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 one of their private real estate funds with as little as $10. I've personally invested $954,000 in real estate crowdsourcing since 2016 to diversify my investments and earn income 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 $3.3 billion in assets under management, has over 400,000 active investors, and over 100 employees. Below is their assets under management in 2017 and 2018. Going from $488 million in AUM at the end of 2018 to over $3.3 billion in 2023 is impressive!
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 into play.
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.
Fundrise Alternative
If you are an accredited investor, another great private real estate investing platform is Crowdstreet. Crowdstreet offers accredited investors individual deals run by sponsors that have been pre-vetted for strong track records. Many of their deals are in 18-hour cities where there is potentially greater upside.
If you want to get more surgical in your private real estate investments, Crowdstreet is a strong solution. I've met the people at Crowdstreet on two separate occasions and came away impressed with their risk-management and product offerings.
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. Below is also a conversation I had with Ben Miller about his views on the real estate market today.
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
That’s cool. I didn’t realize there was a startup like this. They’re thinking of everything when it comes to fintech. I’m familiar with REITs but that’s neat that this company offers the option for investors to select individual properties to invest in as well. I think having more ways to diversify is a good thing.
I went ahead and put me an order of 2500 dollars for the fundrise growth eREIT. Okay well its not quite 20% of my net worth, more like less than 1%. But I am interested to see how this plays out and want to learn more, so why not have a tiny bit of skin in the game… 2500 dollar investment probably wont break me or make me rich even if they do provide 20% returns, but hoping to get comfortable and learn about other investments other than your usual index funds.
My question is this: What is the benefit of signing up with Fundrise–or any other real estate crowd sourcing platform–over buying a REIT off the stock market?
I have a brokerage account filled with dividend growth stocks. Amongst them are Reality Income, W.P Carey, Omega Healthcare Investors, and other REITs. I can buy as many or as few shares as I want for the same low commission that I pay for nonREIT stocks. So what exactly is the benefit of crowd sourcing or Fundrise’s eREIT as opposed to any of the more easily accessible REITs?
I would like something that puts my name (along with all the other investors) on the title deed of a specific property, allowing me to directly collect my portion of the rent and truly own a piece of physical real estate. I’ve been doing some research on some of these platforms (the first one I heard about was Acquire) and none of them seem to fit the bill. I’ve seen ones that allow you to invest in mortgage debt for individual properties, but a loan has a finite lifespan and I don’t want to LEND. I want to OWN.
Just curious as to your thoughts, Sam.
Sincerely,
ARB–Angry Retail Banker
The potential benefit is investing in individual real estate investment opportunities, and a more customized basket of mid-market sized properties. It’s more specialization with no guarantees.
I see, but many publicly traded REITs are specialized too. OHI deals with skilled nursing facilities, NNN deals with retail properties, and over on divhut.com, I learned of a REIT that deals in advertising space. Literally, it just owns billboards.
Do you know of any crowd sourcing platforms that operate anywhere close to what I described? Allow you to directly own property rather than a company or subsidiary that owns properties?
I just want to point out that I love REITs and own–and will own more–in my portfolio. I just don’t personally consider them real estate; I consider them stocks. To me, Realty Income is a stock (obviously with some different tax implications, I know). If I want to diversify into real estate, I want to own real estate directly rather than investing in REITs. If I’m going to invest in real estate crowd sourcing, I want THAT to be the end result rather than just investing in REITs in a more complicated way.
Hope that sort of clears up what I’m looking for and why. I hope that makes sense to everyone.
Sincerely,
ARB–Angry Retail Banker
ARB – couldn’t have said it better myself. Also, I own all 3 of those REITS as well :)
I’ve done three projects in realty shares. They have various levels of debt vs equity. I’d have to reread the contracts to know the exact structure but it seemed much more involved then lending club or prosper. It also seemed more contractually safe but I don’t recall the exact details.
There were no crazy returns just 10-14% based on equity or debt. Usually a one to three year payback – mostly one year. Seems probably fine until a real estate recession, then who knows.
10-14% a year is pretty damn good in this market. So you basically have gotten your principal back + 10-14% after one year? Where could you see things going wrong? For example, do they talk about a delay in getting your principal back due to a delay in a project’s remodel? How did you go about choosing which investment to invest in?
Are these properties where the lead is buying and flipping? Any purchase and rent out for long term income opportunities?
thx
This platform gives me pause. The value of real estate is its tangible nature. I don’t know what it would take to make this a comfortable prospect for me. And perhaps this is partially why I don’t yet have your wealth.
I’m doing my due diligence on them and the industry as well. Always good to pause and contemplate.
Admittedly, I haven’t read much into it; however, it doesn’t pass the sniff test for me. I have to lock up money in a private company for an asset that would already be illiquid? And I have to hope they have my best interest at heart, rather than their bank accounts? Just doesn’t make sense to me when I could just hire a property manager and own turnkey properties in areas I don’t live in.
At least if I invest in a REIT index fund, I at least know I can pull my money out when I want it. But in the case of Fundrise, I’m putting all my real estate eggs into one, albeit diversified, basket no?
Sure. A REIT ETF / index fund is more liquid. I try not to buy anything if I don’t plan to hold on for at least one year. In fact, I am always thankful for investing in funds, structured notes, etc that have a longer lock up period e.g. 3 – 7 years, as they’ve prevented me from selling at wrong times in the past.
Real estate, due to the high transaction costs, kept me from NOT selling in 2012 when I engineered my layoff. All I wanted to do was sell, cash out, and liquify once my main source of income disappeared. But thank goodness I didn’t b/c SF real estate is up over 60% since!
I’m always locking up money in private investment vehicles btw. I think you’ll enjoy the next post about college endowments and how they invest. Think long term w/ great IRRs.
Should I Sell My House Now That Facebook IPOed? – In 2012, totally tempted to sell.
Take Advantage Of Unfair Situations – Check out the charts of property prices since 2012. Ridiculous!
I am too much of a control freak to do real estate crowd funding. The more I analyse real estate, the more I find a lot of landlords and flippers don’t make a profit long term. I am over allocated in real estate in my portfolio, but feel that I can find good deals rather than average deals. I would be too concerned in a crowd funded investment, getting burnt by poor deals / market downturn.
Sounds like a decent option, but how much better could it be by taking on some of the work yourself? I feel like with leverage and a property manager you can easily beat that. Yes, you will have to manage the manager, but if you run the numbers, I trust it’s worth the effort. Have you considered selling your property in the Bay Area through a 1031 exchange and purchasing a rent-ready 4 to 10 unit building in the mid-west with a property manager? Would it be worth the effort if you could go from a 13% return to a 20% return?
Yeti brings up a good point about vetting the company and key players…
I am too risk averse to do such an investment. I would prefer to be more hand-on when it comes to real estate investing…
Hi Sam,
As a DC resident, I invested in one of the early Fundrise projects – where you could invest in a single, specific property in DC. I loved the idea of investing in my community and making a little extra cash on the side. The two owners of the fund are from DC and most of their original projects were DC based. Recently they started expanding across the country. It is hard to know how well they are picking each property since they must be relying on other people to know the local markets.
I was intrigued enough by the idea of their REITs as well, to put a little money there too. Each one of the their offering windows has sold out in minutes. However, there seems to be some controversy around their projected numbers and I don’t like it how in their desire to appeal to the unsophisticated investor they are cherry picking their numbers.
https://therealdeal.com/2015/12/08/how-fundrise-crowdfundings-most-celebrated-startup-cherry-picks-its-numbers/
There were also recently some tabloid style news over a senior officer in the fund leaving on less than good terms. I am glad that I put in some money to see how it goes, but right now I view it an experiment, rather than a real investment strategy. Plus the Fundrise investment is even less liquid than a property you own outright, which presumably you can sell in a month or two even if not at the highest price.
As an accredited investor you have the opportunity to invest in many individual projects across the country. It may take a little bit of work to find a developer to work with, but I am sure there are great opportunities in SF and elsewhere that provide much higher returns. Have you considered that?
Very interesting. How did your Fundrise investment pan out so far? What was the return or is it tracking on schedule? How long is the investment for?
I fear the opportunities in SF are now fewer and far between. I’m sure there are some, but the returns are much lower now, and I think we are flatlining. I know SF very well, and I expect a decline over the next two years.
You have reminded me to ping my buddy who is a developer though. But man, I really want to keep things as simple as possible.
I came across Fundrise a couple months ago and wasn’t too impressed with the options available to non-accredited investors. I’ve got 10+ years experience investing in real estate, doing everything from buy and hold rentals to flips to hard money loans. I don’t see much benefit to Fundrise over a standard REIT or private hard money loan though trusted business partners (which not everyone has). Personally, for REITs, I buy Realty Income stock (O). They pay dividends monthly and have for 45+ years. They never lowered their dividend and they have had 74 consecutive quarters of dividend increases. It’s a stock, not a mutual fund, so there are no fund loads or expenses. I still prefer hard money lending as my real estate investment of choice.
It is interesting to note that, in a footnote on one of Fundrise’s pages, they say “Fundrise’s services do not constitute “crowdfunding” as described in Title III of the Jumpstart Our Business Startups Act (“JOBS Act”).”
Thanks for highlighting Realty Income (O). I had a position in them before, and will look into them again if I sell my condo.
Can’t agree with this enough. Such a great company and stock.
I’ve been wanting to get into purchasing physical rental properties, but as you noted, the down payment is a hurdle. I took a chance and just invested a small portion of my portfolio into Fundrise and so far so good.
I do have some trepidation with it, but I also invest in Prosper so I wasn’t too concerned about it. There is risk in many things and I feel if I am properly allocated across different investments, the risk isn’t any crazier than tenants having 50 people up on a roof.
Good write up–and I’ll continue to look at owning physical property in the future too.
Can you elaborate on your experience w/ Fundrise so far? Have you received interest payments or principal back yet? Have you been able to find good investment choices that have enough supply to fit your investment criteria.
Hello Sam. I have invested in a similar platform called realty shares since feb2015.my investment is around 50K and so far received 2000 worth of distribution.
Sorry for the delay in responding — I invested in the eREIT offering. I’ve received one interest payment (they come quarterly) and the return was just under 10%. The group chooses the investments for you, so there isn’t any choice under the REIT. If you’re an accredited investor, I’m sure you have more range of choice besides the REIT.
The portfolio will eventually hold 20 different properties but sits at 10 right now. The fee structure is palatable since historically, Fundrise has had very good returns. Of course, no guarantee that lasts.
I could have just placed some money in a Vanguard REIT with a much lower fee base, but the returns are paltry and since it’s an index fund, it also correlates to the stock market and I wanted some separation.
I’m still very skeptical of much of the FinTech crowd-source/peer2peer newcomers. The recent issues facing Lending Club are concerning. Not so much the basic model itself, but the reliance on the ability of the individual company itself to not implode.
What happens if you have 20% of your net worth invested with Fundrise and shenanigans causes them to blow up? Do you own actual stakes in the underlying properties? Can you diversify across properties and areas, and/or does the whole investment rely on the continuing healthy existence of the platform (Fundrise itself)? My understanding with Lending Club is that you don’t own the actual notes to the borrower, only Lending Club notes.
Basically, I’m too much of an idiot to evaluate the actual risks in such investments. I can comprehend the risks of buying a rental house on my own. I think I can understand the risks of REITs, or at least an REIT index fund. But I’m not sure I would be comfortable having 20% of my net worth in ONE REIT basket that relied on one individual company not doing stupid stuff.
I’ve got $20k excess cash at the end of the summer that I’m thinking of deploying in real estate. How would I properly evaluate the risk of something like Fundrise vs. a REIT Index fund, vs. a buy-and-hold local property (which I could realistically buy leveraged with about $20k in my area).
According to LendingClub’s website they say that in the case they go out of business they have a backup servicer (Portfolio Financial Servicing Company). They do mention that if the notes are determined to be part of their bankruptcy estate then you won’t get payments. I guess that is not too assuring.
I agree that the investments sound good but the platform is worrisome.
I’ve been on the Fundrise platform for a little under a year. Thus far, I’ve been really happy with it as an alternative investment vehicle and as a way of getting exposure to real estate in a more convenient, equity-style transaction.
Previously, Fundrise was focused only on accredited investors with a variety of individual assets across the capital stack (senior debt, preferred equity, equity) to choose from. They’ve since moved to focus on this eREIT model as Sam pointed out – one basket focused on income and one focused on growth. These eREITs are open to non-accredited investors.
I preferred the ability to select from individual assets personally, mostly because of the better flexibility in terms – I have a range of assets that term from 12 months to 36 months. The eREITs they offer are basically 5+ year terms with no firm timeline to liquidity. I have 5 individual assets in my Fundrise portfolio as well as funds in both of their eREITs.
As far as returns, the platform has more or less delivered the targeted gross annual returns. One loan paid back early, so I didn’t get the targeted total, but the annualized rate was on target and the principal was returned so it didn’t really bother me.
My biggest complaint with Fundrise honestly has been that they can’t seem to keep investments open on the platform. As soon as an offering is made it’s sold out in less than 12 hours, and as I mentioned previously, they are not really focusing on individual assets any longer, but more the mass eREIT model which I do not like for liquidity purposes.
That said, looking at a flat or negative stock market over the past 12 months (and, I believe a flat or negative stock market for the next 12 months), it’s been absolutely amazing to put capital to work earning north of 10%.
I recently also opened an account on RealtyShares. While it has slightly higher fees (1% on average vs Fundrise’s 0.5%), has a lot more in terms of options of individual assets.
For what it’s worth, this is what Fundrise’s FAQ says when asked “What happens if Fundrise goes out of business”:
When you invest in a Project Payment Dependent Note (the “Notes”), you are investing in an obligation of the National Commercial Real Estate Trust (the “Trust”), for which a Fundrise affiliate entity serves as trustee. Real estate companies make payments to Fundrise Servicing, LLC, an affiliate of Fundrise that services the corresponding real estate assets on behalf of the National Commercial Real Estate Trust, and in turn, the National Commercial Real Estate Trust uses the proceeds of such payments to make payments of principal and/or interest on the Notes.
Payment on the corresponding project investment will remain due even in the event Fundrise goes out of business. However, payments on Notes issued by the National Commercial Real Estate Trust could be delayed or modified in the event of a business disruption.
Always good to be skeptical. I will spend hours analyzing an investment and then weeks, if not months contemplating on whether to invest. If I do, I tend to start with $10,000 and work my way up.
Here’s what they say if Fundrise goes out of business:
“When you invest in a Project Payment Dependent Note (the “Notes”), you are investing in an obligation of the National Commercial Real Estate Trust (the “Trust”), for which a Fundrise affiliate entity serves as trustee. Real estate companies make payments to Fundrise Servicing, LLC, an affiliate of Fundrise that services the corresponding real estate assets on behalf of the National Commercial Real Estate Trust, and in turn, the National Commercial Real Estate Trust uses the proceeds of such payments to make payments of principal and/or interest on the Notes.
Payment on the corresponding project investment will remain due even in the event Fundrise goes out of business. However, payments on Notes issued by the National Commercial Real Estate Trust could be delayed or modified in the event of a business disruption.”
“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.”
FS, a downturn might solve your problem!:-)
Seriously, sounds like you are pretty far along on your decision-making, it is a good time to sell and also a good time to hold. Your decision will be correct! Safe travels!
Good questions on crowdfunding – I have interest, but am just a little too cautious to jump in just yet. However, I am very intrigued by your statement here: “However, the best opportunities require minimums of $100,000 or more…” – can you explain more about these best opportunities?
Basically $100,000 – $250,000 is usually the minimum for an individual to invest in a private fund. For example, a Venture Debt fund I’m investing in has a $100,000 minimum. As they grow in size, they probably will raise it to $250,000 because they want to have only so many limited partners.
I’m glad to have finally have found an Early Retirement & Personal Finance blogger that is talking about the crowdfunding real estate market! I’ve been using a few different platforms as an investment vehicle for about a year now with good results.
So many bloggers all seem to focus on espousing the benefits of dividend stocks, and quite frankly after a while it gets repetitive. My hunch is that they have figured that the majority of their readers aren’t accredited investors and therefore can’t participate in crowdfunded real estate.
The biggest question I have is how does the net return of crowd funding real estate compare to the typical dividend stock portfolio affect accounting for taxes. From my understanding income from dividend-paying stocks is taxed at capital gains rates 15%? Whereas these real estate crowdfunding investment returns are taxed at your regular income rate — the platforms send you a K-1 at the end of the year. If you’re in the upper tax bracket it could eat into your earnings much more than capital gains income, no? I haven’t done the math myself since I don’t have any real data as I never got into dividend stocks (yet). I wish someone smarter than me would crunch the numbers! ;)
Jason you are correct with these REITs. They are required to pass pay out most of their earnings. To be technical these are considered pass-through entity’s meaning the income flows directly to the person, in the case of REITs the investor. While they may be high yield it is something you need to factor into your investment decision. Hope this helps!
This is my understanding as a tax accountant fyi.
Good point on taxation. Yes, dividends are taxed at 15% up to 20%, depending on your income. You get a K-1 w/ RE crowdsourcing and income is taxed as ordinary income.
I’m frankly looking at ALL investment alternatives. I’ve been asked about RE crowdsourcing for a couple years now and never covered it until now. When Fundrise approached me to cover them around the time my tenants gave their 30 day notice, I decided it was finally time to look into it.
Do you know if the K-1 passes through any amortization or other write offs? What did your K-1 look like? Did you pay taxes on the whole dividend?
If I get an 8% unqualified dividend on my taxable account, the after tax return will be about 4.8%. Unless there are other write offs, Fundrise seems like a better investment for those with a low income.
I invested a small amount in Fundrise just out of curiosity. I might consider this for my retirement account though.
Sam I am on the exact same wave length as you right now. 23% of my portfolio is currently in REITs as I think low interest rates are here for some time. I have not done crowdfunding but I have seen this advertisement numerous times on my Facebook page.
I am still in college but I will like to have physical rental properties but not in the US. I find that tenants are usually more respectful in my home country of Trinidad and the economy is on a dip right now so hoping to accrue enough money to take a swing at the market. Would love to see how your investments in REITs do in the coming years compared to your physical rental spaces.
You know I have looked into the whole crowdfunding scene as well as fundrise and have always been intrigued by the amount of effort involved to jump into this type of investment. I love the idea of not having to worry about tenants, property management, etc.. as I do now with my current real estate assets.
And 13% in average returns is not too shabby! I think for now since I have the energy and ability I will stick to buying rentals and fixer uppers but I would not doubt for one second moving to this route in the future.
Good write up!
Sam,
Can you explain the benefit of investing with FundRise vs investing in a REIT ETF like Vanguard’s (VNQ) that has a $31+ billion portfolio with very low fees (0.10-0.12%)? Is FundRise considered a higher risk/reward play? Can a company like FundRise withstand a real estate correction even 1/4 the size of 2008?
For the sake of transparency with the positive review, are you able/willing to disclose any benefits FundRise provided/offered you for writing this?
Thanks!
Yes, Fundrise is considered a higher risk/reward play in the mid-market, and with different projects to choose from. VNQ is the gorilla REIT ETF that will mimic the entire portfolio. No idea whether any company can withstand a correction. Fundrise is a marketplace, so in a RE correction, volume will decrease and their profits will decrease. It will depend on whether they manage their burn well enough w/ their $40M in funding. Finally, I was approached by three RE crowdsourcing companies, and I decided to start w/ Fundrise because they were the most responsive when I asked them questions about their returns, platform, competitive advantage etc. I haven’t received any benefits yet to writing this post.
I’m more interested in hearing whether anybody else has invested in RE crowdsourcing yet, and how has their experience been so we can vette the space as best as possible. I haven’t sold my condo yet, so I don’t have the proceeds to reinvest yet.
How about you Kendall? What is it you do? What is your experience investing in real estate? What is your prediction of the real estate market? And where are you based?
Sam,
Thanks for the response. I wasn’t saying I thought you were pimping FundRise because they were giving you kickbacks or anything, I’m just always looking for what people’s motivations are.
I’m based in the very middle of the States, working at a large healthcare IT company. We have about 38% of our NW as the equity in our primary residence and about 8% of our retirement assets in two different REITs. We’re accumulating right now and focused more on pushing our assets into the market instead of real estate, but depending on where we are cash-wise when we have to up-size due to family growth, I’m playing around with the idea of retaining our current home and renting it to start a real estate portfolio. I don’t know if I want to landlord though…
My prediction is that as international waters remain choppy and uncertain with Brexit potentially looming and this nutty “race to the bottom” with interest rates, international buyers will continue to park portions of their assets in valuable real estate, keeping the major US markets growth steady. I don’t know what trickle-down affect that has on the lesser US markets, but my guess is that a rising tide will lift all boats as domestic investors may seek real estate opportunities in less tapped domestic cities rather than compete with international buyers.
Political uncertainty in the US towards the end of the year could have a similar effect or the opposite effect. Do the markets further stagnate and drive people toward locking up cash in real assets or debt pay-down? Or do people fear leveraging up 4-5x via real estate and just push tranches into relatively stable market funds and alternative investments on the way down and wait for the next bull market to start? None of the above? Bring the popcorn and we can watch it unfold. Thanks!
I’ve been investigating an investment of this type, so I appreciate you covering it.
Not yet sure what to do. This industry seems behind P2P in development and not sure which (if any) of the companies are on solid ground. The LC problems has me a bit spooked as one commenter above said.
I’ll see what you do, how it goes, and decide from there. Interested in follow-ups as you test the waters.
Certainly something worth looking into, I have some REIT funds at vanguard, but had never heard of crowdsource investing in real estate. I personally think the midwest is a great place to invest in real estate, but I’m biased because I live here. I think the hard part for you would be finding an optimal way of investing out here without having to manage it, or lose a ton of money to property managers.
I’ve just recently started getting into crowdfunded real estate as a way of diversifying my portfolio with GroundFloor (it’s one of the only platforms I’ve found that allows non-accredited investors). The trick that I’ve run into is the number of opportunities is limited so I have a lot of idle cash, maybe the eREIT is a good way to get around that? Overall I’m hopeful for the strategy because it’s a great way to invest in multiple properties, but I think it needs time to develop just like Lending Club in 2013. As with anything my strategy is start small, see where it goes, and invest more as it works.
Agree with starting small and gradually increasing if things are working. Never go all-in in the beginning!
Sam, slightly off-topic, but have you considered buying turnkey properties in the Midwest? It is a hands-off approach which still gives you the advantage of leverage. I am looking into this myself right now so curious to hear whether you have assessed the pros and cons of this option.
I don’t know where to start and who to trust. I know nobody in the midwest I can rely on for decent advice.
In a way, investing in a particular crowd-sourced project gives me a higher level of comfort b/c hundreds of people are investing alongside you, and the developer/platform has more pressure to not screw things up or cheat the investors. You never know, but compared to just me going solo w/out expert on the ground knowledge, the former seems better as I don’t have the desire to be an expert midwest investor.
You could consider a DST to 1031 into to avoid some tax.
The primary concern I have about REITs is how do you possibly vet the company and/or the key players to make sure they won’t overcompensate themselves and pay out lesser profits to the investors? With a limited market to sell your interest, and effectively no means of control, REITs always sound like the worst of both worlds to me.
If I were too busy to manage my own property, I think I’d hire a mgmt co before investing in a REIT. At least the mgmt co has to do what you tell them to do, and you know they’re acting on your behalf.
Everything is competitive in the long run. If you don’t perform, you lose investor interest/assets. So the key is to find the right managers. Hard to know without those w/ the longest records of performance. Will the advertised returns materialize, outperform, or underdeliver?
I’m dealing w/ this now w/ a second fund a person is launching. First fund is up, but way underperformed their goals. Just rolling my remaining commitment to Fund II, which will have lower fee, but hesitant to add more.
I have one mReit in my brokerage account with a DRIP the dividend is awesome but it is on the riskier side (crazy price fluctuations lately)
Where in the Midwest are you looking specifically? All the cheap properties around Minneapolis are getting snapped up fast – we are in the market for a house to flip and before we get there, multiple cash offers.
I will definitely be looking into real estate over the next few years as our income grows and emergency fund is full.
There are a lot of local (small) groups buying property together in the twin cities
I have often wondered about your opinions on this, Sam. The numbers look good to me, but in some ways Fundrise and similar programs seem a little too exciting to me; my investment approach is very vanilla. Still, I think I may end up dipping my toe in the waters in the next six months.
Thanks for posting this Sam, I didn’t know Fundrise, this seems like an interesting alternative and the returns they announce (30%/year since 2000) are almost surreal. Is there a catch?
A few things that I found on their website that may be worth mentioning :
– it is mainly for accredited investors. Even though intend to offer investment options to non-accredited investors, there seems to be a lot options in that latter case.
– it isn’t a publicly traded REIT, so liquidity can be limited and they plan to limit to 5% the number of shares that can be redeem on a quarterly basis.
– they plan on being able to have liquidity 5 years after investment, without guaranteeing it, so it’s a long term ‘bet’ on the investment.
Reading their SEC filing (link on their website) would be a good idea wanting to invest with them.
Do you know how they compare to others in the online crowdsourcing real-estate market?
I love to see how more and more startups are trying to transform industries where either competition was limited (taxis), fees are high (real-estate), this is all good stuff for us!
I ignore any outsized returns posted by any crowdsourcing company, as a company will always highlight the highest returns in their portfolios as possible. I plan to do more work on the other two real estate crowdsourcing companies and see how they compare.
The democratization of investment access is why all these startups are good for the consumer long term. In the short-term, it’s kind of anybody’s game.
Hi Sam – I worry about how stable some of these fintech companies are inherently. Case in point: LendingClub. With everything happening to LC, I worry what happens to investors’ investments if these small-ish companies go belly up. Granted this risk exists with ANY company, but the risk is arguably lesser with more mature, publicly traded companies than with recent startups with limited management experience. Your thoughts?
LC is certainly worrying. It looks like a breach of trust issue with back dating of loans and investing in a fund that buys LC loans w/out disclosing to the board. It looks company specific, but private funding has drastically slowed down over the past 12 months. This is why I’m doing my due diligence now and call upon others with experience to pitch in.
Any new investment one must start small and constantly evaluate.
Private funding seems to have recovered. In May-June, around the height of the crisis, good quality notes suddently became available to retail investors. Now, I see a lot of cash idling in my account because all the good notes are snapped up already – by returning demand likely from both institutionals and retail.
Sam,
I had been wondering whether you had considered your overall allocation to real estate, as the last post about selling your rental property seemed to only look at it through a passive income lens. I’m glad you mentioned your target asset allocation for net worth this time. It sounds like you would like to reduce your allocation to real estate. But actually it seems like you just want to reduce your allocation to managing property yourself, as the alternative mentioned in this post is crowd funded real estate!
I currently have about 60% of my net worth in my house, and I’m working to reduce that down to the levels you have suggested (30-40%) before I try to take on more RE. https://www.financialsamurai.com/recommended-net-worth-allocation-mix-by-age-and-work-experience/ (I haven’t figured out how to make the slick weblinks yet)
I don’t have any experience with crowd funding real estate, but a couple of things worry me about it. Specifically they entice you with amazing returns but then turn around and say “by the way, you might not get these returns. Actually you might not get any returns. And while we’re at it, you don’t actually have any ownership in the property either.” So that raises the question, what exactly do you own? I would guess that a property is divided into shares, and hopefully that you could sell or trade to another investor if you wanted to get out of the investment? I’m wondering how “liquid” these investments are, and if your money would be just as tied up as it would be owning real property.
I checked out the website and I couldn’t find much more info beyond what you already provided, aside from a wait list of 60k+ people to show their massive demand. Hah
I never model in a company’s advertised returns in my expectations. 13% is nice, but I’d be happy with 7-8% as I write in my post.
I wouldn’t mind reducing property management time AND property exposure at the moment if I could snap my fingers and make it so. Or, I can just focus on growing other parts of the pie to make property a smaller percentage. I’ve taken that approach forever, but I’m getting tired.
Traveling around Europe right now helps give me that perspective that I’ve been running for a very long time now.
Sam, I feel your pain. Overseeing properties with property managers is still a hassle, as I’m first hand experiencing right now with approving lower rent because of the oil crash or approving broken glass top stove repairs, etc, etc.
I’ve also decided to redirect a portion of my money formerly allocated to rental properties to private equity fund with better liquidity (can liquidate within a year) for a decent ten percent return annually.
I haven’t tried real estate crowdfunding but once it’s available in Canada (it’s taking awhile), I’ll be looking into this for commercial properties to diversify my real estate portfolio.
Just curiouis, what are their policies related to default rates and risk management strategies?
Tracy
Interesting. We haven’t tried real estate crowdsourcing yet, but it could be a good fit while we travel the world.
Sam, what advantages do you see in Fundrise vs. the other real estate crowdsourcing options available? Do they offer lower fees or have less risk than the alternatives?
Different projects and track records. I still need to do work on the two other main names and compare. Here’s their FAQ.
Actually there are a ton of sites out there now, at least 20 by my last count. And, btw, in most of those deals, you are basically leveraged anyways. Granted, you don’t take on PG, but the properties all have a debt stack, and many have multiple tranches. I am an investor that is only in stocks and bonds to the tune of 40%, the rest in commercial real estate, private equity, and cash. I would say for most people, these can be sucker deals, if you don’t know what you are doing. When you invest $100k+, usually you get an attorney and accountant and spend time understanding the risks. Not sure what kind of due diligence can be done on a $25k deal…but past results are not indicative of…