A recent WSJ piece entitled, If You Sell Your House, The Buyer Might Be A Pension Fund, caused some commotion. The article highlighted how competition is heating up for single family homes due to demand from institutional real estate investors.
When I read the article, I was surprised to see Fundrise, my favorite real estate investing platform, mentioned in the second paragraph. Usually, you hear institutional real estate investors like BlackRock in the news. The article is behind a paywall, but here’s the snippet the WSJ allows non-subscribers to read.
A bidding war broke out this winter at a new subdivision north of Houston. But the prize this time was the entire subdivision, not just a single suburban house, illustrating the rise of big investors as a potent new force in the U.S. housing market.
D.R. Horton Inc. built 124 houses in Conroe, Texas, rented them out and then put the whole community, Amber Pines at Fosters Ridge, on the block. A Who’s Who of investors and home-rental firms flocked to the December sale. The winning $32 million bid came from an online property-investing platform, Fundrise LLC, which manages more than $1 billion on behalf of about 150,000 individuals.
The country’s most prolific home builder booked roughly twice what it typically makes selling houses to the middle class—an encouraging debut in the business of selling entire neighborhoods to investors.
“We certainly wouldn’t expect every single-family community we sell to sell at a 50% gross margin,” the builder’s finance chief, Bill Wheat, said at a recent investor conference.
Thoughts About The Purchase From Fundrise
If you are an investor on the Fundrise platform, you ideally want Fundrise to pay as little as possible for a property in order for you to earn the biggest return possible.
Therefore, although $32 million is only a small portion of the ~$1 billion Fundrise manages, paying more for what D.R. Horton normally gets is worth inquiring about.
As a result, I asked Fundrise’s CEO, Ben Miller, to share their side of the story as competition from institutional real estate investors heats up. I’ll then share my thoughts on why you may want to invest with institutional real estate investors. Here’s Ben.
The State Of Single Family Rentals (SFRs)
While the Wall Street Journal piece does a good job of highlighting several key trends, its depiction of the D.R. Horton deal in particular is limited.
There has been rapidly growing demand for SFRs across the country, particularly in the South and Southeast. Demand is driven primarily by demographic changes, i.e. millennials starting families. There are also affordability constraints as there are more people moving away from small apartments in expensive cities to larger homes with yards.
This trend falls squarely into our primary investment strategy of identifying long-term macroeconomic growth drivers. COVID dramatically such a trend.
Simultaneously, there’s chronic under-supply of single family homes in America. It is driven in part by burdensome regulation. And to some extent, the lasting impact of the housing collapse in 2008 has also cut supply short. The issue of under-supply was exacerbated by COVID. Most builders pulled back on building new homes in the beginning of 2020.
All of these factors have made SFRs exceptionally attractive investment assets. Which has predictably led to a growing appetite for SFRs from large traditional investment managers.
On the D.R. Horton Deal In Particular
The Amber Pines community is a purpose-built rental community created by D.R. Horton. The community was already fully leased and occupied when it was brought to market in a single sale of 124-homes. These were not homes available for sale to individual home buyers.
Let me give a brief peek behind the curtain of how the deal was done. The sale was managed through a top national brokerage firm. The auction process was highly competitive with several top real estate investment firms bidding alongside Fundrise.
In the end, we bid approximately 1-2% more than the other leading bidders. In other words, we didn’t overpay based on institutional real estate investor demand. Based on verbal feedback from the seller, we believe the most important differentiating factor was our ability to close quickly on the transaction.
Our conviction around the SFR asset class and our ability to execute an all-cash deal directly from the balance sheet of our eREITs, allowed us to commit to closing in significantly less time than the other potential buyers.
So, how do we feel about the deal in hindsight?
Not only was the community fully leased at closing, but we’ve already experienced year-over-year rent growth on lease renewals of approximately 2-3x industry norms for residential assets.
While we expected strong rent growth when we made the investment, these numbers have exceeded our underwritten expectations. This makes us feel even more bullish on the quality of the acquisition.
We feel very good about the price we were able to negotiate on behalf of our investors. Here is a video of the Amber Pines acquisition if you’re curious. Amber Pines is in Conroe, Texas about 40 miles north of Houston.
Note from Sam: Coming from San Francisco, it’s amazing to me the average price per a home in the Amber Pines community is only $258,064 and already all rented out. I feel like “expensive capital” from the coasts is going to continue buying heartland real estate to earn higher rental yields. Further, the median priced home in America is now ~$370,000, putting these homes Fundrise bought at a 30% discount.
How We Think About Growth Investments More Broadly
As we often share with our investors, we tend to focus on the long-term drivers of macroeconomic growth. We seek to understand how that growth is likely to manifest in various kinds of real estate assets.
In this case, we see the increasing demand and subsequent growth in rents for well-located, newly-built SFR homes as experiencing outsized growth relative to most other real estate assets. We also believe there’s significant downside risk mitigation from the ongoing supply/demand imbalance of relatively affordably priced newly built homes in these high population growth markets.
We were fortunate to be one of the few groups to enter the SFR market almost immediately following the initial onset of the pandemic. This allowed us to gain strong traction with the country’s top home builders. It also allowed us to establish ourselves as one of the more dominant buyers in the SFR space. Even as many of the traditional big name institutional investors continue to struggle to gain a foothold.
Over time, as is often the case, we expect this early mover advantage will allow us to gain more scale, faster. In turn, this should lead to unique opportunities to capitalize on our economies of scale.
What It Means For Fundrise Investors
We believe the D.R. Horton deal demonstrates how Fundrise investors are uniquely poised to benefit directly from one of the most attractive real estate asset classes today.
Fundrise collectively competes against (and beats) the largest institutional investors in the world—all at low costs and at the touch of a button.
None of this would’ve been possible 10 years ago. That’s why Fundrise exists. We enable regular investors to participate in the investment of real estate investment projects once reserved for institutional real estate investors or high net worth individuals.
Come join a community of over 300,000 investors and see for yourself what we have to offer. We now manage over $3.1 billion in assets under management.
My Thoughts On The Real Estate Demand Dynamic
It is clear, demand for single family homes is robust across the country. I believe there will be a multi-year real estate bull market due to positive demographic trends, an accommodative Fed, and a strong economic recovery. As a result, I’ve allocated roughly 40% of my net worth towards real estate.
Although it may be frustrating for individuals to compete against institutional real estate investors, be strategic about buying your next home. With rising rents, Fundrise made a smart move by buying the community from D.R. Horton back in April 2021.
You just have to find single-family homes for sale that are not part of a planned community. That shouldn’t be a problem because many single family homes are owned by individuals. In San Francisco, I’ve never come across a seller or competing buyer who was an institutional real estate investor.
From the institutional real estate investor’s point of view, it needs to search for communities and larger projects to buy rather than individual single family homes. It’s not resource efficient to buy a single family home one-by-one if you’ve got a large amount of capital.
Can you imagine Fundrise trying to negotiate 124 separate single family home transactions to allocate $32 million in capital? What a PITA! The transaction documents alone would be overwhelming.
A Hybrid Way To Buy Real Estate
I think a middle ground solution is to own your primary residence and then allocate some capital with an institutional real estate investor like Fundrise for exposure. You can obviously also buy publicly traded REITs, real estate-related stocks, and rental properties as well. For example, I also own O, OHI, Home Depot, and several rentals.
Just know that during the last downturn in March 2020, publicly-traded REITs like VNQ fell even more than stocks. Therefore, if you’re looking to buy publicly-traded REITs to decrease your portfolio’s volatility, it may not work.
With thee rental properties in San Francisco, I’m at my limit for how much I want to comfortably own. Hence, my desire to diversify into the heartland.
Remember, you’re not really long real estate if you only own one home.
Many people have discovered this reality during the pandemic and have decided not to sell as a result. They know that if they sell, they would then have to then compete to buy a new home or pay higher rents. As a result, housing inventory is down double digits year over year.
Here are some key takeaways of investing in private real estate for over five years.
Invest In Your Real Estate Edge Accordingly
Personally, I feel I have an edge when it comes to investing in San Francisco real estate. However, I have minimal edge when it comes to investing in heartland real estate. I just believe the overall trend will be positive. Therefore, I’m glad to allocate capital to an institutional real estate investor who does have the expertise.
I plan to ride the real estate wave for as long as possible with my hybrid real estate ownership structure. In my opinion, the best holding period for real estate is forever. But sometimes life can be very unpredictable.
If you are frustrated with domestic institutional real estate investors competing for real estate, you can always join them. Access is one of the main reasons real estate crowdfunding platforms exist. The platforms also do the due diligence and heavy lifting for you so you don’t have to.
After buying another single family home in 2020, my remaining real estate crowdfunding investments account for about 10% of my overall real estate exposure. It was about 16% before my latest SFH purchase.
Surgically allocating capital with an institutional real estate investor is different from going all-in on a single family home with a mortgage.
Once I get a particular rental property remodel done, I will likely sell it after my tenants move. Then I’ll roll the proceeds into a diversified eREIT or publicly-traded REIT to earn 100% passive income.
I just paid my property tax bill and it is getting to be uncomfortably large.
Beware Of The Foreign Buyer
Finally, let’s talk about the foreign real estate buyer looking to buy up American property. Eventually, global economies will open up again. If you think competition from domestic institutional real estate investors is fierce, just wait until we start seeing international money re-enter our system.
Take a look at the dollar-volume of existing home purchases by foreign buyers. Notice how the dollar volume peaked in 2017 at $153 billion. It has trended down until March 2020, with likely continued low volume up to now.
The main reason is due to stricter capital controls, especially from China, the #1 foreign buyer over the last several years. There were also many additional visa restrictions during the Trump administration.
However, as a forward-looking investor, there is a high likelihood foreign capital will return. Like us, foreigners also have pent-up savings. Foreign equities are also at or near all-time highs. Further, U.S. real estate is inexpensive compared to many other international real estate markets.
Once fully vaccinated, take a visit to London, Hong Kong, Singapore, Paris, Dubai, or Mumbai. Once there, check out some real estate listings. You will realize how affordable U.S. real estate is, especially when compared to our income opportunities.
Don’t let foreigners price you out of your own neighborhood like what’s been happening in Auckland, Vancouver, and a bunch of other cities. As an American, I want to own as much U.S. real estate as comfortably possible before foreigners bid up our prices. That day is coming once again.
Build Wealth With Institutional Real Estate Investors
Real estate is my favorite way to achieve financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
Take a look at Fundrise, my favorite real estate investing platform for both accredited and non-accredited investors alike. Anybody can invest with institutional real estate investors today. The single-family real estate segment is booming with rising rents, rising property prices, and lower vacancies.
Fundrise has been around since 2012 and has consistently generated steady historical returns. For most people, investing in a diversified real estate fund is one of the best ways to gain real estate exposure.
Readers, to hedge against institutional real estate investor competition, why not just invest with them? For example, I knew I could’t compete with Kleiner Perkins in VC, so I invested in their fund. Do you believe the amount of capital seeking U.S. real estate will increase due to the return of foreign buyers? Fundrise now has over 250,000 investors, a huge spike in growth since April 2021 when it had 150,000 investors.
Who’s liable when the residential real estate crash comes? Taxpayers? Big Investment has political/monetary pull in congress the 50 x 150 schmoe does not. You can tout the (seemingly) benign nature of this kind of investing…using a descriptor such as ‘planned communities’ can also be described as condos which, in most real estate downturns, crash first.
Disagree with the nonchalance about homebuilders selling to large funds in a supply crunch. True, I’ve never competed against a pension fund to buy a house, but there’s also an opportunity cost. If they’re building and marketing houses to investors, that’s time and resources they could have devoted to the individual/retail market. Economically, that’s the role we need homebuilders to play; it is far more important for society that individuals can afford to become homeowners than that they can pool their money and buy communities of rental housing. (Not to knock it, it has its place, but there’s also, again, a supply crunch right now.) I have been looking for a house for nearly a year, offering well above asking price, and have had more offers rejected than I can count. And here I am reading about Samurai’s wealth reaching new heights because of the real estate he’s sitting on. The rest of us need some opening if we’re going to follow in your footsteps.
Financial Samurai says
Agree. Therefore, what is your suggested solution?
I decided long ago that instead of getting left behind, I invested to get at least neutral real estate.
And given I cannot compete against institutional real estate investors, I decided to invest with them in various funds.
We can argue what is fair and what is right and what is noble. But we must find solutions and take action. Otherwise, nothing much is gonna happen.
I have no suggested solutions. I’m just not happy that I didn’t follow your advice and buy property in 2020 or before. Now I am getting priced out of the market.
Rhonda DeVictor says
Frank, love where you live and buy income property. Rent a place for yourself, your family, etc in area that you like and want to be in, then buy a home, duplex, etc for renting out. You’ll be less emotional about the purchase, you’ll have passive income from your rental property, hopefully building equity in your rental property as well. Then you’ll have more cash to put towards a home for yourself.
Phyllis Denise Scott says
It will crash, investors will lose billions, and homes will rot. Who wants to live in a neighborhood of homes filled with renters? Another bad idea based on demonic greed.
Lots of people do. Renters are people, just like them. If homeowners were so upstanding, there wouldn’t be HOAs to keep them in line. I’m sure you’re better than most though.
Just as a reminder, “homeowners’’ are renters too.. their landlord is the bank.
Financial Samurai says
True, and to take it a step further, we are all temporary on this earth.
Money Ronin says
For my real estate, I mostly buy apartments and hire a management company–I classify myself as an real estate professional. I then manage the management company–it’s a fair bit of work given the size of my portfolio.
With regard to RE funds or private equity, I’m okay with the smaller returns as compared to a direct purchase because it allows me to get into markets and deals that I could not access as a smaller investor. However, I have the following concerns with these funds:
1. I can’t control timing of sale. In general, I’d like to hold forever, but most of these deals have an exit with a big tax hit at that time. My income is moderate but depending upon the size of the capital gain, it could bump me up to the next tax bracket.
2. On my personal deals, I get a depreciation deduction that offsets the income. I don’t think it will work the same way because I would be considered a passive investor.
3. Steady stream of income–that’s not what I want. I’m looking for capital appreciation but want to avoid taxable income. With direct apartment purchases, I benefit from the depreciation deduction and can incur additional expenses with upgrades/repairs to lower my taxable income. Sometime in the future, my investments might become cash cows, but for now, I don’t want more income.
4. 1031 exchange–If do need to sell, I would normally do a 1031 exchange. I don’t believe it would be possible with these funds.
5. With direct purchases, since I have a buy and hold strategy, I regularly do cash out refis and reinvest elsewhere. Unlike a distribution, it’s tax free. Can’t do the same with these funds.
Am I wrong about how I’m thinking about these funds?
Financial Samurai says
One of the big benefits is to not have to think about the money and what to do. My goal is to have as much of my money working for me in the background so I can focus on living my best life every day.
Having a team of people looking over your money feels good. Whether they do a great job or not is different issue. Personally, I’m at my limit for how my physical properties I own.
Everybody has different levels of comfort.
David @ Filled With Money says
Darn. I actually got a quote from a bank last winter and got a 2.25% interest rate quote. I live driving distance to Conroe. I should have jumped on the opportunity. It’s very expensive to not be in the know!
Have to look for other opportunities!
I would consider myself a sophisticated real estate investor. I’m usually in 3-4 complicated commercial real estate deals at any given time. What is happening right now is mortgages are catching up to rental rates in many markets. For example, you have a house that rents for $1500 a month in a market like Las Vegas selling for $350K. With 20% down, that’s a $1200 payment. Typically you will see mortgages which are 10-20% premium to rents, not the other way around.
All this appreciation is being fueled by interest rates, and nothing else. Enjoy the ride, but beware that it comes to an end, and don’t be overextended when it does. The secret to building a lot of wealth in RE is leverage, but never too much. I would say right now is the time to de-lever to about 50% LTV, not keep piling more debt on because prices don’t look like they are coming down.
Financial Samurai says
I’m going to disagree. I would estimate low interest rates makes up around 50% of the reason for the housing boom. The other reasons include stock market wealth, wage growth of home buyers, technology, the ability to work from home, more desire to be at home, and generational wealth transfer as Boomers reach their 70s+.
Perhaps I’ll write a post!
That drone footage of the cookie-cutter copies of the same model home all perfectly aligned next to each other looks so depressing. Reminds me of that scene from the Matrix with the miles of pods holding human beings locked in the matrix.
Financial Samurai says
Good imagery! A movie favorite.
I think most people would be happy to invest in such a project for the rental income. But I’m not sure about choosing it as a top place to live. But that’s the beauty of the Internet. We are able to arbitrage opportunities if we bother to look and take some risks.
I’m happy with living in San Francisco. But cap rates are very low here and the amount of capital required to buy property is high. So diversification is necessary. It will take me a while to save up enough capital for another 20-50% down payment on a home here in SF.
I’m in NYC and I can’t imagine investing in real estate that I can’t visit within like a 2-3 hour drive max. I see long-distance real estate investment as fraught with pitfalls. Way too many people you have to trust to act in your best interest. At least a REIT EFT has to comply with securities regulations. An exaggeration for sure, but who is not to say Fundraise or it’s like doesn’t exit scam with everyone’s money tommororw. Giving up all the control that comes with owning a piece of real property for the sake of a few % in some flyover market, not sure if I like the tradeoff. Reminds me of buying swampland in Flordia in the 90s.
Local real estate is one of the last inefficient markets where the little guy (relatively speaking) can still one up over big money. If you invest time and effort you can still find a bargain — whether an estate deal or friend-of-neighbor sale — i believe there is opportunity in your local market, no matter where you live. That is of course because you are leveraging your experience having lived in the area some substantial amount of time. Focusing on a specific neighborhood in a market and finding that steal even in a competitive market is much more gratifying. Certainly more gratifying than just transferring 50k to a crowdsourcing RE site and getting some canned update newsletters every few months. Might as well just buy VNQ and wait for the prospectus in the mail.
You 100% missed the mile high perspective and main point of the commenter above. Their point was that it is undeniably utterly depressing, to view how mankind has been dwindled down to matrix-like cloned dwellings.
We are f8cked.
Financial Samurai says
I think I got the point. But why are you so depressed? The homes provide shelter, have water, and electricity, and seem clean. Have you ever lived abroad o visited places like India?
I keep wondering why more Americans don’t recognize how good they have it. Why Americans don’t realize how affordable housing is here compared to many other countries.
And my theory is due to a lack of perspective.
See: Why Is American Property So Cheap Compared To The Rest Of The World
I think they do recognize it and would like for it to stay that way.
Money Ronin says
SFR have been very hot since the pandemic started. These houses may be depressing to you, but it is a step up for their clientele which are former apartment renters. At least now, they have space to spread out–it’s definitely an upgrade.
When I look at this Fundrise investment, it’s basically buying a large apartment complex that have individual lots. If I had the scale and capital, I would have gotten into this business–I can only afford small apartments.
david b says
I was lucky enough to buy my third rental SFH in sept last year. The realtor gave me first look before hitting the MLS. I buy in nice gated communities ( in Virginia) with low carrying cost. The taxes and maintenance on the three homes equals the same on my primary residence in NJ. The homes are all 5-7 years old and have been lucky with tenants. I did pay cash for all three homes and i am making roughly 8 after expenses. Diversifying into real estate has been a great investment. thanks for the push!!!
Financial Samurai says
Congrats! Hard to go wrong if you are buying real estate with cash. 8% after expenses is nice. Try to hold onto these homes for as long as possible.
For the most part I agree with the logic here. I personally think there’s a good chance single family homes are in a bubble but there is still some opportunity in commercial real estate and apartments.
Sam – a simple answer to your question is: leverage. That’s why I don’t reit. I can buy up to 10 sfh on Fannie/Freddy paper with 25% down. The CF generated is 100% mine. Fundrise doesn’t take a penny. Buy 10, use the combined CF to pay off your lowest mortgage balance. Buy another. Wash, rinse, repeat. It’s such a gift the feds let folks go up to 10 on massively reinsured paper.
I get why people do reits. It’s easy. But doing it that way, you’re losing out on one of the key, wonderful things about real estate and that’s leverage!!! Essentially, buying on margin but backed by the home equity!!!! Doing a sf property is NOT as difficult (IMO) as stock-picking against the universe. If you’ve got the cash, why not DIY and just use a property manager? Cash on cash returns are phenomenal if you buy sf homes using spreadsheet templates you can find online everywhere.
Of course, that’s where people get hammered: on the buy. And right now, it’s a sellers market across the board. Unless you’re buying in bulk (Fundrise) or get off-market deals due to your network, MLS is chock full of financial pitfalls right now, each being fought over by countless numbers of investors who read the same things the journal blurted out.
Now is NOT the time to buy SF. Do what Sam has said before. Wait until after thanksgiving, if you’re gonna do it. Use this time to find great investor/reo agents in your community and have them start looking for deals that fit your profile.
Wow, this was way longer than I intended. Thanks for reading.
Fundrise, etc have the advantage of being 1) truly passive and 2) able to diversify more easily on both location, tenant and types of real estate. The disadvantage is the returns may be lower than doing it yourself, especially with reasonable leverage. I think if you can manage and repair yourself, owning SFM and Townhomes for rentals are much better than passive investing, but if you do not want to manage (or far away and can’t manage) and have to pay a third party for most repairs, I think Fundrise/REITs etc will be better. Of course, no reason you can’t do both if you have the investment funds!
Whatever one can do to get onto the same playing field as institutional investors makes sense since that’s where big money is being made. Institutional investors also purchase mortgage notes. Since 2017, as a group of local real estate investors, we formed multiple LLCs to purchase different sets of mortgage notes. As a group, we can combine capital to compete with institutional investors which is similar to the benefit of working with Fundrise.
Now is a really great time for purchasing real estate because of lower interest rates. If there is a rise in inflation, the property’s value and rent will rise with it.
Respectfully disagree with the buy now sentiment. Lockdowns have over-inflated and distorted demand. Once that calms down, mortgage forbearance programs will expire, and you’ll see supply rebound due to short sales and foreclosures- all pent up over the last 12+ months. Lots of cash sitting idle on the sidelines eating for just that.
If you’re a fan of buying all all-time highs because interest rates are still low, by all means. But like anything, there’s a curve, and there’s a dip coming (see above) so think about waiting until you see the effects of stimulus and mortgage forbearance peeling off before plunking down cash.
Financial Samurai says
It will be interesting once the forbearance ends. Will retail and institutional demand be ready to pounce? Or will will be flooded with excess supply?
Personally, I’m going to have a cash hoard ready to pounce.
What is your current real estate ownership situation? What do you plan to do?
I think yes, wealthy individuals and cheap corporate cash sucks everything up the first 6-12 months. There’s just no yield out there. Multi-family had a magnificent run from 2010 on. Hard to find any deals out there at all. Maybe in the $1m-$3m space. But you’re competing against cash offers even at that level. It’s nuts.
So no, I don’t think it’ll be a massive oversupply, but you’ll see it calm down once the initial glut is gone and bought with cash. I’m done doing deals in 2021 unless I trip into something that makes sense. I’ve done 3 adds, but all off market and even then, slim margins.
I’m long sf in my portfolio of rentals. Low double digits in doors but have a team built and am now in the mix enough to have started to get off market deals and bump into things. I’m by no means a heavy hitter but have been aggressively adding doors over the last 4 years after doing flips etc off and on for decade plus. Turning my corporate funny money into tangible assets that CF month one.
Dipping my toe into the world of multifamily low-income housing rehab and/or construction. The world of grants, preferred loans and long term holds. Should be interesting.
I just don’t see the typical “I heard rentals are cool” investor snooping around the MLS with their agent having any success. Buyers beware.
Just because you bought a $85k Chevy suburban at 0% interest rate doesn’t mean you got a good deal. It means you bought an $85k Chevy suburban.
C M Cal says
Matt, interesting comments and feedback. sounds like you well-positioned.
If you don’t mind sharing, what states/markets do you anticipate distress selling? And what markets are you invested in? Just talking to a commercial RE lender, in San Fran, she said there’s been very little distressed sales so far and a lot of people seem fairly capitalized. The mom and pops often have had them for years so they CF well due to the huge run up in rents and can withstand the rent drops or increased vacancies.
Most people start their RE journey closer to home, which makes it tough if you’re in a HCOL like San Fran, LA or NY. Out of state can be challenging if you don’t know the markets or have time to visit, research and find the right team on the ground.
Right, in all the major CA cities there are very little distressed homes. There has been so much equity increased in homes over the past 12 months, that people hurting can simply sell traditionally and gain at any time. Too much demand, not enough supply, and physical boundaries that make adding new supply tough. Very true here in San Diego, especially anything 10 miles or less from the coast.
I’m not sure there will be that many short sales and foreclosures for two reasons 1) As soon as that program ends, I think a huge number will start paying – many are opting not to but they could
2) Prices have gone up so much, I’m not sure how many actually would be a “short sale” – many simply will just sell and make a bit of money once forced to move
3) Huge number of all cash buyers for rental properties, including FundRise, Blackstone, etc
4) Jobs are coming back
Additionally, I think we are just at the early stages of inflation across the board. 10% may happen in the next 12 months just off inflation, even if that is partially offset by some incremental supply.
Fascinating! Glad to hear the deal has been successful. Impressive it’s fully leased. And good point on preparing for an influx of foreign capital again once the economies open up and restrictions lift.
Accidentally Retired says
Certainly you are making strong arguments to allocate more of my portfolio to real estate, especially once I free up more cash this summer after exiting an alternatives fund. For me it may come down to investing in either Fundrise or VNQ. I see their comparison and clearly Fundrise seems less volatile, but lacks the ease of exiting out of the fund. Something to think on for sure!
Joe Orozco says
I own a Vanguard REIT fund as part of my IRA. I want to go in on Fundrise, but I have a few basic questions I hope you, or a fellow subscriber, can answer:
What is the tax burden at the end of the year? I own shares in the Vanguard REIT, because I forego the fees. I’d like to only have to deal with taxes when I pull my money out.
I understand there are only quarterly opportunities to pull money out. To your knowledge, has anyone ever been denied a withdrawal?
In your opinion, where does Fundrise fit in an investment strategy? I’ve mostly been relying on domestic and international stocks. I’m lukewarm on the idea of managing real estate outside of my own home.
Thanks in advance for answering at least one of my questions!
If you pay high income tax, you’d generally only want to hold a REIT like Fundrise or VNQ in a retirement account. Otherwise you’ll be taxed at normal income rates.
I invested with Fundrise. I initially thought the deals would be as limited partners and receive K-1s, thus lower taxes. But it turned out to be mostly REITs. I was able to cash out fairly easily, although they take a fee. Additionally, I received tax documents as 1099s and K-1s that totaled 57 pages. Not worth the hassle.
Personally, I’d just invest in VNQ or another publicly traded REIT rather than Fundrise.
Financial Samurai says
I think the three key things you have to think about are:
1) Your ordinary marginal income tax rate, as that’s what you will pay
2) Your liquidity needs, as an invest in a eREIT will likely be 3-5+ years. So I wouldn’t be investing any capital that you need to survive. Asset allocation is important.
3) Diversification, I did an analysis on publicly traded REITs during the March 2020 crash. The big ETF REITs like VNQ, O and others dropped more than stocks. It was very disconcerting. If you are investing in real estate to diversify away from stocks or dampen your portfolio volatility, investing in publicly traded beats will likely make your portfolio volatility even higher.
Personally, I hate volatility. I’m at a point in my financial journey where private funds in real estate, private equity, and venture debt are attractive. As soon as I allocate capital, I forget about it until the distributions start coming in.
Yes, during the March 2020 debacle, investors were not allowed to pull money out of their Fundrise accounts. However, this should’ve come as no surprise to the investors, because Fundrise had clearly iterated this possible scenario to all investors multiple times, and even several years beforehand, to prevent them from having to sell assets at the most inopportune time: the bottom.
It was a protection to keep investors from hurting themselves, and they followed that plan to the letter when the downturn occurred. I give them kudos for having a plan & sticking with it when the tide went out.
Financial Samurai says
Man, could you imagine selling in March 2020 and holding cash or shorting until today? Brutal!
It is interesting how some people still panic-sell, even though they have agreed to tie up their capital for X amount of years. As someone who is absolutely OK with tying up capital for 5-10 years with the capital I want to tie up for 5-10 years, throwing up a gate to protect me and others is welcome.
If you don’t want to tie up capital, then invest in other more liquid assets.
Agree- forcing you to tie up capital is a feature not a bug for most people. Prevents your worst instincts from becoming reality.