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.
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
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.
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.
An Easier Life
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.
Starting on June 12, 2017, Fundrise introduced the first low-cost private market investment portfolio. You can choose among three different goal-based portfolios and have Fundrise invest your money accordingly. When you invest with Fundrise, your money is automatically diversified across their proprietary eREITs and eFunds, investment products specifically designed to be low-cost and tax efficient.
About the Author: Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $170,000 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.
FinancialSamurai.com was established in 2009 and is one of the must trusted personal finance sites online with over 1 million organic pageviews a month.
An investment in the common shares of any of the eREITs involves substantial 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.
The information presented represents the historical operating results for the sponsor (Rise Companies Corp.) of the various eREITs that are available for investment on the Fundrise website, and the experience of real estate programs sponsored by Rise Companies Corp. Investors in any of the various eREITs’ common shares should not assume that they will experience returns, if any, comparable to those experienced by investors in the sponsor’s prior affiliated real estate programs, and investors will not thereby acquire any ownership interest in any of the entities to which the foregoing information relates. For a fuller description of the sponsor’s prior performance, please see the Prior Performance Summary section of each eREIT’s Offering Circular, links to which are available on each eREIT’s individual offering page, as well as on the Securities and Exchange Commission’s EDGAR website.