How Does Fundrise Work
Investing Simple is affiliated with Fundrise. This relationship does not influence our opinion of this platform.
Recently, a number of crowdfunded real estate investing platforms have emerged. One of the most well known and established examples is Fundrise. This 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. The reason this is possible is because people from all over are pooling money together to invest in these real estate projects.
Crowdfunding allows projects to be funded by collecting small amounts of money from a large number of people. The internet has made this incredibly easy! Traditionally, to invest in real estate you would need thousands if not tens of thousands of dollars for a down payment on a piece of real estate. With Fundrise, you are able to chip in towards these real estate projects with an investment of $500 or more. This has significantly lowered the barriers for real estate investment!
How Does Fundrise Work
Fundrise works like many other crowdfunding platforms out there. First, investors pool money together by investing via the online platform. Then, Fundrise will invest that money in real estate projects. This could be new construction or a renovation project. Fundrise makes money for investors through income producing properties and flipping real estate in hot 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 for facilitating this, Fundrise collects an annual fee of 1% from investors.
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 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 around 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.
Fundrise Investment Portfolios
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 towards 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 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 and 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 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.
eREITs will produce income for your portfolio in the form of dividends. Here is how you earn dividends with Fundrise:
Rent payments from underlying apartment and commercial leases owned within the eREIT.
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. Partnerships avoid 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.
How To Invest In Fundrise
When you are ready to begin investing, you can set up an account with Fundrise in a few short steps. Anyone who is 18 years old or older and a US resident can invest with Fundrise. Currently there is a $500 account minimum to begin investing in the Fundrise starter portfolio and $1,000 minimum for the Fundrise advanced portfolios.
Step 2: Decide on an investment plan.
Step 3: Link your bank account and deposit the desired amount.
Step 4: Sit back and watch your money grow!
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.
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! Understand that liquidity and distributions are never guaranteed.
Fundrise Investment Taxes
At the end of the year Fundrise will send you any tax documents associated with your account. Investors may receive 1099-DIV for any dividends received throughout the year. Investors may also receive a K-1 for any income generated in an eFund. You may also receive a 1099-B from any other transactions within Fundrise. Your tax situation will depend on which portfolio you are invested in Fundrise. Consult a tax professional for guidance on how any income generated in Fundrise will affect your specific tax situation.
If you are looking to learn more about Fundrise, read our full review here!
Fundrise is a great 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.