Traditionally, investing in real estate took a big bankroll. Buildings, after all, don't come cheap. The returns were enviable, backing up the idea that you need mega money to make mega money. That's where Fundrise comes in. Like other tech startups, Fundrise seeks to disrupt, in its case, the real estate investing world, by democratizing the system.
Before Fundrise, non-institutional and non-millionaire investors could buy publicly traded real estate investment trusts (REITs) through real estate mutual funds and exchange-traded funds (ETFs). Also, there are non-publicly traded REITs sold by broker-dealers, sometimes with upfront fees as high as 15%. More recently joining the options, real estate crowdfunding sites let you browse individual projects to invest in.
Fundrise’s approach falls into a different category, while offering relatively low barriers to entry for those who want to invest in real estate. The principle is simple: the condos, office buildings, retail spaces and hotels that make up the properties in Fundrise’s eREITs and eFunds earn investors money as they appreciate and as tenants pay rent.
But unlike real estate crowdfunding platforms, Fundrise doesn’t have its users pick individual projects to invest in. Instead, investors pick from four portfolios, each of which is a different mix of eREITs and eFunds, which in turn are the limited liability companies that hold the real estate investments. The four portfolios are named after their strategies: the Starter Plan, the Supplemental Income Plan, the Balanced Investing Plan and the Long-Term Growth Plan.
It’s important to remember that past returns are no guarantee of future performance. That being said, this company's performance so far has been enough to tempt thousands of investors and catch the eye of the financial press. In 2018, Fundrise's average annualized return was 9.11%. From its launch in 2014, the average of its annualized returns is 10.80%.
Ben Miller, the company's co-founder and CEO, worked in the real estate world for years before starting Fundrise. Back in 2010, disillusioned with the state of post-Crisis real estate investing, Miller says he thought “the system is broken.”
“Our partners were bankrupt, our partners were in shambles,” he told SmartAsset during a phone interview, referring to the Wall Street partners dominating real estate investing.
Miller thought “there’s got to be another way to raise money than through Wall Street-type partners.” He came up with the idea of raising the money for urban real estate investments on the Internet, and the rest is history.
- Rookie real estate investors who have some cash to spare
- Experienced real estate investors who don't want the hassle of owning investment properties directly
- Funds can sell out
- Your shares in Fundrise's offerings can only be liquidated once per quarter
- Dividends are non-qualified so will be taxed at regular income tax rates
Pricing: How Much Does Fundrise Cost?
|Option Name||Management Fee||Minimum Balance||Features|
|Fundrise||0.85%||$500||Management and advisory fees total 1%.|
The Fundrise's fees are the same for all four portfolios: 0.85% in annual management fees and 0.15% in annual advisory fees. These, of course, neatly add up to 1%.
So how does this compare to competitors’ fees? It's a bit like comparing apples to oranges, since Fundrise is different from the others. For its real estate ETFs, Vanguard buys assets from real estate companies which in turn have bought or developed assets (apartment buildings, etc.) and taken them public. Other companies often repackage the real estate ETFs that Vanguard has already packaged, adding their own fees on top.
Miller says his company is special because it “drills through all those layers” of fees to deliver the same asset at a much lower cost: “You end up with an asset in the private market that an individual cannot purchase at the same price as an institution – except through us.”
In fact, Miller compares what Fundrise has done to what Vanguard did when it revolutionized investing by introducing index funds. Like Vanguard index funds, Miller says, Fundrise’s portfolios offer “structurally lower costs” compared to the options that came before them. "Our model is to have a super-low-fee approach for investors to deploy into real estate.”
Fundrise's Investing Strategy
As mentioned earlier, Fundrise offers four plans. The Starter Plan or portfolio invests 25% in its Income eREIT V, 25% in its Growth eREIT V, 25% in its Income eREIT II and 25% in its Growth eREIT II.
Its Supplemental Income portfolio is currently invested in 40 projects. Of them, 71% are debt real estate assets (meaning it owns the loans) and 29% are equity (meaning it owns the property).
The Balanced Investing portfolio is invested in 52 projects, of which 57% are debt and 43% are equity.
Finally, the Long-Term Growth portfolio is invested in 41 projects, of which 38% are debt and 62% are equity.
- Individual and Joint accounts
- Limited Liability Companies
- Limited Partnerships
- C Corporations
- S Corporations
- Roth IRA
- *Can invest in IRA accounts through Millenium Trust Company, a Fundrise partner, for an additional fee
Fundrise’s performance record is certainly appealing. Its first year, 2014, its average annualized return was 12.25%, followed by 12.42% in 2015. Performance came down in 2016, but as noted earlier, annualized returns since inception average out to 10.80%. Over the same period (2014 to 2018), the S&P 500's annualized returns average out to 8.90%.
Also, the robo-advisor's platform is well-designed and easy to navigate. It targets rookie real estate investors, so explanations are in layman's terms. Some might find the descriptions a little oversimplified, but if you're entirely new to private real estate, you will appreciate the clarity and minimal use of industry lingo.
Who Fundrise Is For
Fundrise investing is open to anyone with at least $500 – you don’t have to be an accredited investor. That's the minimum investment for Fundrise's Starter Plan. The company's advanced plans, which offer more options for diversification, require a minimum investment of $1,000.
Still, Miller admits it isn’t for everyone. “If you only have $5,000 or $10,000 saved we’re not a good fit because you need your money to be liquid, you need to be able to sell your stocks tomorrow to pay an unexpected bill. But if you’ve saved some real money and you’re thinking about the long-term, that mass affluent customer is our core client,” he says.
For its target customers, Fundrise advocates the Yale Endowment Model, which recommends that 20% of an investment portfolio should be in alternative investments like real estate, as a complement to stocks and bonds. Alternatives like real estate are less liquid but tend to deliver higher returns. Their performance may stay strong even when stocks take a dip.
If a customer keeps 20% of his or her net worth in Fundrise eREITs, the other 80% could be in, say, low-cost index funds from Vanguard. But convincing potential customers, even wealthy ones, to hit that 20% target is a challenge, Miller says.
“It’s really uncommon for a small investor to have 20% of their investments in real estate. We’re trying to bring a less sophisticated investor to the same level of portfolio allocation you see with an institutional investor,” he explains.
Though you can invest in Fundrise through an individual retirement account (IRA) by paying a $75 annual fee to the Millennium Trust Company, it may be best to save your real estate investing for non-retirement funds. That way, you can put your retirement dollars into a mix of low-fee stocks and bonds and use a separate pot of money for investing in alternatives like real estate. Once you have an emergency fund and you’re on a solid footing with your retirement savings you can dabble in real estate investing through a company like Fundrise.
If you have $25,000 or more in investable assets, you may want to consider getting a human advisor instead. You can use SmartAsset's financial advisor matching tool to get matched with an advisor in your area who suits your needs. To learn more about different individual advisors in your area, explore SmartAdvisor Match.
- Access to real estate investments ordinarily not available to small investors
- Tax Harvesting
- Portfolio Rebalancing
How Fundrise Works
Any U.S. resident over the age of 18 and with at least $500 can invest, though Fundrise's advanced plans require a minimum investment of $1,000, $10,000 or $100,000, depending on which advanced plan is chosen. You can browse the Fundrise portfolios online. You’ll also be able to see the projects in each plan. The site details each investment's type, location, rating and projected return.
Real estate is not a short-term investment. As noted earlier, these portfolios are really meant for investors who will not need to cash out within five years. That's generally the minimum time frame Fundrise says its investors should have. During this time, you’ll receive quarterly dividends, but you’ll have a hard time getting your initial money back unless one of two things occurs.
The first way you could get your money back would be to take advantage of the 90-day satisfaction period. If you’re not satisfied with your experience and you’re still within your first 90 days as an investor, Fundrise will buy your investment back at the original amount you paid in (subject to some limitations).
The second way you could get your money back would be to redeem your shares. Each eREIT or eFund has a quarterly redemption plan that allows investors to request cashing out some or all of their shares (subject to some limitations). You can find details of each redemption plan in the Offering Circular.
The eREITs or eFunds are on a quarterly dividend schedule, which means you have the potential to get dividends once every three months. However, you can also opt to reinvest your dividends through the Fundrise Dividend Reinvestment Program “DRIP”. You can opt in or out of the DRIP at any time by changing your account settings online.
At tax time, you’ll get a 1099-DIV that details any distributions you earned. Your dividends will be taxed at your regular income tax rate, not the 15% rate used for qualified dividends.
If you decide to redeem your shares, Fundrise will report that fact in a 1099-B. Based on the information on this form you might owe money to the IRS for the amount you received in compensation for your shares.
What’s the Catch?
The dividends you receive from Fundrise will be non-qualified dividends. That means they’re taxed at regular income tax rates rather than at the 15% rate used for qualified dividends.
Fundrise's plans are like a real estate ETF that you could get from Vanguard, Wealthfront or Betterment. But as Miller points out, Betterment and Wealthfront are repackaging Vanguard real estate ETFs, and Vanguard is what Miller calls a “wrap” on investments by real estate companies.
Real estate companies gather assets in the private market, buying apartment buildings, for example. The real estate companies then take the investments public, marking up those assets so they make more money and paying a cut to an investment banker in the process. So when Vanguard or another firm buys those assets the price has been marked up.
Fundrise, by contrast, offers consumers access to real estate investments they wouldn’t otherwise be able to access without paying a mark-up. Miller estimates the savings from cutting out the middleman to be around 30%. But on the face of things, the fees you’ll pay each year with Fundrise are higher than the fees you would pay for a low-cost REIT investment you made with Vanguard or Schwab.
For some, the lack of liquidity could be a catch. For others, the fact that you can’t choose individual projects to invest in could be a downside.
Competition: How Does Fundrise Stack Up?
If you ask Miller (and we did!), Fundrise’s closest competitor is Blackstone, the mammoth private equity group that invests in real estate projects across the country. But even that comparison isn’t perfect because regular investors can’t invest with Blackstone. If a retail investor were able to invest in private equity, he or she would pay “two and 20” - a flat 2% of asset value for a management fee and 20% of any profits earned.
Another potential competitor is Vanguard, which offers REIT ETFs and index funds. The expense ratio of these funds is low, but the funds are what Miller calls a “wrap” on existing securities. In other words, by the time you buy a REIT ETF many layers of intermediaries have gotten paid to package the real estate in your ETF and take it public.
Fundrise’s approach “disintermediates the public market," Miller says. Translation? There are fewer middlemen standing between the investor and the real estate investments.
Bottom Line: Should You Use Fundrise?
Fundrise makes real estate investing easy and accessible. It also delivers relatively low-cost access to real estate projects formerly reserved for accredited investors. Real estate investing is a natural choice for someone with a comfortable financial cushion who wants to diversify his or her portfolio.
Ready to invest in real estate? Have a chunk of change you don’t mind tying up for a while? If you answered yes and you’re chasing higher returns in our current low-interest-rate environment, it’s worth considering. You can always do what Miller says many of the company's customers do and dip in your toe with a $500 investment.
Tips for Finding a Financial Advisor
- Before you start looking for an advisor, it's smart to consider what you want from an advisor. Are you hoping to find someone to help you save for retirement or create an estate plan? Or are you simply trying to get started with investing?
- Once you’ve figured that out, the search can begin. As you’re looking, note a financial advisor’s certifications, background and typical clientele. If you’re overwhelmed, a matching tool like SmartAsset’s can make it easier to find someone to work with. Simply answer some questions about your financial situation and goals and the program will match you with up to three advisors.