Adding real estate to your investment portfolio can be an excellent way to generate strong returns and hedge against market downturns or inflation. If you’re not interested in purchasing and managing a property on your own, though, there are alternatives. Both REITs and platforms like Fundrise make real estate investing easier and more accessible to investors. However, while Fundrise may seem very similar to basic REITs, these two investment options have important differences to note. Here’s what you need to know. With all the options you have to invest in real estate assets, it may make a lot of sense to work with a financial advisor as you pick such securities.
What Is Fundrise?
Fundrise, which is a type of REIT, is an online platform that allows investors to purchase shares of real estate interests. Through Fundrise, investors are able to diversify their portfolio, adding low-cost real estate investments without the hassle of buying, renovating or managing those properties.
This also makes real estate investing possible for more people. Rather than requiring the full capital necessary to purchase a property, Fundrise has lower minimums that make real estate investing accessible to newer or lower-budget investors.
Fundrise operates as a crowdfunded business model. Investors purchase shares of preset portfolio strategies; their funds are then diversified across various funds within that strategy. Fundrise uses this capital to purchase, renovate, market and occupy a range of property types while charging investors an annual advisory fee and a management fee.
Over time, the investment properties held within Fundrise’s portfolios may gain value and provide income. In turn, investors may see their own portfolio’s value grow, and may even receive quarterly dividends as a result.
How REITs Work at Fundrise
One of the simplest ways for investors to add real estate to their portfolio is through a real estate investment trust, or REIT. Buying shares of a REIT is similar to buying shares of other investments such as mutual funds, exchange-traded funds (ETFs) or even individual stocks.
When investing through Fundrise, investors are purchasing shares of private equity REITs, or “eREITs,” which is a trademarked term. These investments provide capital for various residential and commercial real estate projects, offering investors a return on the property as it increases in value.
Equity REITs can be privately or publicly traded; in the case of Fundrise, their eREITs are open to all investors but are not traded on an exchange. There are no brokers and no sales commission for investors who buy eREITS; they are sold directly by Fundrise.
Fundrise vs. REIT Investing
Investing in REITs – especially publicly traded REITs – is a lucrative option for many investors. Not only do these investments traditionally perform well, but the majority of the time they even boast a higher return yield than the S&P 500. The REITs offered through Fundrise are privately traded investments, however. This means that they may not boast the same returns or have the same benefits as public REITs purchased through a brokerage account.
With that said, Fundrise REITs usually cover a wide range of investment types. Because of this, they may help hedge against market downturns better than some specialized REITs or individual real estate purchases. Here’s a look at some of the important differences between the two REIT investment methods:
All REITs are required by the IRS to pay out at least 90% of their taxable income to investors. These are disbursed in the form of dividends. While dividends (and overall returns) are never guaranteed, this requirement can make REITs an excellent choice for investors seeking passive income streams.
Fundrise vs. REIT: Which Is Better?
So, between investing through Fundrise or investing in public REITs, which is better? Well, the difference will really depend on your goals and priorities as an investor. Both can be good options depending on what you’re trying to accomplish. While traditional REIT options might be more plentiful and more affordable to invest in, Fundrise will offer a more automated solution that is much easier to manage.
With that said, if you’re just looking for the easiness of managing your REIT investments then you may just want to consider working with a financial advisor who can manage your entire portfolio, including REIT investments.
The Bottom Line
Standard REITs can be publicly traded, privately traded or public non-traded. Fundrise REITs are private, and thus may be somewhat illiquid, may be simpler for some investors and only require an initial investment of $10. Investors can just choose the preset portfolio that best matches their goals. Fundrise platform fees are 1% annually, which is higher than the average public REIT fee. While the Fundrise investment model is pretty simple, return yields may be lower than public REITs, depending on the portfolio you choose.
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