Real estate is one of the best asset classes to build long term wealth. As an owner of four properties (2 in San Francisco, 1 in Lake Tahoe, 1 in Honolulu), I've seen my net worth soar over the past 15 years as my principal values and rents have increased far beyond inflation. Real estate alone accounts for roughly $200,000 in gross passive income a year.
Now that I'm over 40, my attitude towards buying more physical real estate has changed because of three key reasons:
1) Property taxes. I'm already paying $50,000 a year in property taxes.
2) Dealing with bad tenants. Most of my stress comes from dealing with bad tenants who wreck my property or don't pay rent on time.
3) Too much financial risk. To add hundreds of thousands of dollars in illiquid real estate exposure near the top market in coastal cities sounds like a bad move.
With these three reasons, I sold my San Francisco rental house I bought in 2005 for $1.52M, for $2.74M in 2017 and reinvested $500,000 of the proceeds in real estate crowdfunding.
REAL ESTATE INVESTMENT SOLUTION
Real estate crowdsourcing is the best solution I've found for investors who want to continue investing in real estate, but more surgically with lower amounts, for potentially higher returns, and less hassle.
Based on my first-hand research meeting with various real estate crowdsourcing CEOs and testing out their platforms, I've decided that Fundrise is the best real estate crowdsourcing platform today.
Fundrise is headquartered in Washington, D.C. and the platform allows individuals to invest as little as $1,000 in real estate development projects.
The inspiration for founders (and brothers) Ben and Dan Miller was to open up real estate investing to ordinary people and to give them a chance to own a piece of property in their communities. Their father was a major real estate investor, so they've grown up with real estate in their blood.
Fundrise Funding History Details
In early 2017, Fundrise also raised ~$14 million from existing Fundrise investors through an “Internet Public Offering,” bringing total funds raised to over $54 million.
Fundrise Management Team
Fundrise’s leadership team gets high marks from industry insiders. The founding brothers, Benjamin and Daniel Miller, are sons of noted Washington D.C. real estate developer Herb Miller.
Benjamin Miller, who acts as CEO, has 15 years of experience in real estate and finance. He worked on $500 million of property as a managing partner of WestMill Capital Partners.
Brandon Jenkins, Chief Operating Officer – Brandon helps to run the design and tech teams to ensure the Fundrise software platform is running smoothly. He was previously an investment advisor and broker for Marcus & Millichap, the largest real estate investment brokerage firm in the U.S.
Kenny Shin, Chief Technical Officer – Kenny has been the CTO since Janary 2011 and has previously consulted for Fortune 500 companies in the finance and technology space, including Fannie Mae, Oracle, Department of Defense and NATO.
Real Estate Crowdfunding Benefits
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 has easy eREITs to invest in. 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 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.
Fundrise says its servicing fees are 30 basis points (a basis point is 0.01%) a year, which ranks quite favorably among real estate crowdfunding platforms. In the fine print, it says this can go up to 0.5% of invested capital per year.
Each deal’s annual returns are quoted gross, not net, of annual servicing fees. The platform has historically not taken a spread between income from the asset and payments. Fundrise also charges real estate companies a one-time 1% to 2% origination fee and $5,000 closing cost.
Currently, for all Fundrise eREITs, investors will not have to pay anything in asset management fees until they earn a 15% annualized return until December 2017. After this (or if you earn over 15%), asset management fees range from 1-1.5%, depending on the eREIT you have.
Fundrise, like other platform counterparts, touts the cost-saving advantages of crowdfunding over traditional investing models. Fundrise wants users to know that their advantages can boost returns on a theoretical project with a 14% gross annual return on a $100,000 investment. On Fundrise, the investor would get a net return of 13.7% or $68,500 versus a 7.7% net return, or $38,500 on a non-traded REIT.
Real Estate Investing Sweet Spot
Historically, data shows investors with a 20% allocated to real estate have outperformed those who only own stocks and bonds. The 20% real estate model was made famous by the ~$30B 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 and am still working on my house slowly today.
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.
Diversify Your Investments
Low interest rates are here to stay for likely the rest of our working lifetimes. They've been going down for 35+ years in a row now. 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.
Fundrise says that of the hundreds of projects it reviews every month, fewer than 5% are approved. It performs due diligence and pre-funds all its investments from its own balance sheet before offering them to investors. Fundrise wants to align its interests with all of its investors.
The following diagram shows the approval process for a project at Fundrise.
As a real estate crowdfunding investor with over $260,000 in exposure, proper due diligence is vita. Of the less than 5% of deals that make it for investment consideration on the Fundrise platform, I will then do my best to choose the best of the best.
Starting on June 12, 2017, Fundrise introduced the first low-cost private market investment portfolio. When you invest with Fundrise, your money is automatically diversified across their proprietary eREITs and eFunds, investment products specifically designed to be low-cost and tax efficient.
For those who want to diversify their investments, own an underlying hard asset, not have to deal with maintenance and tenants, and take advantage of lower valuations and higher rental yields across the country, take a look at Fundrise. It's free to sign up and explore.
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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.