Since Fundrise first started in 2012, it has had to deal with multiple economic downturns. And yet, in 2021, Fundrise is larger than ever with over 150,000 users managing over $1 billion in assets. Let’s look at how Fundrise plans to deal with an economic downturn. As an investor on the Fundrise platform, it’s good to know how your operator thinks during bad times.
As a personal finance blogger since 2009 who has invested $810,000 total in real estate crowdfunding for diversification and passive income purposes, let’s here from Ben Miller, the CEO and co-founder of Fundrise on his thoughts on the next economic downturn.
Tips For Dealing With A Downturn
First, here are my quick thoughts.
1) Reduce risk exposure in assets such as stocks and expensive coastal city real estate
2) Raise cash and take advantage of higher online savings rates that have gone from 0.1% to a very healthy 2.45%+.
3) Build a CD or bond step stool to take advantage of a flattening yield curve
4) Cut spending drastically and pretend your income has been cut in half
5) Build alternative income streams so you don’t have to depend on one main income source
7) Update your resume and start applying for jobs while you still have a job
8) Go through all your stuff and sell or donate all that you haven’t used in six months
Recessions generally last between 6 – 24 months. Even the Global Financial Crisis of 2008-2009 didn’t last longer than 18 months. So rest assured that if you can stay disciplined during the downturn, things generally turn out OK.
But enough from me. Let’s hear Ben’s thoughts on how he is preparing Fundrise for an inevitable downturn. What’s amazing is that posted this and prepared BEFORE the global pandemic in 2020. Now it’s good times post-pandemic. But for how long, it’s hard to say.
Fundrise clearly prepared for an economic downturn beefore the pandemic hit. As a result, this makes me more confident about how they plan to prepare before the next downturn.
How Fundrise Plans To Deal With An Economic Downturn
Here’s a letter from Ben Miller, the CEO of Fundrise.
Though it may seem like a strange notion, I spend time every day preparing for the next financial crisis. As CEO of a financial technology company, it is arguably the most important part of my job. At Fundrise, we tend to follow the advice of the great value investor Seth Klarman, who said, “Take care of the downside, and the upside will take care of itself.”
While it may be unclear what will trigger the next recession or when exactly it will occur, its eventual arrival is inevitable and denying that fact will only make it that much more difficult to handle once it does.
Make no mistake, winter is coming.
So, instead of wasting time debating, we choose to focus our energy on determining how best to prepare.
The funny thing about black swans is that, by definition, they can’t be predicted. So rather than build an investment strategy around forecasting the market’s ups and downs, hoping that a life raft will magically appear when things get choppy, we’ve instead set out to build an ark capable of weathering unexpected storms, assuming that eventually one will hit.
We do this by consistently seeking to make sound investments with strong fundamentals, even if it means being slightly more conservative in our approach than others around us. We focus on the intrinsic value of the real estate, choosing to invest in areas with high barriers to entry and at prices that are at or below replacement cost (i.e. below the cost to construct a new building of similar quality).
We believe strongly that if we invest in markets with stable or rising demand and own properties at a lower cost basis than our competition, then over time our investments should experience stronger than average performance — even if the market goes through a downturn.
While financial crises are rare, such downturns often prove to be crucial turning points on the path to building wealth. All too often, investors both big and small get carried away by the intense emotions sweeping through the economy and end up making rash decisions that they later tend to regret.
It is therefore critical that our investors understand we built Fundrise to insulate our investments from these emotionally-driven periods — in the hopes that we, with our investors, are not only able to weather a financial crisis, but better yet, succeed during it.
The most experienced investors know that during a financial crisis, there is significant volatility in asset pricing due to the enormous sense of uncertainty about the future. The fear caused by this uncertainty can often be exacerbated when (like in 2008) the very institutions that everyone assumed were most prepared for such an event turn out not to be.
As fear takes hold, credit dries up, lenders withdraw from the market, and normal business grinds to a halt. This usually leads to forced selling of assets as margin loans are called and companies and individuals alike seek to cover unexpected liquidity demands. This forced selling in turn leads to a temporary plunge in asset prices, as everyone waits to see where the bottom will be.
In such circumstances, Fundrise will almost certainly suspend our redemption program and investors should not expect us to provide them with liquidity.
While this is true for a number of reasons, the first and most important is that it will almost certainly be in the best long-term interest of our investor base as a whole.
During turbulent times, the value of our underlying real estate property will inherently be unclear. As a consequence, determining the net asset value (NAV) of our investments will be extremely difficult and allowing for redemptions at NAV in the midst of a sudden downturn would almost certainly result in mispricing and poor results for both those investors attempting to redeem, as well as those who remain invested.
We will likely want to allow a minimum of 6-12 months for the market to settle before determining a reasonable NAV and allowing for redemptions to begin again.
To be clear, we’ve built Fundrise for those investors who want to outperform the stock market over the long term. We invest in real property because of the many benefits that come with owning it — higher yields, higher potential returns, and generally greater stability. But those benefits come with a tradeoff, primarily liquidity.
By its nature, real estate is an illiquid, long-term investment with a natural duration measured in years or even decades. Properties increase in value as macro growth trends play out around them. Investors who are patient enough can experience exceptional performance as a result of that growth. However, selling a property before it’s had sufficient time to mature is likely to result in poor returns. Even more importantly, doing so during a financial crisis is likely to result in painful underperformance.
So, while under normal market conditions we seek to provide our investors with liquidity through the redemption program, during a financial crisis, investors should expect us to pause the program to allow enough time for whatever events may unfold.
We believe that the majority of our investors have specifically chosen Fundrise because of the benefits that come from owning a portfolio of illiquid real estate over the long term, and consequently, expect us to make sound decisions with this in mind. During a downturn, that almost certainly means not taking losses as a result of forced sales and likely not sparing precious capital to satisfy a minority of individuals seeking to redeem their shares.
To the contrary, we anticipate preserving capital in the interest of adding value to our real estate investments if and when the opportunity presents itself. In other words, the cash reserves we hold are meant for the benefit of the whole investor base, and it is more likely that we would use them to buy high quality assets at depressed prices than to provide liquidity to a limited number of investors.
To summarize, if you think you may need liquidity from your investments with us during the next financial crisis, then Fundrise’s long-term illiquid real estate strategy is probably not a good fit for you.
Though none of us want to see another financial crisis, that doesn’t mean that we should blind ourselves to the inevitable. If we prepare for it accordingly, it may turn out that the stability of our portfolio combined with our broad base of long-term investors actually creates new opportunities not available to most others in the market.
As Nathan Rothschild famously said, “Buy when there’s blood in the streets, even if the blood is your own.”
Ben Miller, CEO of Fundrise
Focus On The Heartland Of America
If you are a real estate investor and can hold in during the downturn, you will likely continue to earn rents. During the financial crisis, all my rental income remained stick because none of my tenants moved out.
Further, rental leases are almost always one year, and given recessions only last 6-18 months at most, by the time leases are up, the economy has stabilized.
I suggest real estate investors move away from expensive coastal city real estate markets and focus more of their capital in the heartland of America. Valuations are 50% – 70% cheaper while cap rates are 3X – 5X higher.
For example, Google, on February 13, 2019 announced they are investing $13 billion in heartland real estate to expand their data centers and corporate offices in Texas, South Carolina, Oklahoma, and Nevada.
To maximize returns, it’s all about arbitraging opportunity. Real estate crowdfunding by the likes of Fundrise allows us to take advantage of these opportunities.
Investing Where My Mouth Is
I personally sold my SF rental property in 2017 for $2,740,000 and reinvested $550,000 of the proceeds in real estate crowdfunding in commercial properties not on the coastal cities. Not only am I making a higher return, the income is 100% passive, which is crucial since I have no desire or time to manage physical real estate anymore as a new father.
I still own my primary residence and one rental property in SF, but valuations in SF are egregiously high now with cap rates of under 2.5%. I’d rather just earn a 3% risk-free rate of return with 10-year treasury bonds with no work required and no state income taxes, than leverage up to buy expensive coastal city real estate.
Check out Fundrise and explore what they have to offer for free. Fundrise is available to non-accredited investors as well as accredited investors. They’ve been around since 2012 and are the leading real estate crowdfunding platform today.
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.