Real estate is one of the best asset classes to build wealth. Investors can potentially enjoy both capital appreciation, and steady cash flow through monthly rents or quarterly dividends. Let's explore investing with Fundrise eREITs as a way to earn income.
An eREIT is simply a private real estate fund you can invest in online. Fundrise offers a variety of eREITs to choose from.
By investing in a Fundrise eREIT, investors can earn quarterly dividends from sources such as loan interest and rental payments in a completely passive manner. Owning physical real estate can be an extraordinary hassle otherwise.
Fundrise was founded in 2012 in Washington DC, and is one of the best real estate crowdfunding platforms today with over $3.3 billion in assets. They are pioneers in the eREIT space and offer both accredited and non-accredited investors a way to invest in commercial real estate across the country.
Historically, only high net worth individuals or institutional investors could invest in this mid-market segment of real estate.
Fundrise Income Opportunities
Real estate can generate returns in two main ways: income and appreciation. Dividends are the distribution of rental payments or the distribution of investment proceeds after a sale.
Fundrise eREITs investors return income in proportion to their share ownership. For example, if one person owns 100 shares and another person owns 1,000 shares of the same investment, the person with 1,000 shares is entitled to a 10X greater portion of the return.
Dividend returns are prorated for the duration of ownership. An investor is entitled to their share of any income earned by an investment while they own it. In the case of a Fundrise eREIT investment, if an investor owns an investment for an entire quarter, they get their portion of any income earned by that investment during that entire quarter.
How Does Fundrise eREIT Generate Income
Loan Interest Payments = Debt Investment
Under a real estate loan investment (a debt investment), money is lent to a real estate developer who pays interest on the principal lent. Loans generally carry a fixed interest rate that is paid on a monthly basis, which make them useful sources of income.
In the capital stack, debt is the most senior component. This means debt investors are given priority to be paid first.
Within the debt tranche of the capital stack, there’s a division of seniority among loans, which determines which loans receive repayment first. Senior lenders generally have priority over junior debt holders and mezzanine debt holders.
On top of seniority, debt can be further divided by secured and unsecured positions, which determine rights and priority of repayment in the event of loan default.
Fundrise only considers debt investments that offer investors strong positions. This is so investors can potentially earn income and be safeguarded against losses, e.g. senior secured debt and mezzanine debt.
In senior debt investments held by the Fundrise eREITs, investor capital is senior to the sponsor or borrower. Thus, Fundrise investors can receive payment priority.
Equity Income Potential = Equity Investment
In addition to debt investing, equity investing also has the potential to provide income potential by staking a claim on the percentage of rental income of that property.
When you become a Fundrise eREITs investor, you become the partial owner of dozens of properties. Sometimes properties are sold after improvements for profits as well, which bring in cash flow.
In addition to traditional equity, preferred equity investments can also offer investors regular income. Similar to loan interest payments, preferred equity investments offer a fixed rate of return commonly referred to as “preferred return.”
Fundrise Dividend Distribution
A Fundrise eREIT is legally required to derive at least 75% of their gross income from real estate-related sources, invest at least 75% of their total assets in real estate, and distribute at least 90% of their taxable income to shareholders every year in the form of dividends in order to avoid double taxation.
Fundrise makes dividend payments to investors in cash. Many investors choose to automatically reinvest their dividends back into their Fundrise account via our dividend reinvestment program.
The payout of your dividends is not dependent on the value of your funds’ shares themselves. To receive dividends, you do not need to sell any shares. In fact, you don’t have to do anything after the initial purchase of shares. This is the joy of passive investing.
When a dividend is issued, you will receive it automatically without any added effort. That’s why we often refer to the stream of money that investors receive as dividends as “passive” or “residual” income.
Related: Ranking The Best Passive Income Investments
Real Estate Appreciation Potential
While a property collects a steady stream of income from paying tenants, the real estate itself might gain value too. If and when the property is eventually sold, it can generate gains for its equity investors in addition to any of the income that it earned previously over the course of the investment’s lifetime.
Investment Lifetime
But unlike dividends, which are typically paid quarterly throughout the lifetime of an investment, some part of appreciation is only realized at the property level at the end of an investment’s lifetime.
The investment lifetime can be as short as one year and sometimes as long as five years or more. The exit all depends on the investment goals and the investment cycle.
But given you are investing in a portfolio of many different properties, there should always be some type of turnover. A Fundrise eREIT allows you to hedge and keep the income flowing in.
Appreciation
While appreciation can be captured through a return of capital during an investment’s lifetime, some is captured at the property level only when an equity investment is sold. Investors can also realize appreciation at the fund level if the Net Asset Value (NAV) per share increases over time.
Depending on which Fundrise eREITs investments you hold, a limited or significant portion of your return potential may be reaped at the end of each project’s lifecycle.
Three Fundrise Investment Plans
Supplemental Income Plan
The Supplemental Income Plan is designed to earn more income than appreciation. With that return profile, return potential is expected to be captured mostly through income paid through dividends.
This plan is allocated more heavily in debt than equity. But, the equity investments the Fundrise eREITs in this plan hold still offer the potential to capture some potential appreciation.
The Supplemental Income Plan will generally be expected to have larger regular dividend payments than other plans. But its potential lump sum payment at the end of each project (capturing any appreciation) will likely be smaller than other plans.
Long-Term Growth Plan
The Long-Term Growth Plan is built to capture returns more from property appreciation over the long-term than regular income payments via dividends.
This plan is weighted towards eREITs that allow investors to capture gains through potential increases in property values over the long term, but which also hold some debt investments, so the plan can provide regular dividends as well.
In general, the Long-Term Growth Plan is expected to have smaller dividend payment potential than the other plans. But it holds the most potential to capture the greatest returns from appreciation at the end of each investment’s lifetime.
Balanced Plan
The Balanced Plan is a mix between the Supplemental Income Plan and the Long-Term Growth Plan. You can call it Growth & Income.
As an investor, you can consider the Long-Term Growth Plan to be relatively higher risk than the Supplemental Income Plan because it is counting more on capital appreciation for returns.
It's similar to investing in a stock versus a bond with a fixed payment. If you are particular bullish on where we are in the real estate cycle, a Long-Term Growth Plan may be more suitable to you.
Fundrise Growth And Performance
According to thier Form 1 Semi Annual Report with the SEC, Fundrise manages over $3.3 billion in assets under management. They now have over 400,000 active investors. Their AUM grow and investor signups have been very promising.
Fundrise’s five-year average platform portfolio has also done quite well, yielding a 10.79% return versus 7.92% for the Vanguard Total Stock Market ETF and 7.4% for the Vanguard Real Estate ETF. Their massive 14%+ outperformance in 2018 versus the Vanguard Total Stock Market ETF is particularly impressive.
By generating a strong 6-year return, Fundrise has taken a huge step forward. They've proven what they have believed for so long. 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.
Related: Fundrise Fees
Explore Fundrise eREITs
If you are looking for lower risk, but likely lower returns, with a more dependable stream of income, then the Supplemental Income Plan may be more suitable for you. Given most of the investments are in debt, and given debt is higher on the capital stack, a Supplemental Income Plan should be less risky.
If you're looking for a passive way to invest in real estate with less hassle and a lower capital outlay, take a look at Fundrise. It's easy to sign up and free to explore.
I see opportunity in non-coastal city real estate markets where valuations are much cheaper and cap rates are much higher. As a result, I diversified my holdings and am happy with the results so far.
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. Then he worked at Goldman Sachs and Credit Suisse for 13 years.
He owns properties in San Francisco, Lake Tahoe, and Honolulu and has $954,000 invested in real estate crowdfunding. In 2012, Sam was able to retire at the age of 34. His net worth generates $250,000 a year in passive income, partly thanks to his investments in real estate crowdfunding.
He enjoys playing tennis, hanging out with family, and writing to help others achieve financial freedom.
Fundrise is a sponsor of Financial Samurai and Financial Samurai has invested over $134,000 in Fundrise funds. Sunbelt real estate has lower valuations and higher yields. It is a great way to diversify away from expensive San Francisco real estate, where Sam owns multiple properties.