After publishing my post, Focus On Trends: Why I'm Investing In The Heartland Of America, a couple readers pointed out that Fundrise, one of the leading real estate crowdfunding platforms, offers various eREITs.
Further, on February 13, 2019, Google announced they are investing $13 billion in heartland real estate to expand their offices and data centers. The trend to the heartland is real!
One of the unique things about all of Fundrise's eREITs™ is that you don't have to be an accredited investor ($200K+ income, $1M+ net worth excluding primary residence) to invest due to Regulation A+ of Title IV of the JOBS Act.
Regulation A+ is a type of offering which allows private companies to raise up to $50 Million from non-accredited investors. Think of Reg A+ like launching a mini-IPO, but with lower fees than the traditional IPO process.
Given I'm bullish on the heartland for the next 20 years, the Heartland eREIT™ sounded like a promising investment.
I wanted to provide a review, even though the Heartland eREIT™ is no longer available, because the review will give an idea of the innovative thinking by Fundrise as we invest in the new 2020 decade.
Fundrise is all about creating different types of eREITs for investors to diversify with less volatility into real estate. Hence, the Heartland eREIT review is pertinent to all Fundrise eREITs.
Fundrise Heartland eREIT™ Overview
Below is some information I've taken straight from Fundrise's website followed by some Q&A and my thoughts at the end.
1) Objective
2) Time Horizon
3) Heartland Geography
4) Sample of Current Investments
5) Investment Strategy
Sign up with Fundrise here today. It's free to explore.
Important Questions And Answers
Here are all the questions I was wondering about. Some of the answers are from their website and others I got directly from the company.
What is an eREIT™?
An “eREIT™” is a real estate investment trust, or REIT, sponsored by Rise Companies Corp. (the parent company of Fundrise, LLC) and offered directly to investors online, without any brokers or selling commissions. Each eREIT™ intends to invest in a diversified pool of commercial real estate assets, such as apartments, hotels, shopping centers, and office buildings from across the country.
How Do I Make Money?
You earn potential returns based on the real estate investments made by each eREIT™ that you invest in. By investing in an eREIT™, you are purchasing common shares of a limited liability company. In turn, the eREIT™ uses the proceeds from its sale of common shares to make investments in commercial real estate assets.
As an investor, you are entitled to your pro-rata portion of any income earned and distributed by the eREIT™. Distributions are anticipated to occur on a quarterly basis, beginning after the first full quarter of operations, which is expected to be the first full quarter following the launch of a particular eREIT’s™ offering of common shares. However, there can be no guarantee that any eREIT™ will be profitable, and investors may be subject to partial or total loss of their investment.
What am I investing in?
A REIT is a company that combines the capital of many individual investors to acquire or invest in a diversified pool of commercial real estate. A REIT is required to distribute at least 90% of the annual taxable income it earns to investors.
What are the costs and fees associated with investing in an eREIT™?
Assuming a fully subscribed offering, each eREIT™ anticipates having a reimbursement of organizational expenses of approximately 2%, marketing and distribution expenses of each offering up to 1%, and annual ongoing asset management fees and operational expenses of approximately 1-1.5%.
However, the foregoing does not purport to be a full explanation of the fees associated with each eREIT™, which may vary among the eREITs™, and is qualified in its entirety by the disclosure contained in the “Management Compensation” section of each eREIT’s™ Offering Circular, which are available at https://fundrise.com/oc.
Can I redeem (sell) my shares?
Yes, with some limitations. While you should view your investment as long-term, each eREIT™ has adopted a quarterly redemption plan, whereby shareholders may request that an eREIT™ redeem some or all of their shares at the end of each quarter, subject to certain limitations. We may not redeem more than 5% of the total outstanding shares of an eREIT™ in any given year.
What are the risks involved?
Investing in an eREIT™ involves a number of risks and should only be considered by sophisticated investors who understand the risks involved and can withstand the loss of their entire investment. All investors should carefully review the Risk Factors section of each eREIT’s™ Offering Circular.
Related: Fundrise Overview And The Future Of Real Estate
What are the differences between the eREITs?
The primary differences among the eREITs™ are (i) the assets each eREIT™ intends to acquire and (ii) each eREIT’s™ individual investment strategy (which may vary based on asset location, type, and investment structure). Investors in one eREIT™ will have exposure solely to the assets held by the eREIT™, and shall not have exposure to the assets held in any other eREIT™.
For example, the Income eREIT™ intends to acquire assets that pay returns on a more current basis, which is anticipated to produce more predictable and reliable cash flows; however, the Growth eREIT™ intends to acquire assets that it expects to have greater appreciation over time, which may produce larger returns but less frequent distributions.
What is the minimum investment amount?
$1,000.
What is the latest declared quarterly dividend for the Heartland eREIT™?
The Heartland eREIT™ declared an approximate 8.25% annualized dividend for 1Q'17 net of fees.
How often are dividends paid?
Quarterly.
Is there a way to track the price movement of the eREIT?
eREIT™ shares are initially offered at $10.00 per share, a value that was arbitrarily determined by our manager. After an initial ramp-up period, the net asset value (NAV) per share will be adjusted on a quarterly basis. Each NAV adjustment for the eREITs™ will be filed on its respective SEC Edgar webpage accordingly.
How is the income and sale of the eREIT treated tax wise?
The tax section of our FAQs explains how these are treated and the forms investors receive. You should receive a Form 1099-DIV for the dividends and Form 1099-B for any sales.
What is the cost to purchase? Or is the cost embedded?
The per share purchase price will be adjusted every fiscal quarter and will equal the greater of (i) $10.00 per share or (ii) the sum of our net asset value, or NAV, divided by the number of our common shares outstanding as of the end of the prior fiscal quarter (NAV per share).
What is the size (assets under management) of each of your eREITs?
The most up-to-date status of the eREIT™ offerings can be found on each eREITs’™ respective SEC Edgar filing.
As of January 3, 2017, Fundrise has raised total gross offering proceeds of approximately:
- $6.43 million from settled subscriptions in the East Coast eREIT™
- $5.55 million from settled subscriptions in the Heartland eREIT™
- $7.01 million from settled subscriptions in the West Coast eREIT™
As of January 3, 2017, Fundrise has raised total gross offering proceeds of approximately (fully subscribed):
- $50 million from settled subscriptions in the Income eREIT™
- $50 million from settled subscriptions in the Growth eREIT™
Why would one eREIT™ be closed? What is the limit to the size?
The Income and Growth eREITs™ are fully subscribed at this time. Based on the regulations under which we are offering our eREITs™, we are limited to raising up to $50M in common shares in any given year.
Personal Thoughts
Attractive performance potential. With an 8.25% annualized yield net of fees (I double checked with them), the Heartland eREIT™ is relatively attractive if they actually pay out this amount every quarter.
Currently exposed to only three states. I'm a fan of Texas and Colorado real estate (not so much Illinois). However, I'm left wondering about the other heartland states like Nebraska, Kansas, and Oklahoma. More geographic diversification would be nice. I assume they will expand their geographic portfolio.
Flexibility and diversity. For non-accredited investors, these specialized eREITs™ are an easy way to get specific regional real estate exposure with a low $1,000 hurdle since Fundrise has a West eREIT™, Heartland eREIT™, and East eREIT™. It's good to be able to diversify away from where you currently rent or own physical property, especially for folks who live in expensive coastal cities like SF, LA, San Diego, NYC, and Washington DC where the real estate market is slowing.
Liquidity restrictions. Unlike a publicly traded REIT, an eREIT™ adjusts its Net Asset Value (price) once a quarter. Further, if you need money from the eREIT™ you can only sell once a quarter. Therefore, it's important you only invest money you can afford to tie up for the duration of the fund's time horizon.
Expense ratio. The biggest kink with Regulation A+ is that each eREIT™ can only be a maximum of $50 million in size. With expenses up to $1,000,000 a year, the lowest expense ratio is therefore 2% ($1M / $50M). You can see how expenses can really be a drag if they are not managed in unison with asset growth.
To help with the expense drag, there's an important section in the offering circular called Fee Waiver Support which basically states the Manager can waive the management fees for a certain period until enough assets accumulate.
There's no getting around the fact that 2% is a high fee compared to the majority of other investment opportunities out there. The hope for investors is that for this fee, Fundrise will be able to cherry pick the best investments that provide the highest risk-adjusted returns since it's often hard to tell which one is best since they all sound pretty good.
Given the first two eREITs™ filled up to capacity quickly, it seems likely so will these three regional eREITs™, thereby spreading out the costs to a wider base. Strategically, you want to be the last investor to join in order to pay the lowest percentage of costs. But you might also miss the boat as well.
Product offering expansion potential. Once each eREIT's capacity fills up to $50M, an investor will have to wait until the next eREIT™ is created to invest. I can envision a scenario where Fundrise creates the Heartland eREIT™ II, III, IV, V etc. If Fundrise has the manpower, they'll not only continue to have specific deals for accredited investors on their platform, they will also have a large portfolio of eREITs™ for non-accredited investors. 20 eREITs to capacity is a cool $1 billion dollars in assets under management.
Innovative. You've got to make a bet on Fundrise themselves since the JOBS Act only passed in 2012. Fundrise was first seed funded in 2011 and has since raised ~$41 million. They recently did their own Regulation A+ company funding by raising an “Internet Public Offering” from their existing members.
More than 2,300 Fundrise members — including investors across all 50 states — participated in the internet public offering, according to the company. Investors had to purchase at least 200 shares — or $1,000 — to participate in the offer. And only existing investors with Fundrise could participate. In total, their Internet Public Offering raised an impressive $14.6 million, meaning that they'll have raised at least $54.6 million in total funding once the latest fundraising is settled.
Their IPO plus their creation of the eREIT™ category is pretty forward thinking.
Sign up with Fundrise here today. It's free to explore.
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 eREIT™ has more debt investments, while the Long-Term Growth eREIT™ has more long-term equity investments. The Balanced Investing eREIT™ 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.
Updated for 2020 and beyond.
Sam, did you end up investing in the Fundrise EREIT as mentioned? I haven’t seen any further mentions after this post and it seems like you put a lot more emphasis on (and real money in) RealtyShares. I put $7k into the Heartland REIT – really like the idea of getting some exposure to non-coastal real estate – but acknowledge some of the concerns that others have had with where dividends are coming from as well as the fees.
I’ve looked for the financial statements on the Fundrise website but can’t find any. Just lots of narrative and pretty graphs going forever up and ‘projections’. What am I missing?
Sam, your thesis in the post about investing in the heartland was really solid, but I do wonder if this particular investment actually follows that thesis. Fundrise calling Chicago, Austin, and Denver “the Heartland” is a bit of a stretch, and reminds me of when I first moved to Boston from Illinois, and it was clear that many East Coasters had zero conception of “flyover country”.
A look at the first “featured assets” in the Fundrise Heartland eREIT is a good example. It’s a “324-Unit Suburban Austin Multifamily Development” in Pflugerville, TX, which certainly sounds like the heartland, until you dig in a bit into the description: “The property is within a 10-15 minute drive of the “Silicon Hills” area of Austin. Silicon Hills is home to the corporate campuses of 48 of the top 100 technology companies in the US, including Dell, IBM, Apple, Samsung, Cisco, and Hewlett-Packard.”
The San Antonio property is a bit more credible, emphasizing the importance of healthcare and a military base nearby (where there’s a case to make that both sectors will do well in the years ahead), but then looking at the Tempe, AZ Multi-family, again the emphasis is on proximity to high-tech firms: “Tempe is a center for technology and has among the highest concentrations of high-tech firms in Arizona. Major technology-based employers in Tempe include Google, Microsoft, Intel, Amazon, eBay, GoDaddy, Orbital, Avnet, PayPal, and Shutterfly.”
Your point about the likely winners and losers over the next few years was a great one, but in this case most of the Heartland eREIT investments appear to be in or near cities that are quite blue and dependent on companies tied quite closely to the economic activity of tech-heavy regions.
(FWIW I invested $1,000 in the Fundrise Income eREIT and $4,000 in the Growth eREIT, though have not invested in any of the new eREITs.)
When reviewing a prospective multi-family investment in Groton, CT on EquityMultiple a few months ago, I had your piece on the “winners/losers” in mind, especially after seeing the dynamic on the ground here in Connecticut (where I moved from Boston last year), which is generally seen as a blue state, but once you get about 75 miles out of NYC, it’s got quite a bit in common with the “heartland”.
Maybe another alternative is to go long on IYR which is an ETF which has 0.44% expense ratio and dividend yield of ~3.7%.
And you can juice up the total return by selling out-of-the-money covered call against your long IYR position. Instead of getting 3.7 dividend yield, one could get 2 to 3x of the dividend yield without too much work by the negative delta call position to reduce your cost basis of IYR. Last but not the least, you have a position that is very liquid and don’t have to tie up your capital for years. Isn’t that neat?
Is the income eREIT from Fundrise and REIT dividend from realtyshares subject to standard income tax rate while investing using taxable accounts. Would it be tax free if investing from a ROTH account.
Where does the dividend money come from? Is it like an interest payment or just profit money from different real estate assets?
Sam,
FundRise while giving & Calculating dividends is a bit awkward, I invested $1000 earlier but quarterly they give around $8 i.e. 1 share worth of $10 each or so..so they say 8% dividend on 1000/10=100 shares, some calculation which is understandable but I don’t subscribe & acknowledge that it pays 8% dividend
Before FIRE, I worked in commercial real estate for about two decades. For me, this information about this offering somehow doesn’t add up. If you look into the 3 investments the fund has made so far, the majority of the investments are going into preferred equity in new construction deals. Nothing fundamentally wrong with that, but I don’t see how you can support a dividend from that. It takes a few years before an apartment property is built and leased, so returns on equity usually can’t start until maybe 3 or 4 years out.
So how can a fund that invests primarily in non-cashflowing investments pay a consistent distribution? Or was your yield estimate of 8.25% an annualized projected rate of return over the next 10 years? Without knowing more, I would think that a fund like this would pay a dividend in the 1-2% range annually at most, and have the bulk of its return come on the exits from their investments down the road, with an average total yield of 5-8% (if everything goes well.)
You make a good point. Here are some reasons:
* They have more than three investments in the REIT. I just highlighted three examples.
* When you build a fund up to capacity, it’s a timing issue. You need more money to invest in more projects etc. There will always be a timing issue.
* In one fund I invested in (not this one), you accumulate your preferred dividend of X percent once the projects start cashflowing. There is a cashflow provision.
I haven’t invested in the Heartland eREIT fund yet, but the 1Q2017 8.25% dividend is what was stated.
See my comment above. The dividend is NOT the cash flow of the underlying investments. Bottom line is atleast some of the dividends are coming from investor cash
This is my concern as well. Is there anything preventing them from using new investor cash to pad returns? Some of their offerings even have guaranteed returns through a specified date. It seems like the temptation is there.
I am also curious about the comments from the ex-CFO.
I want to like it as I love passive income, real estate, and diversification.
I am wondering if I should do this or buy another sfh. Houses in the midwest are cheap.
Yeah, this is a major issue. I think it boils down to trusting the managers not to abuse this practice. Corporations use debt to pay dividends, so it’s not unheard of, but it’s one of the major risks. After reading the circular, I was struck by how broad the managers discretion is :). I’m still giving it a try, because I think it has huge upside potential.
Sam,
Having lived in the Midwest I am not bullish inspite of your Heartland thesis. Automation killed those jobs which will never come back.
I am already long the Bay Area so I invested surgically using PeerStreet and Realty Shares in some out of state properties with 65% or lower LTV. In a crash, the heartland properties will hurt more than the coastal cities and you need some protection. This ETF is too opaque to get that comfort wrt LTV.
Hi John,
That’s fine. Disagree is why there’s a market. Which area of the Midwest are you talking about?
I really like Texas, Colorado, Nebraska, and Utah.
I like the idea of crowdfunded real estate investments that don’t require you to be an accredited investor, but I’m not sure I have fully wrapped my brain around how this eREIT actually works. I’m going to have to do a lot more research before I invest.
What’s your take on the capital gain and dividend taxes? Aren’t REIT dividends treated as unqualified dividends?
If I’m in the top tax bracket, I’d be paying over 40% on those gains if it’s held in a taxable account.
https://blog.wealthfront.com/tax-efficient-reits-investing/
I have actually been considering buying a rental property in Dallas, but I do like the sound of this REIT. And 8.25% is a pretty sweet dividend, even with the high fees. I have not been able to invest in opportunities like this in the past because I am not an accredited investor yet (hopefully I will be in the next couple years). While I do love to invest in individual properties, the capital required is so huge, it takes so much time to save up the money!
The capital required is huge. Most people will put a 30% downpayment for a multi-unit or commercial property, and THEN take out a massive mortgage.
At my current stage, and I think for many people, it’s much more appealing to not go levered and diversify around the country now. We are 8 years into a bull market folks. Going after super expensive coastal city properties is NOT WISE imo.
Hey Danielle,
I’ve been stalking the Dallas rental market as well, and that’s why I’ve only invested in the west coast and east coast Fundrise eREITs. Let me know how your search goes. Are you looking for multi-unit properties, or single family?
Dividends are different than earnings. If you peel the onion on these eReits you may find that the actual earnings are no where near the dividend rate. The returns are frequently being paid out of money coming in.
There is a name for that type of “investment”.
Be careful folks.
I personally find the 2% fee a bit high, but the over 8% dividend (if sustainable) compensates. I agree with you that both from a US and international perspective the heartland looks quite undervalued now if you also consider the purchase power. All together it seems like an attractive investment; too bad that non US investors can’t open an account at Fundrise… :(
Sam, did I miss the article where you had invested the $260k in crowdfunding real estate? I know of this $10k and the $25k in your money addition article and the original money you put in Realtyshares.com but can’t find the other article.
Thanks for the help in advance
Fist time on the website! Thank you for a good coverage. I started with the income eREIT since they started. They did deliver around 10% annually. My concern is that they keep actively soliciting more purchases and promoting more products. First it was the Income eREIT, then the growth eREIT, then the 3 regional, and then they are selling shares of the company. All this in less than 2 years! Do they need this new influx of cash all the time to finance operations since the company is losing money?
Another issue I had when reading the circular about their iPO, one of the risks listed is that if the government decides to regulate them as an investment company other than some other classification.
It’s just the way startup culture is. Growth is the elixir that makes companies successful, and employees rich. Growth is what companies and investor pay for, often in lieu of profits (see Amazon, Netflix, Tesla, etc).
Startups have essentially subsidized the consumer through their funding. Without startups, the cost of many things would not go down. Startups also help give us ACCESS, which is the case w/ RE crowdfunding. In the past, only institutions and Ultra high NW individuals could invest in these commercial real estate deals. Sponsors would laugh at people with less than $500,000 – $1,000,000 to invest out the door. Now, one can invest with as little as $1,000 is pretty game changing IMO.
Uber lost almost $2 BILLION in 2016 to help make reads cheaper for us all. This year, they may lose $2.5 – $3 billion. So long as the VC gravy train runs, all is good. It’s when the economy takes a nose dive where things get hairy. This is why trying to get to EBITDA break even BEFORE the crush happens is pretty vital, often in lieu of growth.
Regulation will ALWAYS be an X-factor with relatively new financial investments. I’m taking the bullish look and thinking the new government will deregulate and widen the definition of accredited investor to include more people. I could be wrong, but that’s why there’s no risk without any reward.
I really like the idea of crowdsourcing knowledge on FS to get as many smart people in the room as possible to evaluate investment ideas.
I assume you are doing Equity vs Debt? I would imagine you’d need to in order it to be worthwhile.
It probably depends on one’s tax bracket, but 8% taxable income isn’t super attractive IMHO based on the risk. After taxes that could be ~4%; which is about what a double tax free muni bond is paying today with a drastically lower risk profile IMHO.
Locking in for 4-6 years with a young IPO company, after a long bull market run, in a pretty inflated RE market, with a Trump Presidency factor (which… 4 years out is election time) for the Equity deal seems exceptionally risky to me. You are betting on the market, this company, etc. The equity appreciation would need to be very high over the next 4 years to be worth the risk it would seem. What type of return are you hoping for?
I’m doing some short term (11-12 mo) debt deals on other platforms primarily just to see how they go and out of curiosity – but closer to the 9.5-11% range. That time frame feels safer to me (both for market, and these companies), but even at that range after taxes… I still debate the risk/reward vs. the tax free muni bond.
Just out of curiosity, are you using Yieldstreet for the debt deals? Those are about the terms I’ve seen there. I like that they’re offered at about a 50% LTV ratio. I haven’t invested in one of their real estate deals yet (I’ve done a couple of the litigation financing deals), but I’m planning on getting into the next one that’s offered.
You need to come to Colorado Springs to check out the RE!!!!
While here, you can beat me up The Incline (Google it). ;)
The market is on FIRE here. I’m looking for places but the prices are insane. I am also having my property management company look for me back in MI where things are still hot but not as bad as in CS.
Oh yeah, I know about CO real estate being en fuego! Like Portland and Seattle years ago, I wanted a piece of the action b/c I would fly to Denver once a month to visit clients. It looked like a no-brainer then.
And also, how sweet are the BACK BOWLS of Vail?! Best boarding in the world! So rad.
Thanks for the detailed overview. I’m curious what your thoughts are on investing in REITs in what looks like a rising interest rate environment? I assume this is a long term play for income so you may not be as concerned but curious to hear your thoughts.
Also, how does this product compare to REIT index mutual funds that are available for non-accredited investors? This product has the benefit of regional focus but are there any other benefits that come to mind compared to the better liquidity available via the fund?
It’s actually because interest rates on the 10-year rose by ~75 basis points after Trump’s victory that I decided to finally build some positions in bonds and REITs. I don’t think the 10-year yield will rise much over the next 5-10 years. It might get to 3% in 2017, but I doubt it. If I can earn a 4%+ gross yield relatively risk free and pay a 2.35% – 2.75% mortgage, that is awesome arbitrage I will conduct all day long.
See: Explaining The Fed Funds Rate And Interest Rates
Just b/c the Fed raises rates doesn’t mean the rate the consumer sees goes up.
What specific REIT index mutual fund are you discussing? None of them will be as focused on the Heartland eREIT, which is where I want to allocate capital.
Great article Sam! I am a long time follower and always find your work informative and fun to read. I like the idea of fundrise because it gives the average investor exposure to the real estate market without having to make a large initial investment.
I haven’t started a position in any of the eReits offered by fundrise, but i do hold sizable positions in ohi and ete. While ete is not a real estate trust I think it is an alternative way to play the heartland with a nice yield. Again, as always great post.
Wow, ETE has been on fire! I have no idea about the company and can’t comment intelligently. There are just so many investment ideas out there making people lots of money in this bull market.
I’m just waiting for that 10% correction again that doesn’t seem to be ever coming. But, if it does, I’m ready to pounce due to my recently expired CD.
Good luck to us!
Happy to see this post! I invested a decent chunk(for me) last year in OHI. Happy to see that we are in this boat together. The returns are nice and I have thought about expanding to such areas. Ive considered p2p too but always thought this would be a safer bet.
Love and follow all your posts.
Thanks for the guidance.
Cool. OHI seems like a long term winner given our population continues to age. At a 8.5% gross dividend yield post the election, OHI was too juicy to ignore! I will be buying more if the yield gets to 8.5%+ again.
Bond yields have stealthy come down. People need to pay attention to the 10-year bond yield as it is signaling something negative may be about to happen in the equities market here. Who knows, but I am more than happy that I built my bond/REIT portfolio in Dec/Jan.
I’m looking to start investing in some turn key properties for leveraged ROI but this seems like a great addition with a 8% unleveraged (at least from a personally liable standpoint) ROI. I think it is defiantly worth a flyer and with the low cost of entry you can chose how much you want to put in. One concern I have is the administration costs, if they had every investor contribute the minimum $1k they would have 50k investors per eREIT although that will not be the case I wonder if they are truly prepared for the administrative burden of more smaller investors.
I spoken to other real estate crowdfunding platforms who have decided NOT to go the eREIT route because of resources. The REC companies will want to go after institutional money b/c the work is the same onboarding a $1,000 investor as is a $1,000,000 investor.
But the ratio of institutional and retail is tricky. I would think a 50/50 ratio is good. You don’t want to be so heavily reliant on say, Blackrock, when suddenly pulls out $250M funding at a P2P company, and then TANKING the P2P’s business for the rest of the year… or maybe longer.
If Fundrise can pull off both the accredited and non-accredited space with eREITs, it could very well emerge as the long term victor by serving 100% of the investor market.
I think they need to hire someone like me to build the institutional relationships. Damn, I could make them a fortune! Alas, I’m just a HS tennis coach :)
I agree! I believe for this that although you have the opportunity to pull out a portion of your investment each quarter the managers have full discretion on weather to allow it or not. Don’t know the ins and out of Reg A but would think they could offer a tiered pricing structure (like Vanguard Admiral Shares) to reflect the additional back office work of managing retail investors. But I’m in, we’ll see how it goes!
Really cool, Sam! I may have to set my sights on Fundrise. Are these eREITS debt or equity investments? For someone who prefers equity investing, which of the two platforms would you recommend?
Nice to see that non-accredited investors are getting opportunities that have previously only been available to the ultra rich.
Sincerely,
ARB–Angry Retail Banker
The eREITS invest in both debt and equity. Depending on the eREIT mandate, it may lean more towards one or the other.
The Growth eREIT is already fully subscribed, but that would have more of an equity weighting to it.
You have more ability to pick and choose your investments as an accredited investor. Right now, all I see are the West, Heartland, and East eREITs available. But I just care about the Heartland, which is balanced equity and fixed income.
Are any of these eReits leveraged, or are all these properties purchased outright?
I keep waffling over making out of state real estate investments such as the heartland e Reit. All of my property is currently isolated to Portland, Oregon.
I keep coming back to the fact that greater leverage has always equaled significantly greater returns for me. I’ve gotten over 10% cash on cash returns on every property I’ve purchased, and Portland is a horrible place to invest for cash flow. But then again, again an eReit would be a little less of a headache.
Looking at the individual investments, all the properties I see are leveraged with debt and sponsor injected equity. Remember, real estate crowdfunding platforms are fundraising vehicles for the real estate operators/sponsors.
Leverage is obviously great on the way up, and bad on the way down.
I do not want to lever up in a coastal city market where it’s slowing and have to borrow massively. For example, I need a $250,000 downpayment to buy a median priced SF property AND take out a $1,000,000 loan!
Forget that, since I’m already long SF physical property. Instead, I’d rather invest $250,000 without borrowing money to get exposure to much cheaper properties in the heartland that are throwing out 10% gross annual cash flow yields. Less leverage, more diversification, and no borrowing to invest.
How does this compare to an REIT like the Vanguard VGSIX? VGSIX has a return of over 10% since 1996 and is more diversified than this Fundrise eREIT. And of course Vanguard has been around for longer than Fundrise.
The comparison lies in how surgical you want to be with your real estate investments. For example, I was bullish on NYC and SF real estate, so I at least bought SF real estate in the early 2000s. Sadly, I couldn’t afford NYC RE in 2000. If I did, the property would be worth 3X now. SF real estate returns have significantly outperformed the national average for 15 years.
Now I’m bullish on heartland real estate, so that’s where I want to invest. I believe heartland real estate will outperform coastal city real estate over the next 3 years, partly b/c coastal city real estate is softening, and heartland real estate looks to be able to generate 10% gross annual returns.
But since I don’t live in the heartland, buying the Fundrise Heartland eREIT might just be the perfect solution for my investment thesis. I like to invest in trends, and I think there will be a rejuvenation in the heartland for the next 5-10 years.
VGSIX is so large, with so many holdings that hold different RE holdings, that it can be viewed as a proxy for the overall US real estate market.
Vanguard is awesome, and the benefits are low fees and high certainty of it being around. VGSIX is an excellent selection for someone who simply wants some RE exposure in their investment portfolio.
VSIX Top 10 Holdings (33.41% of Total Assets)
Company Symbol % Assets
Simon Property Group Inc SPG 7.09%
Public Storage PSA 3.89%
Equinix Inc EQIX 3.36%
Prologis Inc PLD 3.16%
AvalonBay Communities Inc AVB 2.92%
Welltower Inc HCN 2.91%
Equity Residential EQR 2.73%
Ventas Inc VTR 2.66%
Boston Properties Inc BXP 2.47%
Vornado Realty Trust VNO 2.22%
As a non accredited investor, this looks pretty tempting to jump in especially considering the $1,000 minimum investment relatively speaking. Did not expect the payout to be so often (four times a year).
Based on your article as well as independent research, I agree that the heartland of America is very promising. Areas like Austin, Dallas, Houston (all areas this EREIT is investing in) are undervalued and frequently make up the top investment areas of the United States.
I would say let us know how it goes, but we know you will!
The fees on this one seem high but 8.25% is not bad for diversification.
OHI sports better return characteristics, at an 8% return with 6-8% payout growth each year, rising quarterly slightly.
O has made investors very wealthy if held over the past 10 year and reinvested- something like 16% compounded returns with good monthly cash flow coming in.
-Mike
Can I hold a fundrise or realtyshares investment in a Roth IRA ? If yes, how can I go about doing this?
I believe you can. But it depends on your service provider. Call them and ask. IRAs have a lot of flexibility in what you can invest in. Just need to sign some paperwork and stuff.
I like investing in less liquid securities in an IRA b/c it tends to fill into the long term time horizon of the IRA e.g. 5 year investment, can’t touch your IRA until 59.5, 20 years from now without penalty anyway.
* Age 59 and under. You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA. Withdrawals from a Roth IRA you’ve had less than five years.
Wow. Very detailed analysis. Someone did their homework :)
While the 8.25% sounds tempting, the two things that give me pause are “you can only sell once a quarter”, the 2% MER, and the diversification across only 3 states.
I’m also skeptical about whether they can actually consistently get a 8.25% yield after fees.
Guess we’ll find out as I’m sure you’ll be posting updates on how your $10,000 investment is performing. Looking forward to seeing the results!
Hi Sam,
Thanks for sharing this very informative well-researched article!
What I do like about it is it allows smaller investments and allows diversification over many real estate deals.
And the liquidity is a BIG bonus, quarterly is awesome (much better than the one I have where it’s only liquid once a year).
And a secured collateral is is a big win. Plus I like the grading system as a good sniff test.
Do you know if Fundrise reports on performance on the deals? Curious because so many projects take longer than expected..
Now I have to see when they are coming to Canada.
Yes, they send regular updates up the performance of their deals. As an investor, the more the merrier. Quarterly is good because it follows the standard of publicly traded companies who report quarterly earnings.
I originally started off with a 1k investment in the growth eREIT but slowly added to it and now I have 10k over a few different eREITs at Fundrise. I like how they constantly provide updates on when deals are made and how existing investments are doing. The eREITs that have been established for a while such as the Income eREIT are seeing returns as advertised but some of the newer ones such as the Heartland eREIT are still below projections because they are just starting to ramp up. I’ll prob add more to my investment in the near future.
Yes, the strategy is to be one of the LAST investors in each eREIT so that the cost of running each eREIT is spread out over a large asset base so that each investor bears a lower cost. You just have to be careful not be shut out if there is a sudden surge in demand that soaks up all supply.
In an ideal scenario, I’m guessing a fund size of $100M – $250M is the sweat spot. Small enough to do a good amount of deals of significance, and large enough where the $1M annual cost isn’t that big of a drag. Perhaps Regulation A+ will evolve over time.
I think the $1 million fee is a one-time organizational fee (2% of the maximum fund size). After that, it’s a 1% annual management fee.
Interesting cities they have chosen and I like all of them except my home town. Chicago is a very dynamic city, but one I don’t want any part of anymore with the current state of affairs. I still have a rental property up there that they raised property taxes on in Cook county on by almost $1000, here in Phoenix that would be the entire property tax for the same structure. Not only that it didn’t impact the budget shortfall as they are still broke. Crime is continuing to increase and there is a statewide looming pension issue that is still bubbling to the surface. I really don’t like the city for an investment perspective as there are a lot of issues there at the moment.
The funny thing is, many folks who pay taxes in their home town can’t stomach wanting to buy more in their home town. With Chicago so poorly managed, and Illinois having the second highest property taxes in the state, I don’t blame you for not wanting to invest in Chicago!
Chicago is so damn cheap compared to SF, SD, NYC, LA, DC, but I had the regulation there and I want more hearty heartland exposure.
I have been an investor with Fundrise since January 2016. This was my first foray into real estate crowdfunding. So far I have invested a total of $25,000 in 3 of the eREITs at Fundrise + a $10,000 allocation in the “Internet Public Offering” you mentioned.
My Income eREIT investment saw dividends of $768 on a $10000 investment between Jan 2, 2016 – Jan 13, 2017. The return may appear like it fell short of Fundrise’s projected 8% but that is because I initially invested only $2000 in Q1 2016 followed by the other $8000 in Q2.
My Growth eREIT paid dividends of ~$270 on a $10,000 investment since Oct 2016. This is the onethat stands to have a greater return when the life of the eREIT is over.
I also have a $5000 investment in the East Coast eREIT; only 1 dividend has been paid so far.
Seems like too early in the investment to do any analysis on it just yet.
I am very excited about investing on these online real estate “marketplaces” as an alternative to my other investments (mostly stocks, mutual funds, a couple of rental properties) and have already invested through 2 other online real estate platforms since the Fundrise investments.
Thank you, Sam for starting this personal finance website. FS is the best I have come across in years!
Great to hear the returns have worked out well. What is the latest NAV of the Growth eREIT you see? Par value was $10 right?
What type of tax documents did you receive for your 2016 tax year? 1099-DIV I presume?
I’m impressed you invested $25,000 in the eREITs, but then invested $10,000 in the IPO! What made you get so aggressive on investing a high percentage in Fundrise, the company? Did they send out a fundraising presentation to all Fundrise members?
Thanks!
FIREWannabe,
Can you recheck your dividends from Growth eREIT over since October 2016? I have the same amount invested and received much less. Fundrise states that they only allocated a dividend for the month of October, not November or December (in line with their long term capital growth strategy for this particular fund).
Thank you.
Sam, NAV was $10 per share. Right now, it’s listed as a little less but it’s only updated every quarter. One or more of their real estate assets must have decreased in value but I’m not too worried as the fund is aiming for growth over a 4-6 yr timeframe. They sent out a presentation on the IPO, unfortunately I was unlucky to not get my bid in before it was oversubscribed.
I began investing in Fundrise last November. Being a non-accredited investor, this was the option I liked the best for real estate crowd funding. I initially invested $1k in the growth eREIT to get started. With that investment being closed, I’ve invested about $5k in the Heartland eREIT so far this year. My plan is to bring my investment up to around $10k throughout the various eREIT’s in the first half of 2016. After I get some experience with it, I’ll decide if it’s worth a larger investment.
One thing I liked about the Growth eREIT that isn’t offered with the eREIT’s still open is the accountability feature. The Growth eREIT agreed to pay a penalty of up to $500,000 to investors if the eREIT earns less than a 20% average non-compounded return.
Interesting term in the Growth eREIT. I love investments with downside hedges, which is why I’ve regularly bought index structured notes since leaving the workplace in 2012.
Without a hedge, it becomes very difficult for me, and other people to go naked long. When you are unemployed, an entrepreneur with unknown income, or have a family to support, having a hedge is very helpful!
Do let me know or write a post in the future about any good and bad experiences w/ the eREITs. thx.
Will do. Will be interesting to compare to other crowd funding platforms.
I am a bit pessimistic on heartland investments as I grew up in the industrial upper midwest. It seems home prices there, while they sometimes go down, never seem to go up above inflation.
However, most of your Cities chosen, in CO and TX, should perform well over time. I am guessing Denver will do better because they have more restrictions on building in CO (not to mention federal land ownership) than TX does.
Agreed on your opinion of the industrial midwest, but it also seems like their idea of the Heartland is wide. Where’s Minneapolis?
I like that they have offerings for non accredited investors and a low minimum of $1,000. I personally love real estate and being able to diversify into different areas around the US without having to actually own and manage an entire property is really convenient from an investment perspective.
Perhaps down the road they can create an international eREIT. That would be quite an intriguing product offering especially after reading your post on how much the real estate markets vary around the world.
An International eREIT would be brilliant! Not sure how the logistics/compliance/tax regulation would work, but that would be a blockbuster offering IMO. I’ll ask and see if they ever thought about such a thing and how it would go about.
I’d love to have exposure in: Kuala Lumpur, Prague, Budapest, Bucharest, and maybe Cheng Du.
Sam, 8.25% sound pretty attractive. I haven’t invested in an eREIT yet, but need to consider how to redeploy some RealtyShares capital being returned soon. It is nice that this is available to non-accredited investors. I’ll be interested to see how your $10k performs.
I’ll be interested in how the $10k performs as well. I invested in both the west coast and east coast eREITs, so time will tell how which performs the best. Those startup fees are the biggest potential issue to me, so I like the strategy of throwing in some additional capital once the eREITs raise closer to $50 million (they’ve each raised about $10 million so far) to make sure the fees are spread out. Hopefully everyone else isn’t doing the same thing, or the last few million might go quickly.
I have a write up of Fundrise, as well as a page dedicated to tracking my investments in the west and east coast eREITs on my website if anyone is interested. Good luck to everyone!