- Review: Fundrise
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Commercial real estate investing can be an excellent way to grow your nest egg, although it’s not without risks. The big risk? Commercial real estate requires large amounts of upfront capital to purchase a property. In order to properly diversify your portfolio, you should own multiple properties, various types of properties (e.g., apartment complexes, strip malls, office space, etc.) and in multiple locations.
One avenue for the small investor who wishes to invest in commercial real estate is through a REIT (real estate investment trust). As you may know, a REIT owns and manages income-producing real estate.
By pooling the funds of many individual investors, the REIT can purchase a diversified mix of commercial properties — such as office buildings, shopping centers, hotels and apartments — the typical investor might not otherwise be able to purchase individually.
One type of REIT, an exchange-traded REIT, is available through any broker; as the name implies, their shares trade on the securities markets. Exchange-traded REITs have a few downsides, however. For one thing, their performance is heavily correlated with the broader stock market.
|Offering Types||Debt or Equity|
A lot of factors contribute to daily market ups and downs that have nothing to do with the value of the real estate assets the REIT actually owns, yet the value of REIT shares fluctuates with the market. If you’re looking to diversify your portfolio with real estate to insulate you from stock market risk, an exchange-traded REIT is not going to do the trick.
Non-traded REITs are also registered investments, and while they are subject to the same SEC requirements an exchange-traded REIT must meet, they are not directly correlated with stock market fluctuations. Two downsides: There isn’t the same liquidity since they are not traded on the markets, and front-end fees are even higher than exchange-traded REITs.
As you can see, the main differences between exchange-traded and non-traded REITS have to do with liquidity and fees:
|Non-Traded REITs||Exchange-Traded REITs|
|Not listed on a national securities exchange.||Shares trade on a national securities exchange.|
|Limited secondary market.||Exchange traded. Generally easy for investors to buy and sell.|
|Front-end fees that can be as much as 15%.||Front-end underwriting fee may be 7% or more plus brokerage commission.|
Front-end fees for both types of REITs are substantial — and that’s where Fundrise steps in.
Fundrise started out as a crowdsourced real estate investing service primarily for accredited investors but has recently changed its business model. They have developed and are offering a hybrid product, the eREIT™.
Fundrise’s eREITs are most similar to non-traded REITs. The difference is fees. When you invest in a Fundrise eREIT, you don’t go through a broker. You’re buying directly from the issuer. That allows Fundrise to dramatically reduce the fees. There’s no middleman, so there are no upfront fees or commissions. And rather than paying a front-end load of 7%–15%, Fundrise charges just a 1% annual asset management fee.
The minimum investment is just $1,000 for Fundrise eREITs, and you don’t have to be an accredited investor to participate. Shares of the eREITs are purchased exclusively online, and Fundrise members receive notifications when new assets are added to the eREITs.
As of April 14, 2017, Fundrise was offering three open eREITs:
|Name||New Investors||Objective||Geographic Focus|
|West Coast eREIT||Yes||Income & Growth||West Coast|
|Heartland eREIT||Yes||Income & Growth||Heartland|
|East Coast eREIT||Yes||Income & Growth||East Coast|
For the launch of their eREITs, Fundrise offers an “accountability policy” that’s far from industry standard:
- As an investor in their Income eREIT, you pay $0 in asset management fees unless you earn at least 15% annualized return during the first two years of operation, until December 31, 2017.
- For their Growth eREIT, Fundrise will pay a penalty of up to $500,000 to investors if it earns less than a 20% non-compounded annual return.
Fundrise is not a newcomer to real estate investing, and their team has experience from many areas of the real estate marketplace. In 2015, they had $525 million in real estate assets under management and provided an average annual return of 13% net to their investors.
Each property goes through a rigid screening process, and only 2% of investments are approved for inclusion in their eREITs.
|—||Read the Review||Read the Review|
|Rating||Rated 3.5 stars||Rated 3.5 stars||Rated 3.5 stars|
|Fees||1.00%/year||0.30% - 0.50%/year||Free|
|Compare More Real Estate Crowdfunding Services|
- Low Minimum — The minimum investment is $1,000 to start with Fundrise.
- Low Fees — Fundrise charges a 1% asset management fee per year.
- No Accreditation — Unlike competing firms, Fundrise, is open to any investor in the United States regardless of income or net worth.
- 90-Day Guarantee — Unheard of in the investment industry, if at any time during your first 90 days as an investor you’re not satisfied, Fundrise will buy your investment back at the original investment amount. This offer is subject to certain limitations.
- Commercial Real Estate Access — Commercial real estate is typically a high-dollar investment, whereas Fundrise allows you to invest with little money.
- Passive Investment — Unlike owning your own commercial real estate outright, Fundrise investments are truly passive.
- Quarterly Redemptions and Distributions — The Fundrise eREIT has adopted a quarterly redemption plan to provide periodic liquidity; however, distributions are not guaranteed.
- eREIT Portfolio Builder — A nice feature to diversify your real estate investments. Unfortunately, with currently only 3 REITs available makes this tool somewhat limited.
- Investment Liquidity — Fundrise eREITs are not publicly traded. Once you make an investment, you are pretty much committed to the investment for the term. There is currently no secondary market to sell your investment to others; however, there is a quarterly redemption program whereby investors may be able to redeem their shares, subject to some limitations.
- Tax Consequences — Distributions are taxed as ordinary income, as opposed to the 15% tax rate on qualified dividends.
Real estate as an asset class is a long-term investment. This includes REITs, whether they are publicly traded, non-traded or eREITs. The opportunities for capital appreciation, portfolio diversification and regular distributions are alluring; however, distributions are never guaranteed.
While not exactly the same as investing in real estate directly, it is much more passive and allows you to invest in properties outside your geographic location. Fundrise can be a way to diversify into real estate without the large amounts of capital or management headaches involved when doing it yourself.
While I am a real estate investor, REITs have never appealed to me for several reasons — primarily because of the front-end load and ongoing fees. Fundrise takes the sting out of those investing fees with its 1% asset management fee.
And their unique accountability guarantee is a breath of fresh air in the investment marketplace. Every investor I know would fully agree with this statement on their website: “Today’s model of investors paying large fees to investment managers regardless of their performance makes no sense.”
Disclaimer: The information contained herein neither constitutes an offer for nor a solicitation of interest in any securities offering; however, if an indication of interest is provided, it may be withdrawn or revoked, without obligation or commitment of any kind prior to being accepted following the qualification or effectiveness of the applicable offering document, and any offer, solicitation or sale of any securities will be made only by means of an offering circular, private placement memorandum, or prospectus. No money or other consideration is hereby being solicited, and will not be accepted without such potential investor having been provided the applicable offering document. Joining the Fundrise Platform neither constitutes an indication of interest in any offering nor involves any obligation or commitment of any kind.