Historically, real estate has been one of the most lucrative investments a person can make. Although real estate has had lower annual returns than stocks over the past 80 years of market activity, housing is less vulnerable to market bust and boom cycles. Real estate also provides a useful, tangible function that securities like stocks or bonds do not.
One thing that keeps a lot of people from investing in real estate is the relatively high bar to entry. That is where Fundrise comes in. Fundrise is an online real estate investment company designed to let the “average Joe” invest in both commercial and residential properties. Fundrise is one of a growing number of crowdfunding platforms that allow everyday people to pool their assets and purchase investments.
In this review, we will take a thorough look at Fundrise and how it works, We will talk about the pros and cons, and offer our verdict of whether the service is worth checking out.
TL;DR: Fundrise is an excellent real estate platform that allows investing with relatively low amounts, but it comes with some risks; most importantly highly illiquid assets. It is ideal for moderately experienced investors who have some prior knowledge of the real estate market.
Fundrise specializes primarily in real estate investment trusts (REITs)—corporations that own, operate, and finance commercial and residential properties. REITs basically have the same structure as mutual funds. Multiple investors pool their capital and each receives a proportional share of the purchased assets.
The biggest risk of investing in real estate is putting up the initial capital. Fundrise makes it easy by giving a streamlined platform where you can browse, research, and buy investments in REITs. Fundrise offers REITs composed of 3 major types of properties; apartments, single-family homes, and commercial buildings ranging from office spaces to industrial properties.
Fundrise’s unique feature is how it is integrating crowdfunding into the real estate model. Despite its popularity in other sectors, the real estate industry has yet to really take advantage of the benefits of crowdfunding for investments. Fundrise is filling a unique niche and recent crowdfunding legislation have made it much easier to raise funds. Fundrise brings the traditionally closed-book and private world of real estate investing to a broader public.
How Does Fundrise Work?
When you invest through Fundrise, you are basically buying shares of their proprietary eREITs. Account-holders can then buy and sell shares of these eREITs, much like they would stock. Like most online brokerage services, Fundrise gives you a selection of portfolio templates that you can modify.
When you create an account, you will go through a quick questionnaire meant to gauge your investment preferences and risk tolerance, and Fundrise will offer a recommended portfolio based on your responses.
Fundrise offers 4 major types of accounts:
Starter. The Starter portfolio is the simplest kind of account you can make. It has a $500 minimum investment and allows you to invest in over 20 different properties and properties development schemes. The starter portfolio consists of a 50/50 blend of income and growth REITs
Core. The Core portfolio is the main product of Fundrise and is meant to be the “foundation of the investing experience.” The Core portfolio has a $1,000 minimum investment and allows you to tailor your profile for supplemental income, balanced investing, or long-term growth. With over 7 eREITs and over a dozen properties, the Core product also comes with some useful features, including
- Dividend auto reinvesting
- IRA account support
Fundraise also has a neat promotional offer where you will get 3 months of fees waived for every person you refer to the platform. Currently, you cannot customize your portfolio further than setting your goals.
Advanced. The advanced portfolio is the next level and gives investors access to advanced strategies and a larger selection of property investments. The advanced plans also have the option for add-on Plus plan options. Most of the time, these Plus plan options take a portion of your funds and puts it into a more focused and specialized real estate strategy. The Advanced plan has a $10,000 investment minimum and comes with all of the features of the Core plan plus:
- Direct allocation
- 6 months of waived advisory fees for each person you refer
Premium. The Premium plan is designed to give investors access to periodic investments that are highly specialized private equity funds that have a long investment horizon and high illiquidity. The Premium account has a $100,000 minimum investment and provides everything in the Core and Advanced plans, including:
- Priority access to advisory teams
- One year of advisory fees waived for each friend you invite
Once you get to the Core plan, you can start customizing your portfolio based on “goals.” At this time, Fundrise offers 3 goals which fix the allocations of your portfolio.
Supplemental Income – The supplemental income allocation focused on dividend generating investments that have a high cash flow. It places an emphasis on Income-focused as opposed to growth-focused assets, at a 70-30 ratio.
Balanced – The balanced option is the most well-rounded portfolio and allocates assets 50-50 between dividends and appreciation. The balanced profile is meant for long-term holdings and will experience more growth the longer the investments are held. The balanced profile is the recommended option for new investors.
Long-Term Growth – the long-term allocation emphasizes growth and appreciation. Assets are spread 80-20 between growth and income investments. The long-term plan, as the name implies, is made of investments that are expected to experience high growth further down the investment horizon.
Like most online brokerage services, Fundrise makes most of its money from advisory fees. Fundrise has a bit of an unconventional fee structure but it is more transparent than some other services.
Fundrise takes an annual management fee of 0.15% AUM (assets under management) to handle daily operations. So for example, for $5,000 invested, you would pay only $7.50 a year in management fees. That is much lower than many other popular brokerages, such as Vanguard which has a flat 0.30% annual fee. These fees cover things like redistributions, tax management, customer support, and asset rebalancing.
Real estate investments, like mutual funds, also incur fees on the asset level. Because REITs incur costs on the funds level, it can be hard for the investor to figure out what the expense ratios of their assets are.
Fundrise’s solution to this problem is to take a flat 0.85% annual fee to cover these expenses. That comes out to $8.50 a year for every $1,000 invested. These fees go towards managing property expenses inherent in real estate investments.
Fundrise’s fee structure is a bit unconventional, but it simplifies some otherwise obtuse parts of real estate investing. An 0.85% expense fee is fairly high, but you always know how much costs your investments require. Fundrise works directly with developers and operators so they can keep their fees relatively low.
How Liquid Are Fundrise’s Investments?
Private and hard assets like real estate are traditionally much less liquid than intangibles like stocks or bonds. This illiquidity is both a pro and con of real estate investing. On the one hand, illiquid securities are much more insulated from the ebbs and the flows of the market than highly liquid assets. On the other, it can be more difficult to sell illiquid assets in the middle of a housing market downturn.
One other benefit of illiquid assets is that they often compensate investors more for the loss of flexibility and investment opportunities. This means that illiquid assets have potentially higher returns. Additionally, illiquid assets are an important part of having a diversified portfolio because they have a relatively low beta correlation with the larger market
All of this is to say that Fundrise’s investments are generally highly illiquid, but that is ok! Illiquid assets are not inherently bad and can actually be an integral part of a properly diversified investment portfolio. Besides, most REIT investments have longer investment horizons, so illiquidity is not as much an issue.
To deal with this illiquidity, Fundrise has a redemption program that allows investors to sell shares back to Fundrise, for a small fee. The fee is calculated as a percentage reduction of the share price, dependent on how long you have held the asset.
The fee for assets held less than 90 days is 0%, 3% for shares held between 90 days and 3 years, 2% for shares held at least 3 years, and 1% for shares held up to 4 years. There is no share price reduction percentage for assets held for more than 5 years.
What Is Fundrise’s Track Record?
Fundrise currently has over 200 active projects that it has picked up in its 6 years in existence. Fundrise has managed to show some pretty outstanding growth in those 6 years, largely because their model requires investors to stick with investments for the long term.
Since 2014, Fundrise has shown an average 11% return year-over-year, which is some pretty phenomenal growth. The supplemental income plan has an average year-over-year dividend yield of 5.05%, which puts it squarely within the 4%-8% rule for dividend yields.
Now to be fair, it is hard to make determinate claims given that there is not a lot of historical data to go on. But, Fundrise’s crowdfunding methodology has shown great success in other industries and the real estate investments show a historical tendency to increase, slightly outpacing inflation.
What Are the Risks?
Real estate investing has some inherent risks that other kinds of investments don’t have, chief among those their lack of liquidity. REITs also are particularly prone to inflation-risk, considering that housing prices manage to just outpace inflation.
Many of Fundrise’s projects include development properties, which are invariably tied to the economic situation in any city. If the demand for development falls, many of those development investments can be out of luck. This risk might be especially pronounced for portfolios that focus on long-term appreciation as opposed to income-generating properties.
Fortunately, Fundrise has relatively low investment minimums, so that minimizes a good chunk of risk at the outset. In that sense, Fundrise is a good place for new investors to get their feet wet with real estate investing in a relatively low-risk environment.
- Low minimum investments. Fundrise has successfully brought REIT investing to the average person with its low minimum required investments. You can start with as little as $500.
- Transparent fee structure. Fundrise’s fee structure is slightly awkward and takes some getting used to but it is very clear what you are being charged for. Taking a flat fee for asset expenses is a good solution that keeps investors in the know about where their money is going.
- Excellent track record. Fundrise has shown extraordinary growth since founding and has managed an average growth of 11% since 2014.
- Diversification in real estate. Instead of investing in single properties, Fundrise’s proprietary REITs allocate your money over various investment properties, including commercial, residential, and development real estate.
- High illiquidity. Most of Fundrise’s investments are highly illiquid. These funds cannot be publicly traded and you can’t pull your money out of a deal you have signed. Fundrise will buy back investments but the redemption process is lengthy and involved.
- Crowdfunding worries. Crowdfunding has been massively successful in the tech industry but it is still in its infancy. Crowdfunding models are still new and have not had as much time to prove themselves as traditional investment models.
- No guaranteed distributions. The same is true for stocks, but the stakes are higher for real estate. Dividends are never guaranteed and there is a chance you won’t get any distributions paid out.
Fundrise is a novel and innovative firm that has managed to successfully transplant the crowdfunding model to the real estate market. Fundrise serves as a great platform for someone to get into real estate investing. Fundrise’s eREITs don’t need any active management, though there is the option to track investment performance. But, the platform has sufficiently low risk, low management costs, and an exceptional ROI. So we highly recommend Fundrise to any investor.