A lot of you have expressed interest investing in real estate over the years as part of a diversified investment portfolio strategy. However, some of you don’t have the 20%-30% downpayment to get started in rental property investing. Therefore, I’d like to explore the real estate crowdsourcing industry with Fundrise.
With Fundrise, you can invest in a private eREIT or eFund with as little as $500. I’ve personally invested $810,000 in real estate crowdsourcing since 2017 to diversify my investments and earn rent 100% passively.
I’ve been a big fan of real estate since college, but I’ve only invested in actual physical property. I’ve always just bought a place to live in for several years and then rented it out. This way, no matter what happens in the market, I’m hedged because I’ve enjoyed the property. Further, I only need to put 20% down initially.
When my master tenant gave me her 30-days notice recently, I saw it as a sign to explore as many investment alternatives as possible. Roughly 40% of my net worth is tied up in illiquid physical property. I’d like to get that figure down to around 30% for my ideal asset allocation.
Real Estate Crowdsource Investing With Fundrise
Ideally, I’d like to transfer a portion of my proceeds in an expensive San Francisco property into higher yielding properties in the Midwest or South without having to manage the physical asset.
The most efficient way I can reallocate the real estate portion of my net worth is by buying shares in a Real Estate Investment Trust (REIT) or by buying real estate online through a real estate crowdsourcing platform. Fundrise has options for investors to buy two REITs, Growth or Income, and invest in individual properties through their platform.
Let’s take a look at historical performance first, which is no indication of future performance.
Real Estate Versus Equities Performance
The following chart compares the performance between real estate and the S&P 500. I’m surprised to see such massive outperformance by the FTSE NAREIT ALL REITs asset class. But I guess it makes sense because after the NASDAQ bubble burst in March 2000, real estate started taking off partly because the Fed aggressively lowered interest rates, and partly because equity investors looked at hard assets to park their money.
I’m in the camp that interest rates will stay lower for longer. Australia has now joined Japan, Denmark, and Sweden with negative real interest rates by the way. I’m also looking for yield as a retiree. As a result, I continue to see real estate as an attractive long-term asset class.
Here’s another chart highlighting Fundrise’s 2015 returns versus the S&P 500, NAREIT Composite Index, and NASDAQ. With my personal investment return goal of 3X the risk-free rate of return (10-year bond yield), anything above 6% looks attractive, depending on risk.
The approximate 13% net average annual return for 2015 is representative of the aggregate historical operating results from 2015 for 43 individual investments offered under Reg D. Their eREIT model gives all investors access to a diversified pool of quality commercial real estate. In their first full quarter of operations the Income eREIT earned an approximate 9.7%.
They’ve made investments in commercial real estate projects all across the US. To date they’ve been most active in the New York, Los Angeles, DC, Seattle, Atlanta, and Phoenix markets. I’m glad, because I’m looking at areas outside of San Francisco to invest.
Latest Fundrise AUM And Performance
According to the latest public offering documents by Fundrise for its IPO, the firm manages roughly $488 million in assets under management, has 63,271 active investors, and 76 employees. 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. The 14%+ outperformance against the Vanguard Total Stock Market ETF in 2018 was particularly impressive.
With a healthy 6-year track record, Fundrise has taken a huge step forward in proving out what they have believed for so long: that 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.
Real Estate Investing Sweet Spot
Historically, there’s data that shows investors with roughly 20% allocated to real estate have outperformed those who only own stocks and bonds. The 20% real estate model was made famous by the ~$25B Yale Endowment, which outperformed traditional allocations 22.6% annually for decades by investing at least 20% of its portfolio in real estate.
However, in the past, the best private real estate opportunities require minimums of $100,000 or more, making them inaccessible unless you’re very wealthy. The only other option is to go through middlemen who charge high fees, thereby negatively impacting returns. This is where Fundrise and their technology comes in because their investment minimum can be as low as $1,000 for some deals.
Below is a chart highlighting the different sized real estate markets. You and I can’t buy trophy properties like the Empire State Building because these properties are just too large and expensive. You and I can buy fixer uppers to make some sweat equity. I did so in 2014 and am still working on my house slowly today.
But fixers can be risky and stressful if you don’t know what you’re doing. So it seems like the Midsize market is the sweet spot for investing given less competition, a more inefficient market to exploit, and potentially higher risk-adjusted returns. This is where the real estate crowdsourcing industry currently operates.
Income Is More Passive Investing With Fundrise
One of the biggest advantages of owning equities over real estate is there are no ongoing maintenance costs. Something is always breaking in one of my properties, like a kitchen faucet the other week.
Another advantage of owning REITs and equities is there isn’t ongoing property taxes. Even though property tax is only 1.2% of the assessed value in California, isn’t it disgusting to know that in 83 years, you will have paid 100% the value of your property in taxes alone?
But the biggest benefit of not owning physical rental property is never having to deal with people. For the most part, tenants are fine to deal with if you’ve vetted them properly. But sometimes, no matter how nice they can be on paper and in the interview, conflicts may arise.
If I can invest in real estate and make a 7.2% return a year, let alone a 13% return, I’ll double my investment after 10 years. The main “drawback” to investing in REITs and real estate crowdsourcing platforms is that I can’t leverage up 5:1 like I can with a mortgage on a physical property. But sometimes, not leveraging up can save your hide.
Diversify Your Investments
Everybody should seek to own their primary residence to get neutral inflation. After that, consider investing in stocks, bonds, and real estate crowdsourcing investments through a company like Fundrise. Technology has allowed investors to arbitrage higher net rental yields from all around the country.
Fundrise is the best real estate crowdfunding platform for non-accredited investors. I think it’s best for the average investor to invest in a diversified eREIT portfolio, rather than individual real estate crowdfunding investments.
Sign up for free and see what they have to offer.
An investment in the common shares of any of the eREITs involves risks. Each investor should carefully consider the each eREIT’s Risk Factors in addition to the other information contained in each eREIT’s Offering Circular before purchasing shares. The risks and uncertainties discussed in each Offering Circular are not the only ones each individual eREIT faces, but do represent those risks and uncertainties that such eREIT believes are most significant to its business, operating results, prospects and financial condition. Some statements in each eREIT Offering Circular and on this website, including statements in each eREIT’s Risk Factors disclosure, constitute forward-looking statements. Please refer to the section entitled “Statements Regarding Forward-Looking Information” contained in each eREIT’s Offering Circular, which is available on each individual eREIT offering page, as well as on the Securities and Exchange Commission’s EDGAR website.
If interested, here’s another Fundrise overview with Q&A with the founder.
Couple very relevant questions here – (apologies if this is a double-post, I’m not sure if comments on your posts generally need approval)
1. Given the tax inefficiency of Fundrise/REITs, is it a good idea to locate all your REITs in tax-sheltered accounts only?
I have a 2.5% allocation in VNQ (Vanguard REIT) in my 401k and 5% in Fundrise in a taxable account, and I realized that in my earning years, taking a federal + state + potential NIIT tax hit can eat nearly half of the 8% dividends from Fundrise. Ouch! I was looking into moving my Fundrise investments into a Roth IRA to avoid this huge tax drag (e.g. selling the stocks in my current Roth IRA, buying Fundrise in my Roth IRA through Fundrise’s self-directed IRA partner, selling my taxable Fundrise and taking the 3% early withdrawal hit, and then buying stocks in my taxable account – stocks only pay about 2% dividends and they are usually qualified dividends taxed at the capital gains rate. [1]. Is it worth it/is it something you do yourself?
2. For renters, do you recommend a higher real estate allocation in the form of REIT/eREIT than homeowners?
3. New accounts don’t let you choose specific funds anymore e.g. all-in on Heartland, only mixes – how do you feel about this especially in terms of diversification for coastal investors? As a West Coaster should I be happy with stacking up more of the Los Angeles eFund (which is also yielding 0% in its ramp up phase)?
I’m invested with RealtyShares. I was notified this week that they are winding down. No new investments.
Any Thoughts on this “Going out of Business” situation?
Sure. https://www.financialsamurai.com/forums/real-estate-crowdfunding/thoughts-on-realtyshares-closing-its-doors-to-new-investors/
I have a post coming out on Nov 10 with more thoughts.
Other than owning a home, I don’t have any experience investing in real estate. What is meant by, “The main “drawback” to investing in REITs and real estate crowdsourcing platforms is that I can’t leverage up 5:1 like I can with a mortgage on a physical property.”?
I am a Fundrise investor and think it is a good asset class but there is one glaring reason why rental real estate is a better assect class, even with a property manager — leverage. You can leverage a building 4:1 (5:1 for single family) and have a much higher total return (income + price appreciation) than you can with Fundrise. While it’s true that you can spread your money around Fundrise and reduce indosyncratic risk, the returns from a 4:1 property in the early years are superior, assuming modest 1-3% price appreciation. Also, after X years of amortization and property appreciation, you can find a bank to do a cash out refinance and buy another property, provided your debt coverage is adequate. For investors who do not have the cash to buy rental property, Fundrise is the next best thing.
Maybe one day Fundrise will be tradable over a regular exchange and we can lever up with 2:1 margin.
That’s a good point David. Some folks like myself are already levered enough w/ physical rental real estate and don’t need more. I’m overexposed in San Francisco, Lake Tahoe, and Honolulu. I’d rather redeploy some of my assets into the Midwest where there are higher return rates. Real estate crowdsourcing can help make this happen. Fundrise is one solution.
I’m about 50% in real estate – mostly direct investment in value-add multifamily whereby I own small percentages, in the form of LP interests, in C+/B- grade apartment complexes which will be slowly transformed into B+. The typical business plan involves 30% equity + 10 year Freddie Mac debt. Target properties are usually bought in some form of distress, are well below replacement cost, are poorly managed and cashflow initially at about 10% with a goal of stabilized 15% five years out. Roughly 50% of the cashflow gets reinvested into rehabbing the exteriors and common amenities (clubhouse, pool, BBQ area, gym) and interior units. The beauty of this RE asset class is the property is depreciating more than cash distribution. So these things are very tax efficient – you don’t pay any tax in the early years of ownership. And you tend to get 15% returns on your unit rehab expense (value add investment). As rent appreciates from renovation and inflation, so does the value of the asset, so often, as long as interest rates remain low, you can refi or take out a second loan and take out a chunk of your equity while keeping the same LTV – this is not a taxable event! Like the depreciation, it simply lowers your tax basis. Now, tax basis does’t matter if you can manage to hold the asset forever – i.e. you never sell and therefore don’t have a capital gain event. Five years out, you end up with a 15% cash on cash return that slowly grows. The key is finding the right GPs to partner with. Ideally: 1. they have strong name brand institutional partners who represent the majority of the equity. 2. the GP buys a stake of the equity (note the GP principals typically have to personally guarantee the loan so they have that skin in the game too). 3. the GP has a strong track record through numerous cycles. 4. the GP currently owns a good size portfolio, say 5,000+ units and therefore has an infrastructure in place and is already working properties in the related markets. These bigger outfits see better off-market deal-flow, know their markets via their own properties, and can generally offer better diversity to LPs through more deals. 5. the GP focuses on walkable submarkets of major cities near transit to the core. 6. buys where rents represent 25% or less of the area’s median income.
I have not studied the crowd source outfits, but I’d guess that the better GPs that match my parameters don’t advertise on crowd funding websites. These deals do not offer liquidity except via quarterly distributions, refi distributions, or sale proceeds. NOTE, if there is a name brand institutional parter that’s a PE firm, there will likely be a sale modeled 5-7 years out. But as mentioned, forever is the best time horizon if you can find it due to the tax efficiencies and leveraged appreciating cashflow. Plus, a benefit to no liquidity is the behavioral finance benefit: you can’t panic and sell! It forces you to follow Warren Buffett’s ideal holding period: forever. Google around for word combos multifamily, asset manager, direct investment. I like these profiles better than REITs because I think you can find more scrappy and opportunistic managers who have lots of skin in the game and who have strong performance fee incentives. Another way to seek out access to these direct investments is through “syndications” which by into the direct investment LPs and you buy in through the syndication (Google for “apartment” or “multifamily” syndications”). My hunch is that, as your article points out, there might be $100k minimums on a lot of these opportunities, but maybe not. And $100k in one of these deals might pencil out better than trying to manage 1-3 individual rental properties. These are just my 2 cents after golden five years of playing. I’m totally slowing my pace to RE exposure now as rents and values have had such an incredible run and the supply is seeing new records with 100s of thousands of new apartment units hitting the market. But long-term, I agree with multifamily guru, Sam Zell, that the homeownership rate is heading into mid 50%s which will keep multifamily demand robust. But unlike Sam’s main vehicle, Equity Residential REIT (EQR), which focuses on major metros like NYC, LA, SF, Chicago, I prefer the more affordable end of the spectrum, which in most markets have rents in the $1,000-$2,000/mo. range. I myself don’t have the patience to buy individual rental properties, not when I can tag along with a shrewd institutional player.
Hello Sam, thanks for all the great posts. Fundrise seems interested. Have you looked if you’d be eligible for a 1031 exchange? Now that would be money!
Regards,
Mark
Yep, I should be eligible. But I don’t want to buy more physical property as then I’d end up where I am now. I want to minimize.
Sorry meant doing a 1031 exchange into fundrise….less mess, no fuss. I have no idea how you keep up with all your comment responses! I need to learn the ways Obi-Won.p