Real Estate Crowdfunding with Fundrise
Investing $500 in real estate would have been almost impossible in the past but now there’s crowdfunding. We’ll tell you how to put your real estate money to work using Fundrise.
- High ROI
- Low barrier to entry
- Transparency in fees
Fundrise saw this problem and came up with a solution. They used the power of new technology with real estate investment to create the perfect solution for investors with low capital. Small investors can now pool their resources together to invest in the property market for a high-return on their investment.
Fundrise is a real estate investment company that offers the online platform by the same name for online property investment.
Unlike most other investment businesses that cater to institutional investors, Fundrise focuses on small investors to give them the option to invest in properties by pooling their funds together directly.
The main product offered by the company is Real Estate Investment Trusts (REITs). Investors can buy the product by creating a portfolio in one of four ways.
- The Starter Portfolio: This is the default account you get when you sign up with Fundrise. It is a low-rise, low-return option and accounts can be created with as low as $500. You can upgrade to one of its three core plans as per your requirements.
- Income Supplement: This portfolio option is used to create a steady source of supplemental income for the investor. This is achieved through property value appreciation and rental income. It offers a good steady income, but the long-term gain is low.
- Balanced Investing: This option builds a highly-diversified portfolio that consists of income generating and value appreciating properties. The periodic payments are low but investors build a decent value in properties over time.
- Long Term Growth: This portfolio consists of properties that offer the most significant appreciation in value over time, and you can get annual returns as high as 15% per year. Investors holding this portfolio do not get a regular income.
Each portfolio offers different rates of returns, risks, and terms of investment. The average overall ROI for all of Fundrise’s investments was 11.44% in 2017, based on company reports. More on portfolios below.
Before going over the software features, here’s some background about the Fundrise platform. Ben Miller, the company’s CEO and co-founder, had been working in the real estate sector for years before he started Fundrise.
He saw plenty of inefficiencies in the existing real-estate investment model that depended mostly on Wall Street partners. He felt that online technology had developed to a stage where individual investors could directly invest in properties without relying on the stockbrokers as middlemen.
The platform was developed and launched in 2012. It has grown over the last 7 years to over 140,000 investors. The company manages assets worth over $1.2 billion. Investors need not have accredited investor status, and you can invest even with $500. It is popular among millennials and young investors who want to be directly in control of their money.
Fundrise offers a couple of different options for investing. The most common is through their eREIT (electronic Real Estate Investment Trust) option. The other is the eFund. Besides these, though, Fundrise offers a variety of investment types, from starter portfolios to advance investing options.
This option lets you put your money into a group investment in a cluster of commercial real estate buildings. Think of it as a mutual fund except for real estate. The properties include things like apartments, shopping centers, and office buildings.
Fundrise lets you buy the eREIT straight from the company. That means you can skip the commissions and other fees that can add up when you purchase through a broker. Plus, the volatility is low. However, the eREIT also has weak liquidity. You’ll get charged a fee for withdrawing your money before the end of your contracted period.
If you’re looking for a slightly different investment, Fundrise offers e-funds. These are investments in residential-only real estate assets. These investments are not publicly-traded and consist of single-family homes. eFunds are structured as partnerships, not with dividend income like the eREITs above. This means come tax time, you’ll receive a 1065 K-1 form, which differs from the tax form you receive if investing in eREITs.
With the eFund, you’ll still get direct access to the portfolio, which saves on costs. And you’ll still be diversified across different areas and types of homes, so you can count on a relatively stable investment.
More recently, Fundrise has started offering portfolios, including a starter portfolio with a $500 minimum investment fee. There are also passive income plans, plans for more balanced investing, and plans meant to drive long-term growth. You can see the projected growth over the next several years of each portfolio at Fundrise’s website.
These managed plans are a little bit more expensive. But don’t worry as much about balancing your risk and rewards.
Fundrise is available to any United States citizen over the age of 18. You must have a Social Security Number to invest with Fundrise, and the minimum amount to invest is $500.
I’ll cover more on the different portfolios below.
You can now invest in Fundrise with pre-tax dollars and use for retirement planning. (Note that self-directed IRAs may be used just for eREIT offerings.)
Using their new platform, you can invest in real estate based upon your goals rather than types of investment or location.
Fundrise is preparing to sell shares in the business itself through what they’re calling an “internet Public Offering” (iPO). To be qualified for this investment, you should have at least $1,000 on your Fundrise account and have chosen one of the advanced plans. You can invest up to 25% of your total account balance in this offering.
Other Notable Features
- Easy signup that takes less than 10 minutes
- Available in all 50 U.S. states
- Prefund investments are allowed
- The minimum investment is $500
- Asset Management fee ranges between 0.85% to 3.00% per year
- Bankruptcy protection
- VC funding
- Non-accredited investing
- Investments are made in diverse properties including land, industrial, residential, and commercial
- Both debt and equity investments options are used
- 90-day money-back promise, if you are unhappy with the service in the first 90 days
- If the fund does not perform up to Fundrise expectations, your money investment fee is waived
When investing with Fundrise, you are charged two standard fees plus a third that might impact your investment:
- Asset Management Fee: 0.85%
- Investment Advisor Fee: 0.15%
- Asset Origination/Acquisition Fee: 0% – 2% (Depending on your investment)
Add them up, and you’ll see the fees charged equate to 1 to 3% of your portfolio with Fundrise. For example, if you invested $100,000 for a full calendar year, you would be charged a total fee of $1,000 – $3,000. Fundrise charges these fees to your account monthly.
The Fundrise team claims you can save 20% to 40% on cost vs. traditional investment firms. The cost structure can be broken down as follows:
|Investment Advisor Fee||0.15% annual||0.25% - 1.45% annual |
|Asset Management Fee||0.85% annual||1.00% - 3.80% annual |
|Total Annual Costs/Fee||1.0% annual||1.37% - 6.45% annual |
|Asset Origination Cost||0% – 2% advance||0% - 3% advance |
Based on the total annual fee, Fundrise would charge you 1% on your total investment for one year. If you start with a $10,000 investment, you will pay $100 each year. Other popular investing software charge 2% to 6% so you would be paying $200 to $600 for the same period.
The company may also charge one-time fund development and fund liquidation fees of 0% to 2%. This fee is charged by many other REITs and usually ranges between 1% and 3%.
An additional servicing fee may also be charged by the company for non-performing assets. The fee depends on the individual fund manager’s discretion. The total fee equals the reimbursement cost of actual expenses incurred on a non-performing asset.
So far, the business reports there have been no non-performing assets. Hence, customers have not been charged this fee. However, this could change, and investors may be charged this fee.
The investment platform is easy to use and sign up for. Since they are focused on individual non-accredited investors, they’ve focused on keeping things simple.
Just visit the website and sign up to create an account through the ‘Invest Now’ option. You will need to provide necessary details like your full name, email address, and choose a password to create an account.
You will be asked to choose the type of account you want to create. There are two main options here. You can either create an individual account or go with a selection between joint/trust /entity account.
You will then be prompted to fill in personal details including your home address, SSN, date of birth, and phone number. After filling in this information, you will be asked about funding options. You can make an online payment through EFT, debit/credit card or wire the money. The Fundrise platform is secure and encrypted.
If you invest the $500 minimum required, Fundrise will put you in the Starter portfolio, which is merely a 50% income and 50% growth-oriented approach to commercial real estate investing.
If you invest $1,000 or more, you can invest in three goal-based plans:
The Supplemental Income plan is an income-oriented strategy. You are investing in cash flow, making returns primarily through dividends rather than the appreciation of the underlying asset.
So this could be a strict revenue approach. It’s very much like investing in dividend stocks which don’t have plenty of growth of the underlying asset, but they’re paying a consistent dividend and a high dividend yield.
Next, you’ve got the Balanced Investing plan that’s a blend of both growth and income, cash flow generating property, and they also are buying undervalued property in emerging areas and looking to earn money from the asset appreciation.
So Fundrise is purchasing properties, fixing them up, making repairs, and then selling them down the line. The yield is the gap between what they bought it for and the renovation costs and what they are selling that bit of property for later.
Finally, there’s the Long-Term Growth program. This is a growth-oriented approach — investing in undervalued real estate, improving it, and selling it. The asset appreciation is where you’re making the majority of the money with a tiny bit of income from dividend payments or the cash flow from the real estate.
You can start with as little as $500 investment. After you have made the deposit, you will receive a confirmation about the fund transfer. You will almost always start with a starter portfolio, but you can choose and set a different type of investment portfolio based on your needs.
Many people are wary of investing in things outside of the stock exchange. They’re worried about whether or not it is a scam. First, Fundrise files with the SEC, the Securities and Exchange Commission, and it is audited annually.
And those financial statement audits are disclosed on the form 1-K that you could look at right now by just searching for it. And they also have a 90-day satisfaction guarantee with Fundrise.
So if you invest your money and within 90 days you decide that you do not want to be invested in this anymore, they will give you your money back. Now, some there are limitations involved with this so you will want to look into that guarantee yourself.
Fundrise also takes cyber security seriously due to its online financial investment operations. The platform uses bank-level security for protecting their investors. The website uses 256-bit AES symmetric encryption which is similar to what you see for most large commercial banks.
Fund transfers on the platform are secure and protected against hacking attempts. Every investor’s connection to the website is protected with Transport Layer Security (TLS) regardless of whether you connect via desktop or a mobile device.
The client data is kept in an encrypted format and spread around multiple data centers. The business uses AWS for hosting their data centers.
The platform has been around for almost 7 years and has an excellent record for transparency and security. There have been no reported breaches of security or data leaks from the company records over its history.
Fundrise is aimed at the younger generation and millennials. From its earliest concept design to the crowdfunding stage, the platform always allowed accessibility via mobile devices. The mobile support offered by the website makes it easier for young investors to invest within minutes.
The dashboard can be used from your mobile and automatically adjusts to screen size. You can access and use all the options on the dashboard from your mobile, track potential earnings, dividend payments, and property value appreciation in real-time, and you can also access your monthly account statements, quarterly asset updates and tax payments on earnings on your phone.
The quality of customer service is suitable for both investors and real estate developers. The company’s active and customer friendly team listens to client queries and requests. They have useful customer guides on their webpage, and CSRs can be contacted quickly to get help.
As I mentioned above, Fundrise will hook you up with a 90-day guarantee so if you’re not happy they will refund you (with limitations), but overall their customer service options are limited. If you dig, you can find a contact number, but they push you to contact them via email.
I realize this is convenient and helps them keep costs down, but this can become frustrating if you need a quick response on something. Their turnaround time is usually good, but it’s not like a live chat or phone option where you can instantly get an answer to your question. This is something to think about before you invest.
- Access to more diverse investments: Investing in real estate used to be difficult and expensive. And it was only for elite investors with healthy amounts of cash to invest. This is no longer the case. Added to a more traditional stock and bond portfolio, a Fundrise account is a great way to get more diversity in your investments. That’s always a good option.
- High ROI: From 2014 to 2017, Fundrise has boasted between 8.76% and 12.42% average annualized returns. This is a great performance, so it’s tempting to take advantage.
- Investing is relatively simple and cheap: Investing through Fundrise isn’t the absolute cheapest way to invest based on fees. But it’s not a bad option. It’s one way to make investing in advanced options like real estate simple and straightforward. You just need to know enough to make a good decision about which portfolio to choose. And even then, Fundrise can offer you some help and advice when selecting the investments correct for you.
- Great reviews: When you check them out online, Fundrise has excellent reviews with places like the Better Business Bureau. Customers seem happy with not only their returns but also with the fees and the company’s level of customer service. That’s definitely a point in their favor.
- Low barrier to entry: The fact that Fundrise has a $500 minimum to begin is terrific. That's a very low barrier to entry to be investing in commercial real estate. It’s not the most economical way to get involved in real estate (you could open a traditional brokerage for less and buy a share of a REIT), but it's a fantastic way to be getting involved in personal, commercial property. And not being correlated with the stock market as substantially as you would be with a publicly traded REIT is a nice bonus too.
- Transparency in fees: Fundrise charges a 1% fee. Beyond that there aren't any hidden fees like you would hear about with mutual funds or other funds out there.
- No minimum income required: There is no minimum income or net worth to be involved with Fundrise. Often, these funds are reserved for high-end investors. And traditionally, to be investing in commercial property, you need millions of dollars, and you need to have an enormous net worth. With Fundrise, the only limit is you will need to have $500 to get started. So there are not those income limitations traditionally involved with investing in commercial property and private real estate investments.
- Diversification: With Fundrise, it's not like going out there and buying a single apartment building or a single shopping mall where you are not well-diversified. You're investing in a pool of real estate that is producing cash or growing in value. And if there is some real estate that's not doing as well, the other pieces of real estate generating positive cash flow and the asset that's appreciating will offset the losses in the other portions of real estate that aren't performing.
- Limited liquidity: Liquidity is a significant issue with Fundrise’s investments. The majority of Fundrise’s finances are used to invest in eREITs and eFunds. These investments are always long-term and cannot be sold in the publicly traded market. Fundrise cannot pull money out of a deal they have signed, unlike other investment firms. That is why they have a lengthy process for redemption of funds.
- Transparency: Another issue is fee transparency. Fundrise claims they save money on third-party costs for investors by creating a direct funding link with real estate property. However, there are hidden costs to these transactions that investors are not told about such as fund development and liquidation charges. These costs are not advertised clearly at the time of signup, and Fundrise only advertises the 1% fund management fee which isn’t accurate.
- Crowdfunding challenges: Also, consider the implications of investing in a crowdfunded platform. These fintech investment models are still new and have yet to be tested. They were popularized after the financial crash of 2007 – 2008. Traditional investment companies, despite all their faults, have gone through decades of investment experiences and seen multiple market crashes to get where they are today.
- Distributions may be taxed as ordinary income: This from the public offering document provided by Fundrise: “Unless your investment is held in a qualified tax-exempt account or we designate certain distributions as capital gain dividends, distributions that you receive generally will be taxed as ordinary income to the extent they are from current or accumulated earnings and profits. The portion of your distribution in excess of current and accumulated earnings and profits is considered a return of capital for U.S. federal income tax purposes and will reduce the tax basis of your investment, rather than result in current tax, until your basis is reduced to zero.”
- Distributions are never guaranteed: This is the same thing with stocks, but something to consider since the stakes may be higher. When you're investing in a dividend-paying stock, dividends are never guaranteed. They could be cut, or they could be discontinued at any point in time. The same thing is true with Fundrise dividends or distributions paid out.
Fundrise is one of the first and oldest real estate crowdfunded investment businesses based online. However, it is not the only real estate investment platform for small investors. Several other investment firms have joined the market since 2012 and offer similar or better service.
If you are looking for a real estate investment alternative to Fundrise, look into these platforms.
One of the original real estate investment startups RealtyMogul also started in 2012 and is still in operation. With an estimated total asset portfolio of more than $250 million, it is one of the larger investment companies online.
Property managers can get funds for their projects in the form of both loans and equity capital. Investors have the option of either investing in property directly or going with a REIT. To use the REIT option, you can use their MogulREIT which is very similar to Fundrise.
To directly invest in a property on your own, you must be an accredited investor. You get the option to select the property you want.
This is another popular real estate investment platform with more than $300 million invested in different projects. RealtyShares allows a REIT funding option and offers a reasonable return on investment.
Real Estate developers and property managers can get funding for both residential and commercial properties. Funds can construct new properties and financing for a fix and flip project.
Patch of Land
Patch of Land focuses on debt-based investments where investors can choose projects with a term of one month to three years. You can adjust the riskiness of your portfolio by selecting between a variety of loan types including residential/commercial or new construction/fix and flip.
Real estate developers can use the website to apply for and get funding for their projects at the advertised interest rates. You can borrow from at least $100,000 to a maximum of $5,000,000.
Related: Real estate crowdfunding – Everything You Need to Know
If you want to invest in commercial real estate but you’d rather not work with a real estate crowdfunding platform, take a close look a Streitwise. It’s a public, non-traded real estate investment trust (REIT), that invests in income generating commercial real estate. You can invest with as little as $1,000, and you don’t need to be an accredited investor.
Because of the unique investment methodology used by Streitwise, the trust pays annual dividends of between 8% and 9%, net of investment expenses. And because it’s a REIT, there are certain tax advantages, including a 20% pass-through reduction of your income, as well as lower long-term capital gains taxes on capital appreciation earned and distributed.
Read more: Streitwise Review
Fundrise offers an excellent way to diversify your investments and includes an eREIT fund to your portfolio. The minimum investment for starters is $500 while serious long-term investors can upgrade to one of the three $1,000 accounts. Investors with low savings can invest in the fund, making it their preferred choice. However, the company’s CEO Ben Miller noted that to get the best wealth generation and passive income, invest at least $25,000 with Fundrise.
The fund requires minimal monitoring from the investor, but you can check out how your fund is doing through various charts and account balance summaries. This makes it the ideal choice for passive investors.
Investments in REITs is a long-term commitment. If you are on a tight budget and want a liquid investment, then this fund isn’t the best choice for you. If you can wait for the long-term without the need to redeem your money quickly, then Fundrise is a good choice.
Real Estate investments are always long-term propositions to get any real benefits out of your investment. When investing in a REIT like Fundrise, plan to do so for 2 – 5 years to get a higher return.
Investments made via Fundrise do not require active monitoring, but you do have the option to keep track of your investment. The fund is low risk, easy to sign up for, has a lower management cost, and historically boasts a reasonable rate of return. If it matches with your needs, investing in the fund is a good option.