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Many people turn to real estate investing to grow their wealth. When done well, this type of investing may produce attractive returns. It also holds the possibility of being a regular income source over the long run.
There are several options for investing in real estate. You might purchase residential or commercial properties for investment purposes. The goal is to rent the property and live off of the income.
The work involved and the money needed to get involved in the traditional real estate game can be overwhelming for many people. However there are other options, like crowdfunded real estate, for people wanting to potentially grow wealth through real estate.
Fundrise is one of the more well-known investment firms focusing on what’s commonly called crowdfunded or crowdsourced real estate investing. Fundrise can be a good way to get started investing in real estate with low minimums.
What is Fundrise?
Fundrise is one of the more well-known investment firms focusing on what’s commonly called crowdfunded or crowdsourced real estate investing.
Table of Contents
- What is Fundrise?
- How Does Fundrise Work?
- How to Start Investing with Fundrise
How Crowdfunding Works
Those wanting to own and manage real estate ventures avoid doing so financing the ventures with their own funds. Instead, they use the combined funds of those wanting to invest in real estate to purchase commercial or residential buildings for potential profit. They collect smaller amounts of cash from several dozen – or several hundred – different investors.
Each investor then has a stake in the properties and their profits or losses.
Crowdfunded investing is a great way to bring big time real estate investing to the average investor. It works much the same way that crowdfunded lending holds the possibility of bring big bank profits to the average investor like you and me.
With crowdfunded real estate investing through firms like Fundrise, investment opportunities that were previously reserved for the Warren Buffett crowd are now available to nearly every level of investor.
The power of working together allows the average investor to combine their money with other traditional investors. The goal? To create a large financial portfolio that has the necessary cash needed to fund large investment projects. People who couldn’t previously do so can now invest in assets such as apartment building complexes or large commercial building purchases.
With crowdfunding, smaller investors who participate in these ventures then reap the possible profits that can accrue from commercial building rental or development.
A few different real estate crowdfunding companies have entered the investing scene in recent years. Fundrise is one of the more established companies to offer real estate investment options to mainstream investors.
Here’s a summary of the company’s overview, taken from information on the Fundrise web site.
Fundrise has been helping people invest in real estate ventures since 2012. Fundrise founder Ben Miller actually started working to create Fundrise in 2010. In 2011, he brought Kenny Shin and Brandon Jenkins on board, and their combined partnership brought the company fully functional.
As experienced investors, the founders realized that many real estate investing options left the profits in the hands of middlemen like big banks. Meanwhile, while the investors themselves were short-changed on profits thanks to fees and high loan interest rates.
The team’s motto? Give everyone the opportunity to invest directly in high quality real estate, without the middlemen.
Fundrise’s management team worked for nearly a year with the Securities and Exchange Commission. Their efforts to become an approved investment company paid off. Fundrise launched their first online public offering in 2012 and gained 175 investors.
Today, the company has over 80,000 members and has invested in over $1 billion worth of real estate investments.
How Does Fundrise Work?
It used to be that private market real estate investing was limited to those with hundreds of thousands of extra dollars laying around. If you didn’t have big bucks, you weren’t allowed to play the game.
Fundrise has helped to change that by allowing investors of nearly all bank account sizes to participate in bigger real estate deals. Let’s start with an overview of the Fundrise features a potential investor may want to know about:
- The minimum investment with Fundrise is $500
- Investor type: The company does allow non-accredited investors to participate, however members must be residents of the U.S. and be at least 18 years of age
- Annual fees: The company charges an 0.85% annual asset management fee
- Fundrise offers only commercial real estate investment options
Historical Real Estate Performance vs. Traditional Market Performance
The chart below shows the returns of the real estate market versus the returns of the S&P 500 from the year 2000 to the year 2016.
As you can see, real estate performed far better than the S&P 500 did. Even without the housing bubble burst and its comeback you can see better performance in the real estate market.
I would imagine the reason for this has to do with two facts. First, the increase in market crashes over the last twenty years may have made investors feel more secure in owning brick and mortar properties as opposed to pieces of paper that claim ownership in companies.
Second, low mortgage interest rates may have spurred on investors’ eagerness to take advantage of how cheap it is to borrow money for real estate purchases.
The reasons for the solid returns in real estate investing in recent years are anyone’s guess, but the proof is in the numbers. Real estate investments have been outperforming the market for the last several years – almost two decades now.
Consider All Factors
This shouldn’t be the sole factor you consider as you decide whether or not real estate investing is for you. However, historical returns are an important fact to weigh into the equation.
Also, market performance has had its own rally in the last couple of years, with the S&P 500 rising in value by over eight percent in just the first half of 2017 alone.
The point is that all markets have their ups and downs, whether it be the real estate market, the stock market, or the bond market.
Your goal as an investor is to decide how you should diversify your investments between the different markets. You should do this in a way that makes you feel comfortable as it produces growth in alignment with your risk tolerance level.
If real estate investing is something you are comfortable with, and if you have a good understanding of the risks associated with it as well as the historical profits, including some real estate holdings in your portfolio might be a good way to help you reach your financial goals.
If you end up deciding to explore crowdfunded real estate investing, here’s what you need to know about the Fundrise process for new investors.
How to Start Investing with Fundrise
Here’s the process for getting started in crowdfunded real estate investing with Fundrise. As a new investor, you would open up an account with Fundrise by visiting the company’s web site. It’s free to open an account with the company.
From there you would share your bank account information. Don’t worry: security is a top priority for Fundrise. The site boasts a 128 bit SSL encryption security system. Making your minimum $500 deposit to your Fundrise account deems you to be eligible to begin investing.
After you opened your account you would choose from one of the eREITs Fundrise offers. Fundrise’s eREIT is a bit different than the popular REIT. What is an eREIT? And what sets it apart from an REIT? Read on for clarification.
What is a REIT?
Investopedia defines REITs (Real Estate Investment Trust) this way:
“A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock. REITs provide investors with an extremely liquid stake in real estate. They receive special tax considerations and typically offer high dividend yields.”
Fundrise offers a similar type of product, which they call an eREIT (Electronic Real Estate Investment Trust).
The company defines the product as “a professionally managed, diversified portfolio of commercial real estate assets such as apartments, hotels, shopping centers and office buildings.”
The Fundrise eREITS are non-traded, which means stock market ups and downs can have less of an impact on the performance of Fundrise investment offerings. Speaking of performance, here’s a chart directly from the site that can give you an idea of their eREIT returns.
Available Portfolio Strategies
The company lets investors choose between a combination of three different portfolio strategies:
- The Supplemental Income Strategy
- The Balanced Investing Strategy
- The Long Term Growth Strategy
The Supplemental Income Strategy
Fundrise’s Supplemental Income Strategy “focuses on generating a much higher current income stream than you can get from traditional income-focused investments, such as bonds or REITs, while preserving capital.”
The majority of your funds in this portfolio are low/moderate risk, while they include some high-risk and some low-risk investments as well.
While this fund shows the most conservative returns compared to the other choices, this is also the fund that is expected to produce the highest current income yield.
The Balanced Investing Strategy
Fundrise’s Balanced Investing Strategy portfolio “aims to provide an attractive balance of higher expected total returns. It also has the goal of producing more income than traditional investments, with broad diversification.”
In other words, this portfolio tends to hold more high-risk funds than the Supplemental Income Strategy, but that also means more possibility for growth. This fund expects to produce moderate current income yield.
The Long Term Growth Strategy
The company’s Long Term Growth Strategy “focuses on earning a much higher return over the long-term than a traditional portfolio of seventy percent stocks and thirty percent bonds, while still producing some income.”
This is the company’s highest risk portfolio choice. It potentially produces the highest return over the long-term. However, it will likely also provide the lowest current income returns. As the name states, this would be a good fund for those seeking out a long-term investment.
Basically, the company offers differing eREIT choices for nearly all levels of investors with a variety of investment goals.
Broad Range Investment Choices
Fundrise invests in commercial real estate deals all over the United States, which can possibly lower the risk for default or losses.
Here’s why. Let’s say the commercial real estate market collapses in Atlanta. Fundrise will investors still have a stake in properties in Dallas or other major metropolitan areas in the United States. Since the eREITs are made up of a variety of properties nationwide, one area’s market collapse won’t necessarily affect another area.
The broad diversification of Fundrise’s portfolio properties means investors have a lower potential risk for loss. With their “eggs” divided up into many properties within each fund’s basket, risk of loss is potentially reduced. .
One of the reasons for the rising popularity in crowdfunded investing is that it takes away much of the work of real estate investing. It also eliminates many of the other possible problems associated with traditional real estate investing.
When you invest in traditional real estate via rental properties or fix and flips, you’re in for some serious potential issues.
Traditional Real Estate Can Be Tough Work
Investing via the traditional routes definitely has its benefits. Buying and renting homes and apartment buildings can produce a steady monthly income stream. If you’re looking to increase cash flow or replace traditional job income as you head toward financial independence, real estate investing can be attractive.
Doing the fix and flip thing can produce large amounts of cash in a relatively short period of time. Profits can increase if you are handy with home repair and improvement tasks and can do most or all of the work yourself.
However as with any type of investing – including crowdfunding – there are some downsides to the traditional types of real estate investing.
Owning Rental Properties
With owning rental properties, you’re on the hook for finding and managing tenants. You’re also responsible fortaking care of any home repair issues that might come up.
Also, not all tenants are responsible, respectful members of society who will value your property as much as you do. Some tenants are careless and not concerned about being respectful of the property. Some won’t pay the rent on time – or at all.
Yes, there are safeguards you can put in place to increase your chance of getting a good tenant. Performing credit checks, references and background checks are all good ways to increase your chance of getting a good tenant. However, those safeguards all require the time and money of the property owner.
And even if you put all of the safeguards in place, and there’s still no guarantee you won’t end up taking your now former tenant to court for non-payment of rent. Similarly, you could end up doing a major overhaul on the property due to damage inflicted by tenants.
Of course, you could hire a property management company to do all of the dirty work for you. However in doing so, you’re looking at giving away a slice of your monthly profit as well.
Fixing and Flipping Properties
Fix and flip real estate investing can have its own set of problems. First, there’s the work involved in finding and then fixing up the property. Then, as improvements progress, there is the risk of possibly finding more problems than you bargained for.
After the property is fixed (usually costing several thousands of dollars) you’ve got to sell it and pay realtor fees. Often times a bottom line profit in the fix and flip world isn’t what an investor hoped it would be.
Also, fix and flips generally require quite a bit of time and effort on the part of the investor.
Large Down Payments Needed
On top of that, most mortgage lenders require that real estate investment deals have at least twenty to thirty percent down payment before they’ll fund the deal. That can be an astronomical amount of cash for the typical investor.
A small residential home costing $100,000 would require a down payment of $20,000 to $30,000. And that’s not including closing costs and the money needed to perform any repairs or improvements.
This is not to say that traditional real estate investing isn’t for you. Only you can decide whether or not you want to own brick and mortar properties. However it’s important to know up front the cash needed and the work involved before you become a direct owner of rental properties or fix and flip properties.
Is Fundrise Legit?
Just as there are risks with traditional real estate investing as outlined above, there are also risks with crowdfunded real estate investing.
Next, I’ll outline some of the risks of crowdfunded real estate investing. That way you can make an informed decision about whether Fundrise or other crowdfunded real estate opportunities might be right for you.
Due Diligence Limitations – Banking on the Expertise of Others
With crowdfunded real estate investing, investors are basically banking on the expertise of others.
Unless you have an in-depth knowledge of commercial real estate investing as a whole – and of the commercial real estate markets in the areas you are choosing to invest in, you will be relying on the information you are being given by the crowdfunding company as to the possible profitability of a deal.
Similarly, if you are not familiar with loan risk analysis parameters, you may unknowingly choose an unwise investment to put your money in.
When investing in real estate deals, whether crowdfunded or otherwise, t’s good to know the answers to the following questions:
- What is an acceptable loan-to-value ratio? Should I invest in a property where the owner is only putting five percent down? Or should I look for deals with down payments in the twenty and thirty percent range like the bank does?
- Are the ROI projections for the deal realistic? Is the owner really going to make as much money on the deal as he or she thinks they are?
- What is the need in the area for the type of property the owner is promoting? Is the chance of gaining quality tenants high enough?
There are good and bad sides to the crowdfunding investment platform. The bad side is that you are giving up a large amount of control as you are putting your money into the hands of others in hopes for a profit.
The good side is that reputable crowdfunding companies will commit to doing some serious due diligence on the deals they present to their members before they offer them.
Having an Expert Management Team Helps
Fundrise management staff does work to help minimize risk by only approving deals that have been thoroughly scrutinized. That being said, it is important that investors understand that this intense examination doesn’t eliminate risk altogether.
Since the leadership team at Fundrise has had personal experience in commercial real estate investing, it means they have more experience than the typical investor at spotting a good deal versus a bad deal when commercial property managers come to them for a loan.
This truth can help to counter possible risks for investors who have little or no personal real estate investing experience. It helps to have this expertise backing you as you consider whether or not crowdfunded real estate investing may be a smart choice for your personal investment portfolio.
But as with any investment the risk for loss still exists, even on highly analyzed real estate deals.
Crowdfunded real estate investments do have limited liquidity capabilities too. In the case of Fundrise, there is a six-month holding period on all investments.
After that six-month period is up, investors have the option to cash out their investment, but that option is only offered once per quarter.
Are you the type of investor that likes to have full liquid access to your investments? If so, crowdfunded real estate investing might not be the right product for you.
Potential Property Owner Failure
With any real estate deal, there is the chance that the owner of the property could end up losing the property or going bankrupt due to unforeseen costs. This could leave crowdfunding investors holding an empty bag.
The key to avoiding this type of scenarios lies largely in making sure you are dealing with a company that has done due diligence on its investments. You need to know the company has taken steps to be transparent about its inner workings.
Because Fundrise is a publicly offered investment, it lies under the scrutiny of the Securities Exchange Commission. This helps you as an investor to be secure from a Bernie Madoff type of a situation.
The company also works to invest in the top commercial real estate markets and with the top real estate companies.
Being choosy about who they loan money to helps to protect investors from potential property owner failure. However, it’s important to know that risk still does exist with any investment platform, whether in real estate or in the stock market.
Is Fundrise a Good Investment?
So, is investing with Fundrise a smart investment choice? Only you can answer that question. Even with the crowdfunding option, some investors might be more comfortable building their real estate investment portfolio slower by purchasing properties directly.
Knowing that you have full control over the buildings you own directly might be more appeasing to you than owning pieces of a basket of buildings you’ll likely never see. However, the upside of owning via crowdfunding is that you don’t have to spend time managing those buildings either.
Whether you choose traditional investing or crowdfunded real estate investing is up to you. But know that the real estate investment market can be a path to building wealth that may sustain you for years to come.
Investing can be a well-known path to building wealth. A well-rounded investment portfolio includes a variety of investments. It might contain some stock market investments, some real estate, and/or ownership interests in individual businesses.
At the end of the day, the goal of an investor is to weather the ups and downs of the different markets and come out ahead. For short-term investors, the “end of the day” could mean anywhere from one to five years. For long-term investors, it could mean ten to forty years or more.
All investment markets have their highs and lows. It’s not the highs and lows that you necessarily need worry about as an investor. Instead, it’s whether your investment choice has the stability to weather those fluctuations and come out profitable over the long-term.
Do your research and choose your investment portfolio offerings wisely. Diversification is important. Investment education and management is important as well. By managing your investments well and staying educated on the latest investment news, you’re creating a foundation that will provide financial security for years to come.
Readers, now it’s your turn. Have you ever considered crowdfunded real estate investing? Leave your thoughts and questions in the comments section below.