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Fundrise is a new investing platform that allows everyday investors to invest in private commercial and residential real estate projects. By combining technology and the release of new regulations, Fundrise has been able to establish a platform that differs in many ways compared to traditional real estate investments.
Through Fundrise, you can invest in two different investments known as eREITs and eFunds. To learn more about eREITs read our article here.
Fundrise eREITs are designed to provide income to the investor, while eFunds are designed for growth. More details on that later!
What Is The Fundrise eFund?
Fundrise eFunds consist of investments with the objective of providing a growth opportunity to the investor. This is possible by buying existing real estate, renovating and later selling the property for a higher price and recognizing a capital gain.
Fundrise currently offers 3 types of eFunds based on their geographic location: Los Angeles eFund, Washington DC eFund, and the National eFund. The focus is primarily on single family homes along with townhomes and condominiums located in growing and developing metropolitan areas.
Fundrise eFund VS eREIT
Fundrise builds the eFunds using a slightly different structure compared to eREITs. In an eFund there is no minimum requirement for return of earnings to shareholders every year in the form of dividends. A REIT is required to pay out 90% of the taxable earnings to the investors in the form of dividends. It is important to understand the goal of the Fundrise eFund is to recognize capital gains over time, so this traditional REIT model does not make sense for this application. Fundrise is not investing in properties with the goal of cash flow through the eFunds. If you are interested in that, check out the Fundrise eREITs.
Since eFunds are designed for growth rather than income, they are set up as partnerships which are slightly more flexible to manage than REITs. In a partnership, your share of the net income that is generated by the eFund will be reported to you on a K-1. At the end of the year, you will report earnings from the K-1 on your tax return.
Partnership earnings are generally taxed as ordinary income to the taxpayer. Any capital gains in the partnership will be taxed at capital gain tax rates to individuals. Consult your tax advisor for questions about your specific tax situation.
Fundrise eFunds offer diversified investments in residential real estate. These investments are difficult for individuals to construct on their own and would require millions of dollars of start up capital. By setting up partnerships, Fundrise can leverage investor capital and participate in growing real estate markets throughout the US.
One of the main goals of Fundrise eFund investments is to participate in growing real estate markets. They do this by identifying specific areas that are showing a high demand for affordable housing. Most of the cities Fundrise focuses on are metro areas with high affordability gaps. This is the gap between rental housing costs and the average monthly income of residents. Fundrise sets the goal to provide more housing options in these high demand areas.
Fundrise eFund Investment Strategy
Fundrise has a strategic investment approach to their eFunds. They aim to buy residential real estate or land in areas of high growth; specifically areas with high likelihood of first time home buyers and growth in younger demographics. They then renovate or develop entirely new projects to increase the value of their land or real estate acquisition. Once they have completed redevelopment of the area, Fundrise will sell the property realizing any profits or losses. Investors earn a return through asset appreciation, not rental income or cash flow.
Currently, Fundrise offers 3 different eFunds:
The National eFund plans to invest in residential housing in major metropolitan areas throughout the US. This fund strategizes in targeting first time home buyers and areas with high potential for development. The National eFund plans for construction of single family homes, townhomes, and condos. This eFund plans to acquire land and other real estate in areas of the US that are not being sponsored by another eFund. In LA for example, this eFund aims for single family renovations and rentals where the LA eFund targets new housing development.
Washington DC eFund
The Washington DC eFund looks to purchase land for development in the metropolitan areas of Washington DC. Like the other eFunds, this fund aims to develop single family homes, townhomes, and condominiums in high growth areas. This fund has a main focus on first time home buyers and areas of DC with high affordability gaps.
Los Angeles eFund
The Los Angeles eFund aims to purchase land in the metropolitan areas of LA for the development of residential housing. The main focus is on the construction of single family homes, townhomes, and condominiums in high growth neighborhoods. The LA eFUND targets areas with high potential for first time home buyers and younger demographics.