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It seems like the American dream today is to make money by investing in real estate. I am sure we all have that rich uncle or family member that made a fortune by investing in real estate. One of the biggest obstacles to achieving this dream is the amount of money required to buy a single piece of real estate. The upfront cost for an individual to purchase a piece of residential or commercial real estate can be astronomical. This creates high barriers to entry to many real estate markets.
The typical down payment on a home is 20%. If this is a commercial loan for the purpose of renting it out or flipping it, this down payment could be as high as 25%. If you are looking at a $200,000 property, you could be looking at a $50,000 down payment without factoring in closing costs!
On top of that, home prices are on the rise. It is getting increasingly more difficult to invest in physical real estate.
There are plenty of people that are in their 20’s that want to invest in real estate, but they are unable to save the thousands or even tens of thousands of dollars required to get the ball rolling. The good news is, there are other ways to invest in real estate outside of direct ownership.
The Publicly Traded REIT
Traditionally, investors have been able to overcome these barriers by investing in REITs (real estate investment trusts) or other investment vehicles offered on public exchanges.
These investment vehicles are large pools of real estate split up into millions of shares and sold to hundreds or thousands of investors. These products allow common everyday investors to gain access to real estate markets.
This video provides a great explanation of what a REIT is.
The downside of this publicly traded real estate investment is that these products traditionally have high upfront fees and you may need a minimum net worth or income to participate in the investment. Another downside to this is a bit more complicated, but it is worth explaining. These REITs trade on a public exchange like the NYSE and NASDAQ. They are bought and sold just like a stock.
One way that investors look to achieve diversification is by investing in different asset classes. Typically, these are assets like stocks, bonds, real estate and even precious metals. While publicly traded REITs offer the ability to easily diversify asset classes and own real estate, these investments are heavily correlated with the overall market.
Generally speaking, if the markets are doing well the publicly traded REIT investments are as well. If the markets are performing poorly, the publicly traded REIT investments are as well. The point of investing in different asset classes is to have assets performing in different ways at different times. Maybe the stocks in your portfolio are performing poorly, but the value of the gold in your safe is soaring.
Consider the example above. On the left is a publicly traded Vanguard REIT and on the right is the S&P 500. In January and February of 2018, there was turmoil in the market and a broad market correction took place. As you can see, a correction also took place with the Vanguard REIT. While it is not identical, the performance of these two investments is very similar. This defeats the purpose of asset diversification, meaning the publicly traded REIT is not the perfect solution to our real estate problem mentioned above.
Fundrise Real Estate Investing Platform
One of these new real estate investment options is Fundrise. This is a new platform for investing in real estate that was founded in 2010. Fundrise is a new online investing platform that gives everyday investors the power to invest in commercial and residential real estate at a very low cost. The minimum investment to get started with Fundrise is just $500.
Fundrise offers investment 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.
Fundrise has significantly lowered the barriers to entry for real estate investment and offered an interesting alternative to the publicly traded REIT.
We will be explaining how Fundrise is different shortly.
Fundrise pools money from investors and separates the investments into different plans based on your investment objective. You can invest in a growth oriented plan, an income oriented plan or a blended plan. Fundrise takes this money and invests it in a variety of different real estate projects. This could be new construction or renovation of existing real estate.
Take the Charlotte, NC townhome renovation project for example. This is a renovation project taken on by Fundrise where they will be modernizing 46 townhomes in a desirable location in North Carolina. These townhomes have a dated look, and they will all look like the newly renovated home on the right upon completion.
Each project has a website where you can learn about the project as well as the investment opportunity. This investment has a Debt Rating of C, giving it a higher projected return. The Projected Return of this project is 10% at a Total Investment of just over $4.1 million. Collectively, Fundrise investors have funded this renovation.
Fundrise Investment Vehicles
Fundrise allows you to invest through two financial instruments that they invented; the eREIT and the eFund. The short explanation of these investments is that they are non traded, meaning they are not available on a public exchange like a traditional publicly traded REIT. The eREIT and eFund are also investments you purchase directly from Fundrise. This cuts out the middleman and reduces the overall fees.
If you want to dive a bit deeper, here is more information!
Fundrise eREIT: An electronic non traded REIT built to provide income to the investor.
eREITs are created by Fundrise and have no broker fees and no front end load fees. Many traditional REITs have 7-15% front end load. Fundrise charges a 1% asset management fee annually (0.85% annual asset management fee and 0.15% annual investment advisory fee).
Take the Delaware Global Real Estate Fund for example. This investment has a front load fee of 5.75% and an expense ratio of 1.4%!
eREITs are non traded REITs offered by Fundrise. Non traded REITs are highly illiquid, so understand what you are investing in before you decide to commit.
We will be talking more about investment liquidity later on in this review.
Fundrise eFund: A professional portfolio of real estate assets.
An eFund is setup as a partnership instead of a publicly traded corporation. This allows the fund to avoid the double taxation that corporations are subject to. You will pay tax on capital gains and dividends as they are incurred. Where eREITs are designed for income, eFunds are designed for growth.
eFunds also cut out the broker in the transaction and helps maximize the investors return on their capital. eFunds also have quarterly redemption periods, so you will not be able to liquidate your position on an immediate basis.
Fundrise Fees Explained
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.
For more detailed information on Fundrise fees, keep reading!
One of the biggest advantages to investing with Fundrise is the extremely low fee structure compared to other real estate investment trusts. As we mentioned above, a front load of 7 to 15% is not uncommon in the REIT industry.
If you were investing $10,000 in a REIT with a front load of 15%, you would be paying $1,500 in fees on Day 1!
Traditionally, investors have been able to gain access to some of these real estate markets using non traded REITs. These are real estate investment trusts that are not offered on public exchanges. These non traded REITs carry the same benefit discussed above, having less correlation with the overall stock market.
To invest in a non traded REIT, you must purchase it through a broker or investment advisor. Most brokers will charge 5 to 8% commission on the total amount invested. Be careful when investing in non traded REITs through a broker or investment advisor. Often times, they will tell you they are not being paid any commission. Ask a lot of questions and understand the likelihood of hidden fees!
Beyond the front load fee associated with a non traded REIT, you also pay an annual management fee. This is typically around 1%, and this is the same fee charged by Fundrise. When you invest with Fundrise, you pay a 0.85% annual asset management fee and a 0.15% annual investment advisory fee for a total of just 1%. There are no other hidden fees with Fundrise and there is no front load fee.
Is it Safe to Invest in Fundrise?
Fundrise files with the SEC and is audited on an annual basis. These financial statement audits are disclosed on the Form 1-K. Beyond that, Fundrise offers a 90 day satisfaction guarantee. Some limitations do apply, but if you are unhappy with your investment in the first 90 days, Fundrise will buy it back at the original price you paid. Fundrise is for United States investors only, however international investors can invest through some US based entities. The minimum investment to get started with is $500.
Fundrise Investment Liquidity Explained
An asset has high liquidity if it can quickly and easily be converted into cash. Assets like stocks are highly liquid, as you can sell them on a stock exchange in a matter of seconds. Real estate is inherently a low liquidity investment. Real estate does not change hands as easily as a stock. It is important to understand that liquidity is never guaranteed when investing in Fundrise.
When Fundrise invests in a real estate project, it is typically a long term investment of five years or more. It is important to understand that as an investor, you should be ready to leave that money invested for the long term. Fundrise has stated this platform is for investors who have a minimum time horizon of five years. If you are a short term investor, Fundrise is not for you!
Fundrise offers a monthly redemption plan where investors have the opportunity to cash out each month following a minimum 60 day waiting period. It is important to understand however that liquidity is never guaranteed.
In order for Fundrise to generate the greatest return for investors, they need to remain as fully invested as possible. If Fundrise held 20% of the fund in cash for redemption, that means 20% of the fund is earning a return of 0% or close to it. This is referred to as the cash drag of an investment fund. Idle cash is not desired when it comes to an investment fund. In order to achieve high returns and keep investors satisfied, Fundrise remains as fully invested as possible.
Fundrise Investment Options
Fundrise offers one plan for beginners who invest a minimum of $500 and three plans for advanced investors who invest a minimum of $1,000.
|Investment Plan||Minimum Investment||Portfolio||Anticipated Return|
|Starter||$500||50% Growth, 50% Income||Not Disclosed|
|Supplemental Income||$1,000||Cash flow producing real estate focused on dividends||8.5 to 10.3%|
|Balanced Investing||$1,000||Blend of both income and growth producing real estate||8 to 11.7%|
|Long Term Growth||$1,000||Returns are primarily recognized by asset appreciation||7.7 to 12.5%|
How To Make Money With Fundrise
Fundrise is a 100% passive investment. You simply invest your cash and it is immediately put to work. With Fundrise, you make money in one of two ways; asset appreciation and dividends or distributions.
Your eREITs within Fundrise will pay quarterly dividends or what Fundrise calls distributions. These dividends consist of interest payments from loans and rental payments. The amount of your investment in the entire eREIT determines the amount of your dividend payout.
If you buy into an eREIT, the first quarter your dividend will be prorated based on the amount of days you owned it during that quarter. After that, you will receive your dividend based on the amount of share ownership you have in the eREIT.
Investors can expect to receive dividends from Fundrise on a quarterly basis, but it is important to remember that these dividends are never guaranteed. Just like with the stock market, dividend payments are never guaranteed. The payout frequency and amount can be increased, decreased or the dividend can be canceled at any time.
In terms of asset appreciation, Fundrise will purchase properties with a high potential to grow in value. Often times this is a property in a booming area where population growth is exceeding the national average. The goal is to buy property ahead of a major trend and capitalize on the growth of the neighborhood. Once a property is acquired, Fundrise will often renovate the real estate and make improvements to increase the sale price and the value of the property. The returns are primarily realized upon the sale of the property.
Consider the North Los Angeles Renovation project. The city of Los Angels has the nation’s second largest economy and a massive housing shortage. On top of that, environmental and zoning regulations make it difficult to build more density. There is a massive shortage of housing in this booming area, and Fundrise has identified this as a huge opportunity. This $3.8 million renovation of a Los Angeles apartment building is expected to return 8.7% to investors. This is a perfect example of a growth oriented strategy where a return is generated primarily through asset appreciation.
If you’d like to receive mostly dividends in Fundrise, your best bet is to invest in the Supplemental Income Plan which aims to maximize income through dividends. Fundrise also offers a Balanced Investing Plan which aims to give you a mix of asset appreciation and dividend income.
Reinvesting Fundrise Distributions (IMPORTANT!)
All distributions or dividends from Fundrise will automatically be deposited into your bank account on file unless you opt in to the dividend reinvestment program. If you want to maximize your returns with Fundrise and allow your dividends to compound, you need to opt in to the dividend reinvestment program or DRIP. Fundrise provides this dividend reinvestment program free of charge as a courtesy for investors.
Compound interest is the effect of earning interest on top of your interest. By reinvesting dividends you are able to earn more dividends because you have a larger investment. Over time, the compounding of these dividends will result in exponential growth of your portfolio.
Consider the above Fundrise portfolio. This is an investment of $1,000 in the Balanced Investing Plan, so returns will be generated from both income producing properties and asset appreciation. Earnings to date is $6.42 and the next distribution is expected in mid October of 2018. On the right, you can see that dividend reinvestment is enabled.
Fundrise Historical Performance
Past performance does not guarantee future returns. All investing involves risk, including potential loss of principle.
The Fundrise Supplemental Income Plan aims to generate returns through quarterly dividends and it is less geared toward asset appreciation. The money invested in this plan is invested in income producing real estate and rental income is distributed to investors in the form of dividend payments or distributions.
The Fundrise Balanced Investing Plan generates returns through both dividends and asset appreciation. The money invested in this plan is invested in both income producing real estate and renovation projects.
The Fundrise Long Term Growth Plan generates returns through asset appreciation and it is less geared toward income producing real estate. The money invested in this plan is invested in real estate renovation projects where the majority of the returns are recognized when the property is sold.
Pros of Investing in Fundrise
- The minimum to get started with the Starter Portfolio is $500
- Since this is a non traded REIT, it is less correlated with the overall market
- Small retail investors are able to access private real estate investments
- Fundrise has a transparent fee of 1% per year
- Fundrise does not have a minimum net worth or income requirement like most private investment funds do
- Fundrise gives you diversified exposure to real estate
- This investment allows you to earn compound interest, with the option of automatically reinvesting quarterly dividends
- Fundrise supports some retirement accounts
- This is a 100% passive real estate investment
- Monthly redemption periods eliminate the temptation for panic selling
Cons of Investing in Fundrise
- Liquidity is never guaranteed
- Distributions (dividends) are never guaranteed
- Distributions (dividends) are taxed as ordinary income
- Fundrise has a limited track record of four years
Fundrise is a perfect platform for passive investors who are looking to gain access to private real estate markets. Fundrise is also great 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, you 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.
Fundrise is best for investors with a 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.