Believe it or not, Fundrise, a leading real estate crowdfunding platform established in 2012, and pioneer of the eREIT segment has low fees and a simple fee structure compared to larger institutions. Lower fees is one of the key benefits of technology efficiency, which Fundrise so readily deploys.
The easiest way to see the favorability of Fundrise’s fees is to compare them directly to the fee structures of similar products. This article compares Fundrise REIT fees to Blackstone and Starwood REIT fees.
Fees For Fundrise, Backstone, Starwood REITs
As you can see from the chart, Fundrise REITs are much lower than Blackstone and Starwood's REITs with zero sales commission, zero carried interest like hedge funds, and lower annual servicing and management fees.
Founded in 1985, the Blackstone Group is the largest private equity alternative investment firm in the world, with over $100 billion AUM. The Blackstone portfolio includes a wide variety of asset types: retail, residential, industrial, office, and hotel.
The Starwood Capital Group was founded in 1991 and has been a major real estate player for over twenty-five years. Starwood has fifteen real estate funds available to investors, the largest totaling over $5.5 billion.
However, neither Blackstone nor Starwood has fewer or lower fees than Fundrise, largely thanks to the way their tech platform enables vertically-integrated transactions, without any reliance on third parties or brokerage firms. Though the products may appear similar at first, for most investors, the difference is clear.
Unlike Fundrise, you’ll notice that Blackstone and Starwood include fee structures similar to traditional institutional fund fees: in a typical 2-and-20 structure, investors pay, roughly, a 2% fee on their assets under management per year, plus 20% of their upside, usually after a minimum hurdle rate. Both Blackstone and Starwood list 12.5% fees after 5% hurdles.
In comparison, Fundrise’s fees are anywhere from a quarter to a half of Blackstone’s and Starwood’s. At 1-2%, our origination fee is about two-thirds of theirs (2-3%). And while high sales commissions are the norm for REITs, Fundrise simply doesn’t charge them.
By establishing their own investment products aimed at individual investors, Blackstone and Starwood have highlighted the potential of this investment category. They've essentially legitimized Fundrise's first-mover advantage into the eREIT space.
Fundrise eREIT Review
I’ve worked with Fundrise since 2015, and they’ve consistently impressed me with their innovation. They are my favorite real estate crowdfunding platform today.
Fundrise is open to non-accredited investors i.e. everyone. Further, their business model of creating tailored funds like the Heartland eREIT is attractive to someone who wants to diversify into real estate, but who doesn’t want to pick and choose individual investments on the platform, despite these investments also being carefully vetted first.
For starters, a REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate.
Below are some eREITs that Fundrise created to tailor their product offerings. I'm personally biased for the Heartland eREIT because I see a multi-decade migration to cheaper areas of the country thanks to technology.
Fundrise eREIT Overview
Here are some questions and answers about the Fundrise eREIT product.
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.
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?
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?
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?
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 about liquidity?
Unlike publicly traded REITs that often hold other publicly traded assets, all of Fundrise’s capital is invested in properties they pick. As a result, they can’t simply pull out money from a deal without selling the actual property.
However, to provide better liquidity, they have quarterly windows where they allow existing investors to cash out. So, while you can’t withdraw your cash whenever you’d like – you can do it at four times throughout the year without a penalty.
Fundrise eREITs Details
Income and Growth
The Income eREIT is focused on investing in debt, not all that different from how a bank collects an interest rate on a mortgage. Thus the fund is all about cash flow.
It invests using the following three core principles:
- Small Assets: We believe targeting assets that fall under the radar of big banks and investment funds allow us to achieve higher relative returns.
- Regulatory Inefficiencies: Increased banking regulations as a result of the 2008 financial crisis have opened up new opportunities for more flexible lenders to expand into the market.
- Urban Infill Location: Real estate assets located in the core of large cities benefit from higher demand, and higher pricing, due to the relative lack of supply.
The Growth eREIT is focused on equity. Unlike the Income eREIT, this fund owns properties with an eye towards appreciation.
Its main focus is on multi-units, and it also follows three core principles:
- Workforce Housing: There is a growing need for affordably-priced apartments, referred to as “workforce housing.” However, there is a limited supply of existing apartments that meet that demand. The result is that affordably priced apartments face little competition from newly built apartments. We believe this growing demand and lack of supply will result in existing “workforce housing” increasing in value over time.
- Low-Cost Basis: The Growth eREIT seeks to acquire properties below their replacement cost, a strategy known as “value investing.” In other words, the price paid to acquire a property is less than what it would cost someone else to build a similar property in the same location today.
- Long-Term Fixed Financing: Interest rates on loans for acquiring apartment buildings are at historic lows. By securing long-term, fixed-rate debt today, the Growth eREIT can maximize consistent cash-flow while also reducing volatility over the term of the investment.
Both the Income and Growth eREITs are hyper-focused on either cash flow or appreciation. The regional eREITs provide a more balanced investing approach as well as a way for you to invest in sections of the US that you’re particularly interested in. As such, they’re broken into three balanced funds: East Coast, Heartland, West Coast.
It's important that investors invest on only the best real estate crowdfunding platforms. Fundrise rises above them all is the most experienced operator with the most innovative products. You can sign up and check them out for free.
I've personally got $810,000 invested in real estate crowdfunding after selling my SF rental property for 30X annual gross rent in 2017. I'm earning a higher return, but best of all, all the income is passive. I couldn't stand dealing with tenants and maintenance issues, especially since I became a dad not to long ago.
About the Author: Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has $810,000 invested in real estate crowdfunding.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $220,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.