Washington D.C. based Fundrise is one of the most innovative real estate crowdfunding platforms today. They were the first to create the eREIT, a real estate fund that uses crowdfunding regulations to provide access for non-accredited investors to invest in private real estate across the country. Then they invented the “Internet Public Offering,” where the company directly raised over $14.6 million from 2,300+ Fundrise customers in a matter of 27 hours.
When they contacted me to sponsor a post about their new eFunds offering, I had to oblige as a real estate enthusiast who loves to learn new things.
What Is A Fundrise eFund?
An eFund is a brand new type of investment that allows you to invest directly into a diversified portfolio that aims to develop new homes for the next generation of American homebuyers in major US cities.
Imagine being able to invest in the renovation or construction of a home in downtown Los Angeles. If your life circumstances are right, several years from now you go ahead and exercise your right to buy.
If you don’t want to settle down in LA because you found a better job in Austin, you can sell your position for a potential profit. Or, you can remain invested and continue to enjoy the benefits of diversification. This is a good solution that smartly aligns investment and lifestyle goals.
So many folks are getting shut out of buying in expensive cities such as San Francisco, LA, San Diego, Seattle, New York, and Washington D.C. due to a lack of supply and soaring home prices. I cannot imagine what SF rent and its median home price will be in 22 years when my son graduates from college, hence my reluctance to sell.
Actually, I know the exact figures for both rent and purchase. A $4,200/month 2/2 condo with parking will cost $6,493 a month in 22 years if rent grows at 2% a year. If rent grows at 3% a year, the condo rent surges to $8,048/month! The same condo that costs $1,100,000 today will cost $1,700,558 if it appreciates by 2% a year and $2,107,774 if it appreciates by 3% a year.
Folks, please don’t rent forever. You will regret it 20 years from now. You’ll also start getting upset at your parents for not buying way back when. There is no time machine. There is only inflation. Pay attention to the angst the home buying demographic is feeling today.
The Old Solutions To Buying A Home
In the past, there were really only two independent ways to save for a home:
1) Set up a home buying savings account. You’d come up with a realistic home you’d like to buy sometime down the road, multiply the price by 20%, and calculate how much and how long you’ll need to save until you can finally achieve the goal. The only problem with this method is that real estate tends to appreciate over time, while a money market account barely pays interest thanks to the Fed.
If your $500,000 target home appreciates by 2%, your $100,000 salary must appreciate by 10% to just stay even. Given that most people aren’t seeing steady 10% annual raises, it’s no wonder why it’s become difficult to get ahead of the home buying curve. As a result, home savers try to take on more risk or save a larger percentage of their income.
2) Invest in riskier assets that aren’t perfectly correlated. Investing in the stock market works over the long term. We’re talking 7% – 10% average returns over the past 50+ years. But sometimes the stock market corrects just when you plan to use the proceeds (e.g. retirement, education, a house, remodeling, etc.). Sometimes your stock picks turn into duds. The multiple corrections over the past 20 years have scared many would be investors into avoiding stocks altogether and holding cash and bonds instead. In fact, only ~52% of Americans own stocks.
If you have some gains from the stock market, do your best to regularly convert some of the “funny money” into real assets like real estate. I know too many people in 2000 and 2008 who lost almost all their gains if not everything.
The eFunds solution is smart because your investment is perfectly correlated with what you care about. Currently, Fundrise has two eFunds, one in Washington D.C. and one in Los Angeles with more to come if everything works well. On the respective pages, you’ll see their general arguments for why investing in D.C. or LA is a good idea.
If you’re planning to buy a home within the next five years and want to establish roots in Washington D.C. or LA, it’s worth digging deeper. You know that demand outstrips supply due to tremendous job growth and under-building over the years. If you’ve ever made an offer on a house, you know the anxiety that comes with realizing someone can trump you with a sweeter offer. Therefore, if you can invest in something that looks good to you now and later have the optionality of either buying a house in the project or potentially profiting by letting the eFund sell the house to other buyers, then that’s an attractive value proposition.
Final Thoughts To Consider
Due to regulations, each eFund can only raise up to $50 million. Therefore, each fund will be limited in the number and type of investments it makes and the value of your investment in an eFund will fluctuate with the performance of the specific assets it acquires. You don’t want to be greater than 20% of the fund’s size for diversification purposes. Therefore, it’s good to ask how the fundraising is going before locking up capital for approximately five years.
As with any investment, it’s always good to start small and work your way up. With a minimum investment of $1,000 for non-accredited investors, that’s small enough to cause minimal damage if things don’t turn out as hoped. A 0.85% annual asset management fee isn’t insignificant, but if the fund can deliver an 8% IRR net of fees and give you the chance to purchase a property you like without having to go through a stressful bidding situation, it’s worth it.
One thing I think could be very interesting is investing the minimum amount it takes to have the optionality to buy a house you want. For example, let’s say you discover that the LA eFund acquired land in a location you like to build a model home that suits your needs. Further, the eFund still hasn’t reached its $50 million cap.
Wouldn’t it be nice if you could invest just $1,000 to reserve a spot on the purchase list when the project is done a couple years from now? We’ve talked about the importance of predicting the future to get rich. Investing just $1,000 for the option of buying in an area that might turn hot seems very attractive.
Fundrise Overall Performance
In 2018, Fundrise returned 9.11% net of fees, a significant 14% outperformance over the Vanguard Total Stock Market ETF, and a 15% outperformance versus the Vanguard Real Estate ETF.
Fundrise also outperformed the S&P 500 index in 2018, which was down 6.4%. All-in, Fundrise had a banner year, and they’ve once again shown the power of their platform as they carefully vet only the best deals with rigorous underwriting standards for investors to consider.
In 2019, Fundrise returned 9.47% versus 30.8% for the S&P 500. In 2020, Fundrise is likely outperforming the S&P 500 given the S&P 500 is down for the year as of June 8, 2020. Further, real estate tends to outperform stocks tremendously during times of volatility because interest rates collapse and the desire for more stable assets like real estate increases.
Before the 2020 global pandemic began, Fundrise was very conservative with regards to their outlook. They mentioned how equity valuations were extremely expensive and how they were investing more prudently. Fundrise turned out to be right.
I am continuously impressed with Fundrise’s forward-thinking ways. My only wish is that they open up a satellite office in San Francisco so we can go get a beer and brainstorm about the future of real estate even further.
8.25% is a pretty good annualized return net of fees for the Heartland eREIT™ given it’s about 3.5X the current risk-free rate of return (10-year bond yield). I like the fact that unlike P2P lending, there’s an actual asset behind the investment that can be worked out in case we hit a rough patch.
Fundrise Investment Offerings Going Forward
In 2020 and beyond, Fundrise is focused on concierge investment strategy approach first based on the amount you want to invest. Below are Fundrise’s Starter, Core, and Advanced offerings depending on investment amount.
Once you’ve selected how much you want to invest, you will then be asked what your investment goals are based on three types of eREITs:
More conservative investors should choose Supplemental Income given its focus on dividends. More aggressive investors who are willing to take on more risk should select Long-Term Growth for higher potential total returns.
The Supplemental Income eFund has more debt investments, while the Long-Term Growth eFund has more long-term equity investments. The Balanced Investing eFund is a mixture of both.
With a healthy 6-year track record, Fundrise has taken a huge step forward in proving out what they have believed for so long: that a model of individuals diversifying into real estate through a direct, low-cost technology platform is a superior investment alternative to owning only publicly traded stocks and bonds.
Sign up with Fundrise here today. It’s free to explore.