In 2023, Fundrise launched its Opportunistic Credit Fund to the public, a specialty fund that lends money for construction loans and refinances. Given the decline in banks willing to lend, Fundrise has stepped in to provide liquidity on some of the best projects it has identified.
According to Fundrise, the dramatic increase in interest rates has created a period of dislocation, as evidenced by the inverted yield curve. As a result, it's more expensive to borrow money for one month than for ten years.
While this unnatural state of affairs creates a wave of potential distress for borrowers, it's driving attractive, once-in-a-generation opportunities for credit investors.
Here is my Opportunistic Credit Fund review for those considering to invest. Since 2016, I've personally invested $960,000 in various private real estate funds, including $143,000 with Fundrise.
My main goal of investing in private real estate crowdfunding is to diversify away from my expensive San Francisco real estate holdings and earn more 100% passive income. After having children, I no longer wanted to manage as many physical rental properties due to all the maintenance and tenant hassles.
Opportunistic Credit Fund Review
Due to a rapid rise in mortgage rates since 2022, property developers have found themselves facing higher borrowing costs. Their existing lenders have asked the developers to come up with more cash because lenders are pulling back. This is where the Fundrise Opportunistic Credit Fund comes in.
There are plenty of high-quality developments in the middle of being completed. Fundrise goes out and conducts due diligence on the best developments it can find that needs additional funding.
Developers aren't going to simply quit their projects midway and lose everything. Instead, developers will find lenders, such as Fundrise, to bridge the remaining loan need.
Developers will take out a 2-5-year loan, which become investments in the Opportunistic Credit Fund. According to Ben Miller, Fundrise CEO, the average duration of the loan will be between 3-4 years.
Lending Money For Refinancing
In addition to lending money to property developers, the Opportunistic Credit Fund will lend money to sponsors with good projects whose loans have become variable.
Most of the sponsor loans are variable loans or have short fixed-rate duration that adjusts after one-to-three years. With the rise in mortgage rates, so has the cost to borrow. Some existing lenders may not want to lend the sponsor more money, which is where the Opportunistic Credit Fund comes in.
For more details about Fundrise, read my Fundrise review. I've worked with Fundrise since 2014 and they are my favorite private real estate investment company.
Target Returns And Fund Structure For The Opportunistic Credit Fund
Target returns: The average gross interest rate for an Opportunistic Credit Fund loan is between 13% – 14%. Therefore, the target returns for the fund will be 12% – 13% net of fees.
Again, the average duration of each loan is between three-to-four years. After a year, the borrower can prepay the loan without penalty if it wishes, which would reduce the fund's returns if too many borrowers prepay. However, Ben Miller is confident the vast majority of borrowers will need to borrow the entire loan for an average of three-to-four years.
The target term (hold period): 5 years (no liquidity before then)
Distribution frequency: Quarterly
Asset management fee: 1.75%
Management incentive fee: 20% over 10% preferred return
Minimum Investment Amount For the Opportunistic Credit Fund
The minimum investment amount is $100,000. If you don't have $100,000 to invest, you can always invest in the Fundrise Income Fund, which has a minimum investment amount of $10.
The Opportunistic Credit Fund will likely have higher returns because it just launched and sees new opportunities with great deals at higher interest rates. That said, some of the deals the Opportunistic Credit Fund finds will also be included in the Income Fund.
Below is a snapshot of some of the Fundrise funds to invest in, including the Income Real Estate Fund. If you are a Fundrise Pro member, you can customize your asset allocation across different funds.
Example Of Opportunistic Credit Fund Investments
Fundrise invested roughly $9 million to provide financing in the form of preferred equity for the development of Thompson Reserve, a 103-unit horizontal multifamily community on 9.63 acres of land in San Tan Valley, Arizona.
The borrower has agreed to pay us a 13.85%1 fixed annual rate that will accrue until the earlier of either redemption or the first extension. Additionally, the borrower has agreed to pay us a rate of 3.50% in current-pay interest on the $500,000 held in interest reserve.
Mayson At Daytona Beach
Fundrise invested roughly $20.8 million to provide financing in the form of preferred equity for the development of the Mason at Daytona Beach, a 300-unit multifamily community on 65.4 acres of centrally located land in Daytona Beach, Florida. The borrower has agreed to pay us a 13.5%1 fixed annual rate that will accrue for as long as it takes to finish the project, and our investment will be paid back upon its completion.
Integral Union Station III
Fundrise invested roughly $20.6 million to provide financing in the form of a senior loan investment in the pre-development of a 500+ unit multifamily community in Union City, California. The borrower has agreed to pay us a 15%1 fixed annual rate paid current on a monthly basis through maturity.
Podcast Interview About The Opportunistic Credit Fund With Ben Miller, CEO of Fundrise
I spoke to Ben Miller, CEO of Fundrise about his real estate outlook as well as his thoughts on the Opportunistic Credit Fund. You can listen by subscribing to the Financial Samurai podcast on Apple or Spotify. Or you can just click the play button below.
You won't find this type of in-depth conversation about the credit fund, income fund, or outlook anywhere else. I've worked with Fundrise since 2014 and I regularly talk to the CEO and other members of the Fundrise team. I liked Fundrise so much that I decided to create a affiliate partnership with them.
An Attractive Investment Opportunity
Personally, I find the investment thesis of the Fundrise Opportunistic Credit Fund to be very attractive at this given time. To be able to lock in above-average lending terms for several years before rates decline is attractive.
If you look at CPI (inflation), it peaked at 9.1% in mid-2022 and has rolled over to 3%. Yet, mortgage rates, have remained stubbornly high. I think it's only a matter of time before mortgage rates decline as well. Interest rats have been in a downward trend since the 1980s.
The opportunities to lend to good projects at attractive terms are plenty. I think it's time to take advantage of this dislocation in the markets before the yield curve eventually resumes its upward curve.
For most investors, investing in a diversified fund is the way to go as opposed to investing in individual deals. Fundrise began in 2012 and now manages over $3.3 billion for 400,000+ investors. Click the link below to sign up and explore yourself.
About Financial Samurai
Sam started Financial Samurai in 2009 to help people achieve financial freedom sooner, rather than later. Financial Samurai is now one of the largest independently run personal finance sites with over 1 million visitors a month. Everything is written based off firsthand experience.
Sam spent 13 years working at two major finance companies. He also earned his BA from William & Mary and his MBA from UC Berkeley. Join 60,000+ others and sign up for his free weekly newsletter.