an investor. Many of us tend to diversify across core asset classes such as stocks and bonds. For those of us looking for alternative investments to the stock market, there are a variety of different options. In this article, we are going to review and compare two very popular alternative investments; Fundrise and LendingClub.
What Is Fundrise?
Fundrise is a new investing platform that allows everyday investors to invest in private real estate projects traditionally limited to high net worth individuals or accredited investors. Using the Fundrise real estate investing platform, you have the ability to have investment exposure to both commercial and residential real estate.
Here is our full review of the Fundrise investment platform.
How Does Fundrise Work?
Fundrise is a crowdfunded real estate investing platform. Similar to real estate investment trusts or partnerships, all the investors pool their money together to purchase real estate assets. These assets then produce income and/or growth and historically have provided investors with a positive return on their portion of the investment over time.
Real estate is traditionally a high barrier to entry investment, but crowdfunded real estate platforms like Fundrise have allowed average retail investors to get exposure to this asset class. You can get started with Fundrise with as little as $500!
Fundrise takes a new approach to the traditional Real Estate Investment Trust (REIT) structure. Through the use of technology, Fundrise makes it easy to fund your account, check in on projects and choose your portfolio. By leveraging a new regulation, Fundrise gives the average investor access to commercial and residential real estate with as little as $500.
The Fundrise platform offers a variety of benefits such as low account minimums and quarterly redemption periods. However, investors should understand the liquidity and time horizon of an investment in the Fundrise platform. We will discuss this in further detail throughout the article.
Fundrise offers plans to invest in different types of real estate such as income producing rental properties or growth oriented real estate developments. Fundrise offers different investment plans based on your investment objectives. You can keep track of Fundrise real estate projects within your account. Fundrise will also notify you about major developments with their projects.
The main investment objectives of Fundrise are to generate revenue from income producing properties as well as buying and selling real estate in thriving markets. As a Fundrise investor, you can choose whether you want to be in a growth-oriented portfolio or income-oriented portfolio. Income from rental payments and proceeds from flips are passed along to Fundrise investors in the form of dividend payments or distributions. In exchange, Fundrise collects a 1% fee as the investment manager.
It is important to understand that Fundrise is a private real estate investment. The Fundrise eREITs and eFunds can only be bought and sold through this platform. They are not publicly traded on a stock exchange like a publicly traded REIT.
Fundrise Investment Options And Portfolios
Fundrise allows you to choose from four professionally built real estate portfolios based on your risk and investment preferences. Some portfolios are geared towards cash flow and others focused on the growth of the underlying assets. If you invest the minimum of $500, you will be placed in the starter portfolio. The other three advanced plans require a minimum investment of $1,000.
Starter Portfolio: This portfolio is designed for new investors who would like to give Fundrise a shot. The minimum account requirement is only $500 to begin investing. This portfolio consists of 50% growth and 50% income-oriented holdings. If you want to upgrade to an advanced plan down the road, it is completely free!
Supplemental Income: This portfolio is geared toward income-producing real estate. Investors will earn returns primarily through dividends from cash flow producing real estate. Dividends are generated through rental and interest payments in proportion to your share of the fund.
Balanced Investing: This portfolio offers a blend of 50% growth and 50% income-oriented investments. The balanced investing portfolio invests in a blend of eREITs and eFunds offered by Fundrise. The goal for this portfolio is for a balance of income-generating real estate, as well as real estate that is appreciating in value.
Long Term Growth: The goal of this portfolio is to generate returns primarily from asset appreciation. This portfolio aims to purchase high growth potential real estate and generate returns mostly from the sale of the underlying properties. This includes buying property and performing renovations in order to sell the asset for a gain later.
Fundrise Terminology: eREIT And eFund
Each portfolio consists of eREITs and eFunds designed by Fundrise. These investments are set up as real estate investment trusts or partnerships and they are managed by Fundrise.
An eREIT will produce income for your portfolio in the form of dividends. Dividends are earned from the rent payments from the underlying apartment and commercial leases owned within the eREIT as well as interest payments from underlying real estate debt investments owned by Fundrise.
An eFund is a partnership created by Fundrise to be treated differently for tax reasons and to provide greater investment flexibility. Partnerships have the advantage of avoiding the double taxation of normal C-Corps. eFunds are designed in a similar way to eREITs where there is a pool of real estate investments split into shares and sold to investors. Where eREITs are designed to generate income, eFunds are geared towards growth.
Fundrise Investment Liquidity
Fundrise uses the funds you invest to purchase real estate. For this reason, there is a 60 day waiting period for withdrawing funds. There are also quarterly redemption periods.
This is why it is important to understand what you are investing in when you invest with Fundrise. Investors should aim for a long-term investment of at least 5 years in duration when investing with Fundrise. Real estate is not an investment with high liquidity and it is not for everyone!
It is important that investors understand that liquidity and distributions are never guaranteed.
Fundrise Historical Returns
Past performance does not guarantee future returns. All investing involves risk, including potential loss of principle.
Fundrise charges a fee of 1% per year. They do not charge any other hidden fees and there is no front load fee with Fundrise. The returns shown above are the returns after Fundrise collects the 1% fee.
Pros Of Investing With Fundrise
- The minimum to get started with the Starter Portfolio is $500.
- Small retail investors are able to access private real estate investments.
- Since this is a non traded REIT, it may be less correlated with the overall market.
- Fundrise has a transparent fee of 1% per year.
- This investment allows you to earn compound interest, with the option of automatically reinvesting quarterly dividends using a drip (Dividend Reinvestment Plan).
- Fundrise does not have a minimum net worth or income requirement like most private investment funds do.
- This is a 100% passive real estate investment.
- Fundrise gives you diversified exposure to real estate.
- Fundrise supports retirement accounts.
- Monthly redemption periods eliminate the temptation for panic selling.
Cons Of Investing With Fundrise
- Liquidity is never guaranteed. During a downturn, liquidity may not be available as many investors will rush to sell and buyers may be few and far between.
- Distributions (dividends) are never guaranteed.
- Distributions (dividends) are taxed as ordinary income rather than capital gain rates.
- Fundrise has a limited track record of four years and not a long investment history.
Fundrise: The Bottom Line
Fundrise may be a great platform for passive investors who are looking to gain access to private real estate markets. Fundrise is also a good option for investors who are looking to diversify asset classes and have less correlation to the overall stock market.
Since you can only liquidate your positions quarterly, investors may be less tempted to actively trade in and out of positions. You can also automate your dividend reinvestment plan, allowing compound interest to build up in your account.
In most cases, Fundrise is best for investors with a minimum 5 year time horizon. Real estate is not a highly liquid investment and inexperienced investors need to take this into consideration. While Fundrise does offer a 90 day satisfaction guarantee, you should not invest if you have a short-term investing mentality.
Click here to get started with Fundrise!
What Is LendingClub?
LendingClub is a peer to peer lending platform that allows investors to earn interest in return for lending money to borrowers on the platform. You can choose which type of lenders to lend to and earn interest on a monthly basis.
Here is our full review of the LendingClub investment platform.
What Is Peer To Peer Lending?
Peer to peer lending takes a modern approach to the traditional bank loan. Traditional lending has been reserved for the banks for hundreds of years. Now, investors can get rid of the middleman and lend directly to borrowers. This allows investors to fund loans and earn principle and interest in return. It also allows borrowers to take out loans and make monthly payments on those loans. LendingClub acts as the exchange; its’ purpose is to connect lenders and borrowers. By enabling this mutually beneficial relationship, and creating the note structure, LendingClub collects a 1% investment management fee on any interest payment received by an investor.
LendingClub Note Structure
LendingClub offers a wide variety of notes on their platform. Each LendingClub note is identified by its relative risk to the investor and rated from A to E. Notes rated A are of the highest quality and E being the lowest quality. A note’s risk is identified by a set of criteria such as credit score, debt to income ratios, credit history and activity of the borrower. The higher the risk, the higher the interest rate on the note. Therefore investors who take higher risk and invest in E grade notes will have the highest interest rates. Notes graded E also have the highest risk of losing part, if not all, of their investment.
It is recommended by LendingClub to invest in a number of different notes in order to diversify your exposure to a variety of different borrowers and lower your risk. We all have heard the saying, “don’t put all your eggs in one basket.” Investors may choose to invest in a variety of different notes with different risk aiming to lower the volatility and overall risk of their portfolio. If you are curious about the average returns on LendingClub, check out this article.
LendingClub Investing Strategies
When choosing the specific notes you would like to invest in, you have different options for investment strategies. LendingClub offers both manual and automated investments on their platform. You have the ability to manually select specific notes and perform any due diligence before investing in a single note. This is a good option for investors that are more hands on and would like to implement their own unique investment style. This manual investment strategy will allow you to hand pick each note.
LendingClub also offers automated investing on their platform. You will select your investment criteria and risk tolerance and LendingClub will automatically purchase notes on your behalf. This saves the investor time and applies a consistent investment approach across your portfolio. This approach is geared towards the passive investor.
Click here to get started with LendingClub as an Investor!
LendingClub Investment Time Horizon
LendingClub recommends investors plan on holding their investments until maturity. Currently, LendingClub offers two time horizons for their notes; 36 months and 60 months. Because there is greater risk in notes that have longer maturities, the interest rates are slightly higher for 60-month notes compared to 36-month notes.
You have the option to sell your notes before maturity on a secondary market, but liquidity is never guaranteed. That being said, you can buy and sell LendingClub notes to other investors on the Folio investing platform. This provides liquidity to investors and allows more flexible investing.
LendingClub Borrower Account Fees
There is no application fee for LendingClub, however there are often origination fees for borrowers. Borrows must pay up to 5% of the loan balance on the origination of the loan. These fees vary by the loan type and grade. Check with LendingClub to understand what origination fees may be involved. Investors do not pay these origination fees.
LendingClub Investor Account Fees
LendingClub has certain transaction fees when investing on their platform. There are no fees when purchasing notes, however there is a 1% transaction fee whenever you receive payment from a borrower.
LendingClub also has fees when performing transactions on the Folio platform, the secondary market where you can sell notes you own. There is a 1% fee for selling any notes on Folio.
LendingClub IRA accounts have a $100 annual fee. LendingClub will pay your IRA maintenance fee on your behalf if in the first year you maintain a balance of at least $5,000 in LendingClub notes. In subsequent years you must maintain at least $10,000 in LendingClub notes to have the fee waived.
Pros Of Investing With LendingClub
- LendingClub offers an alternative investment that may be less correlated to the stock market.
- Lenders can achieve diversification by investing in a variety of different notes.
- You can set up automated investing on LendingClub.
- Exposure to an asset traditionally reserved for the banks.
Cons Of Investing With LendingClub
- LendingClub charges a 1% fee for every payment received by an investor.
- All LendingClub loans are unsecured, meaning there is a greater risk for lenders in the case of a default by a borrower.
- All investment as at risk. Investors have no FDIC protection or guarantees of investment returns.
- Any interest earned on LendingClub is taxed as ordinary income and not capital gains tax rates.
LendingClub: The Bottom Line
LendingClub allows investors to diversify by investing in an asset class traditionally reserved for banks. Because LendingClub is a private investment, shares or notes are not traded on a major exchange. As a result, this asset class may be less correlated to the overall stock market but may be less liquid if you’d like to sell.
One negative of investing in interest bearing assets such as peer to peer lending is that all interest is taxed as ordinary income and not at capital gains tax rates. If you plan on investing in LendingClub, you may want to consider investing in a tax sheltered retirement account.
Click here to get started with LendingClub as an Investor!
Fundrise vs LendingClub
Alternative investments to the traditional stock and bond portfolio may be a good option for an investor trying to diversify their holdings. Both LendingClub and Fundrise can be good alternatives and provide investment exposure to different types of assets. In the end, you should be conscious of the risks and opportunities with each investment option.
LendingClub gives you the option to lend money to a variety of borrowers and earn interest on a monthly basis.
Fundrise, on the other hand, is a good option to gain exposure to the commercial and residential real estate markets with a small initial investment.
One of the core differences between Fundrise and LendingClub is the historical returns. Based on historical performance, returns on Fundrise range from 8% to 12% per year. On the other hand, returns on LendingClub range from 6% to 8% per year. It is important to remember that both Fundrise and LendingClub have a limited operating history. We hope to see returns like this going forward, but it is never guaranteed.
Another key difference is collateral. Through LendingClub, you are investing in unsecured debt like personal or medical loans. Through Fundrise, you are investing in secured debt where the real estate serves as collateral. If you are not comfortable with investing in unsecured debt, peer to peer lending is not for you!
Both LendingClub and Fundrise collect a 1% fee for managing your investments. The minimum to get started with Fundrise is $500 while the minimum to get started with LendingClub is $1,000.