A lot of you have expressed interest investing in real estate over the years as part of a diversified investment portfolio strategy. However, some of you don’t have the 20%-30% downpayment to get started in rental property investing. Therefore, I’d like to explore the real estate crowdsourcing industry with Fundrise, one of the leaders.
I’ve been a big fan of real estate since college, but I’ve only invested in actual physical property. I’ve always just bought a place to live in for several years and then rented it out. This way, no matter what happens in the market, I’m hedged because I’ve enjoyed the property. Further, I only need to put 20% down initially.
When my master tenant gave me her 30-days notice recently, I saw it as a sign to explore as many investment alternatives as possible. Roughly 40% of my net worth is tied up in illiquid physical property. I’d like to get that figure down to around 30% for my ideal asset allocation.
Fundrise Company Overview 2017
Fundrise is one of the leasing real estate crowdsourcing platforms that has raised over $40 million to date. They are based in Washington DC. Fundrise plans on raising a new round of funding in 2017 due to their strong growth profile. Here is their profile overview for your review.
Total Equity Funding: $41 million + $16 million from Fundrise members through their “Internet Public Offering” in February, 2017
Headquarters: Washington DC.
Description: Fundrise is the leading online real estate investment crowdfunding platform. Starting in 2012, Fundrise was the first company to take commercial real estate public online and offer true equity ownership in local properties.
Founders: Brandon Jenkins, Benjamin Miller, Kenny Shin
Categories: Real Estate Investment, Crowdfunding, Financial Services
Founded: January, 2011, Seed funding in 2011
Sign up link: Fundrise
Fundrise Funding History Details
Plus $16M in funding from existing Fundrise members through their Internet Public Offering.
Fundrise Management Team
Real Estate Crowdsource Investing
One of the most efficient ways to invest in real estate around the country is through real estate crowdsourcing. Instead of flying around the country to kick some sheetrock, one can simply invest as little as $1,000 – $5,000 in various pre-vetted deals on Fundrise’s platform. Fundrise only chooses the best operators. From there, the individual can analyze each potential deal.
What’s awesome about Fundrise is that it also has eREITs to invest in by region for non-accredited investors. Each eREIT (West, Midland, East Coast, Growth, Income) is open for all investors where there is supply. An investor can simply ride the geographic/strategic decisions the eREIT manager chooses to make a potentially healthy 8% – 16% return based on historical performance.
Here are three examples of Fundrise’s eREITs. I’m partial to the Heartland eREIT due to the new administration that’s focused on bringing jobs back to middle America.
Real Estate Versus Equities Performance
The following chart compares the performance between real estate and the S&P 500. I’m surprised to see such massive outperformance by the FTSE NAREIT ALL REITs asset class. But I guess it makes sense because after the NASDAQ bubble burst in March 2000, real estate started taking off partly because the Fed aggressively lowered interest rates, and partly because equity investors looked at hard assets to park their money.
I’m in the camp that interest rates will stay lower for longer. As a result, I continue to see real estate as an attractive long-term asset class given real estate provides a relatively good yield relative to the 10-year government bond yield at ~2.5%.
Real Estate Investing Sweet Spot
Historically, there’s data that shows investors with roughly 20% allocated to real estate have outperformed those who only own stocks and bonds. The 20% real estate model was made famous by the ~$25B Yale Endowment, which outperformed traditional allocations 22.6% annually for decades by investing at least 20% of its portfolio in real estate.
However, in the past, the best private real estate opportunities require minimums of $100,000 or more, making them inaccessible unless you’re very wealthy. The only other option is to go through middlemen who charge high fees, thereby negatively impacting returns. This is where Fundrise and their technology comes in because their investment minimum can be as low as $1,000 for some deals.
Below is a chart highlighting the different sized real estate markets. You and I can’t buy trophy properties like the Empire State Building because these properties are just too large and expensive. You and I can buy fixer uppers to make some sweat equity. I did so in 2014 by buying a panoramic ocean view property in the Golden Gate Heights neighborhood of San Francisco.
But fixers can be risky and stressful if you don’t know what you’re doing. So it seems like the Midsize market is the sweet spot for investing given less competition, a more inefficient market to exploit, and potentially higher risk-adjusted returns. This is where the real estate crowdsourcing industry currently operates.
An Easier Life
One of the biggest advantages of owning equities over real estate is there are no ongoing maintenance costs. Something is always breaking in one of my properties, like a kitchen faucet the other week.
Another advantage of owning REITs and equities is there isn’t ongoing property taxes. Even though property tax is only 1.2% of the assessed value in California, isn’t it disgusting to know that in 83 years, you will have paid 100% the value of your property in taxes alone?
But the biggest benefit of not owning physical rental property is never having to deal with people. For the most part, tenants are fine to deal with if you’ve vetted them properly. But sometimes, no matter how nice they can be on paper and in the interview, conflicts may arise.
If I can invest in real estate and make a 7% return a year, let alone a 10% – 15% annual return, I’ll double my investment after 6-7 years. The main “drawback” to investing in REITs and real estate crowdsourcing platforms is that I can’t leverage up 5:1 like I can with a mortgage on a physical property. But sometimes, not leveraging up can save your hide.
Diversify Your Investments
Everybody should seek to own their primary residence to get neutral inflation. After that, consider investing in stocks, bonds, and real estate crowdsourcing investments through a company like Fundrise. They’ve opened up new opportunities for everyday investors to gain access to properties they otherwise would not have access to in the past.
Low interest rates are here to stay for likely the rest of our working lifetimes. It’s therefore best to invest in income producing assets because not only will they provide a higher income stream, they’ll also attract more demand, thereby boosting the principal value of your income investment.
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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. The publicly filed offering circulars of the issuers sponsored by Rise Companies Corp., not all of which may be currently qualified by the Securities and Exchange Commission, may be found at www.fundrise.com/oc.