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If you’re looking to diversify your portfolio through investing in an additional asset class, real estate is worth considering. There are two kinds of real estate investing: passive and active. Active is buying rental properties, flipping houses, wholesaling, etc. While that’s one way to invest, maybe you’re looking for something a little less involved. That’s where passive real estate investing comes in: think things like REITs and real estate crowdfunding. When it comes to passive real estate investing, I decided to try out a platform called Fundrise. Here I will share my honest Fundrise review. Let’s get started!
Why Invest in Real Estate?
Before I dive into this Fundrise review, I want to talk briefly about why invest in real estate. In investing, diversification is the name of the game. It’s how you protect your portfolio against unnecessary risk.
Asset Class Correlation
While there are countless ways to reduce risk in your portfolio, one fundamental way is investing in uncorrelated asset classes. What does this mean?
It means investing in asset classes that don’t always move in tandem. If one asset class goes down, the other may not. The less correlated the assets, the more diversification they add to your portfolio.
Take a simple example. Gold and stocks have very little correlation; that is, they don’t tend to follow the same path. If stocks go up, gold may go down.
Real Estate as an Asset Class
Real estate acts much the same way. It does not have a historically high correlation to the broader stock market (though in specific periods like 2008, it has had an increased correlation).
That’s not to say real estate isn’t volatile. It is. But over a long period, it can act as a stabilizer to your portfolio.
Over the last 40 or so years, real estate, in the form of real estate investment trusts (REITs) have outperformed stocks (though with more volatility). Adding real estate to an already-diversified portfolio of stocks and bonds, you can achieve higher risk-adjusted returns.
While explaining why investing in real estate could be a whole post in itself, I want to focus on Fundrise.
If you want to dig into the details of why invest in real estate, Fundrise has a great article explaining how real estate can bolster diversification.
Let’s forge ahead to our Fundrise review, assuming you’re sold on the idea of investing in real estate. I think it is one of the best ways to invest in real estate passively and I am excited to share it with you.
What is Fundrise?
If you want to invest in real estate and want to do so passively (i.e., you don’t want to start buying property), Fundrise is an option to consider.
So, what is Fundrise?
Fundrise is a simple way to invest in commercial real estate without buying property directly. Fundrise investments include both debt (making loans) and equity (putting money directly into deals). In a nutshell, it is real estate crowdfunding, meaning that a group of investors pool money to buy properties. Fundrise finds the properties, acquires them, and then manages them on behalf of its investors.
Wondering if Fundrise is legit? Yes! Fundrise has over 130,000 active investors and done over $4.9 billion of real estate transactions. To date, they have returned over $79 million in dividends to investors.
When you invest in Fundrise, you are investing in a diversified portfolio of real estate assets. For example, my investments in Fundrise currently cover 69 deals with a mix of about 2/3 equity and 1/3 debt. These commercial real estate investments can include buy-and-hold assets, new constructions, and everything in-between.
Fundrise offers three individual investment offerings: supplemental income, balanced investing, and long-term growth.
In a nutshell, these will weight your investments towards a different mix of properties. For example, the income strategy will focus on deals that generate cash flow and skew towards a higher mix of debt (less risky) than equity. The growth offering is the opposite – it focuses on appreciation, not current cash flow.
Who can invest?
Unlike many real estate crowdfunding platforms, you do not need to be an accredited investor to invest.
How much do I need to invest in Fundrise?
Here’s one of the things I love about Fundrise: you can invest with as little as $500! Fundrise offers different investment tiers based on how much you invest.
As you invest more money, you will gain access to the greater levels of diversification with higher account tiers. The Fundrise account levels are as follows:
- $500 minimum investment
- Target Diversification: 5 – 10 projects
- $1,000 minimum investment
- Target Diversification: 40+ projects
- $10,000 minimum investment
- Target Diversification: 80+ projects
- Access to Fundrise eFunds (more on that in a minute)
- Ability to allocate directly to most funds
I would highlight that the starter portfolio invests in a more limited number of projects (5-10), so I would suggest investing at least $1,000 to gain increased diversification.
Fundrise will place you in a diversified portfolio of real estate regardless of your investment size. How do they do this? Through something called eREITs.
What are eREITs and eFunds?
I mentioned earlier the concept of a REIT. A REIT is just a pool of properties under one umbrella. Think of it as a mutual fund – it’s just a basket of properties rolled up under one roof.
At Fundrise, they have created something called an eREIT. An eREIT is very similar to a traditional REIT except that it is not publicly traded, and therefore, it does not offer daily liquidity.
Traditional REITs often end up with a higher correlation to the market because they do offer liquidity (i.e., people panic sell REITs when the market craters). This liquidity creates a disconnect between the underlying properties and the REIT itself.
When you invest in Fundrise, you are buying a portfolio of eREITs. In a nutshell, think of each eREITs as a container of commercial real estate investments – your investment is spread across multiple containers.
As an example, if you choose the balanced investment plan, your portfolio may look something like the below:
- 40% Income eREIT
- 30% Balanced eREIT
- 30% Growth eREIT
The way you make money off your investment is in the form of dividends (think rental cash flows) plus appreciation (increase in the value of the properties). Fundrise must then payout 90% of these taxable earnings to you. These distributions are taxed as ordinary income.
As mentioned, unlike traditional REITs, eREITs are not publicly traded and do not offer daily liquidity. Wondering how to get your money out of Fundrise. Fundrise’s eREITs do (usually) provide quarterly redemptions where you can redeem your position for cash.
Real estate is a long-term investment, and to get the most out of it, you have to be okay sacrificing near-term liquidity.
Fundrise has a second investment product called an eFund. Without going into too much detail, eFunds invest in residential properties (unlike eREITs, which invest in commercial real estate) with the goal of appreciation in growing real estate markets.
eFunds are not required to pay out 90% of taxable earnings, because they are set up as partnerships. Because of this, eFunds do have some tax benefits, as capital gains in the partnership are taxed at the capital gains tax rate. Dividends are treated as ordinary income for tax purposes.
Note that Fundrise eFunds are only available to those who have invested $10,000+ in the platform.
What is the Fundrise iPO?
Have you heard about the Fundrise iPO, but unsure what it is or whether you should invest? The Fundrise iPO is an internet public offering. In other words, rather than going public, Fundrise has given its investors the ability to invest directly in Fundrise.
Typically, Fundrise offers investors of the Core account level or higher the ability to invest in the Fundrise iPO within their first year.
When given the opportunity to invest in the Fundrise iPO, I elected not to do so. Investors in the Fundrise iPO should expect to hold their investment indefinitely until a liquidity event for Fundrise with no dividends during the term of the investment. Given this uncertainty, I elected to put money towards Fundrise investments rather than the Fundrise iPO.
You’re probably wondering, is Fundrise a good investment? From 2014 through 2019, Fundrise has consistently yielded 9%+ annualized returns. In 2020, when the Coronavirus pandemic decimated commercial real estate, Fundrise still managed to return over 7%. While past performance doesn’t dictate future results, Fundrise’s performance in the downturn reflects a capable management team that has made prudent investments even when the market was in an up-cycle.
So, you may be wondering, what does all of this cost?
Fundrise charges an annual management fee of 1.0%. There are, of course, fees associated with asset acquisition (and other transaction costs), but this is the case with most real estate investments.
Fundrise does take fees seriously, and it aims to keep them low because it wants to make direct access to real estate investing as cheap as possible. They detail their fees on their website, including what each fee is and how it compares to the competition.
With Fundrise, on the surface, the fees may be a little higher than investing in public REITs. However, when you dig into the fees, a lot of the fees of publicly-traded REITs are eaten by middlemen and aren’t directly observable by the retail investor.
Fundrise offers great detail on its fees compared to other REIT investments on its website.
Other Platform Advantages
Apart from what I’ve outlined above, there are a couple of other things I like about Fundrise.
First, Fundrise offers unparalleled transparency into your real estate investments. You can see every property you’re invested in, what the deal structure is, and why Fundrise believes it is a good investment.
Additionally, Fundrise is exceptionally transparent about its approach. It explains why it is doing the things it is (like pausing redemptions, which I’ll explain below).
One other thing I like about Fundrise is the website and app. Yes, this is a minor detail. What matters is the underlying investment. But being able to see my investments at a glance gives me peace of mind.
What I Don’t Like about Fundrise
This Fundrise review wouldn’t be complete if I didn’t tell you what I don’t like about Fundrise.
Perhaps the most significant criticism of Fundrise is that they control redemptions. Here’s why: Fundrise invests directly in real estate. For example, if they invest $1,000,000 in a property, and then you ask to redeem an investment of $200,000, they have no way to return $200,000 to you without selling the property. This is an extreme example, but on a broader scale, Fundrise needs to control redemptions so they can invest money throughout the cycle.
Should Fundrise decide to stop providing liquidity to investors, they can do so – and they have long said that they may do this in the event of a crisis. I would urge you to read about Fundrise’s approach to financial downturns before deciding to invest.
As of March 31, 2020, Fundrise suspended redemptions across its mature eREITs and eFunds. And guess what: I am glad they did. Fundrise puts the needs of its entire investor base ahead of the needs of those who want out. As an investor, this is what I would expect of Fundrise.
If you aren’t okay sacrificing liquidity, you shouldn’t be investing in real estate through Fundrise or direct real estate investments.
One other criticism of Fundrise eREITs is that you aren’t getting the tax advantages of investing in real estate because distributions are taxed as ordinary income. And this is true. But this is also true of traditional REITs. The only way you get the tax advantages of real estate is by investing in real estate directly – and this is a lot more work. Again, Fundrise’s eFunds do offer some tax benefits.
Another downside to Fundrise is that it does have an early-withdrawal penalty on redemptions. If you redeem shares within five years of purchase, there is a 1-3% early withdrawal penalty. Again, this is an illiquid investment. The early withdrawal penalty is to discourage you from treating it like something other than that.
Lastly, it carries an annual management fee of 1.0%. This is relatively high compared to public REITs. However, Fundrise achieves savings by cutting out the middle man. Therefore, it is conceivable that these fees are modest compared to publicly-traded REITs.
While Fundrise is one of the most popular real estate investing platforms, it does have a number of competitors.
One popular Fundrise alternative is a service called PeerStreet. Unlike Fundrise, PeerStreet focuses entirely on real estate debt. Investors can select individual PeerStreet investments that align with their investing goals (such as loan duration, yield, geographic preference, etc.).
Notably, PeerStreet is only available to accredited investors, but if you are primarily interested in debt investments, it’s worth checking out. You can read our PeerStreet Review to learn more.
Another popular alternative to to Fundrise is Realty Mogul. Realty Mogul offers both debt and equity investments to non-accredited investors through its REIT offerings. However, accredited investors can also select individual investments.
Realty Mogul does have a higher barrier to entry than Fundrise (it has a $5,000 minimum investment), but the company has a strong track record and is worth exploring if you’re interested in diversifying with another investing platform.
My Own Experience
I am sharing this Fundrise review with you because I personally invest in the platform. I invested $2,000 in January 2020 as a way to dip my toes further into real estate investing.
Since then, I have nothing but positive things to say about Fundrise. I value the transparency of the platform, particularly as it relates to the updates provided for each investment and transparency about how the COVID crisis was managed.
Now, admittedly, Fundrise isn’t the only real estate investment I have. I also invest in publicly-traded REITs and own multi-family rental property. That said, I am pleased with the Fundrise platform as a whole.
In 2020, my first year investing with Fundrise, I earned a net return of 4.8%. Given the pandemic as well as the typical trajectory of Fundrise returns (i.e., lower returns in the earlier years), I am extremely happy with my investments to-date. In fact, I have been so impressed with Fundrise that I elected to invest an additional $1,000 in early 2021.
While no one knows where the world will be in the next couple of years, I believe in the Fundrise platform and will continue to let me investment grow and potentially add to it based on how Fundrise continues to perform.
Fundrise Review: Our Verdict
If you’re looking to dip your toes into passive real estate investing, I think Fundrise is a fantastic option. It is transparent, has relatively low fees, and provides an opportunity for anyone to invest in real estate with as little as $500. It is a hands-off way to buy into a diversified portfolio of real estate investments that have produced historically strong returns.
Before investing, make sure you’re comfortable tying up your money and fully understand what you are buying. Investing in real estate is a bit more advanced than just investing in stocks or bonds, so I want to make sure you fully understand it before deciding to invest. As a sage man once said to me: “do your own thinking.”
That said, hopefully, this Fundrise review helped shed some light on the world of real estate investing. If you’re just getting started in real estate investing, I think Fundrise is an excellent option. I encourage you to check out Fundrise if you’re interested in learning more.