There are a lot of passive real estate investment options out there.
Whether it's old school real estate investment trusts (REITs) you can buy on the market or some of the many real estate crowdfunding platforms, passive investments in real estate is easier than ever.
One area that hasn't gotten as much attention in the crowdfunded world is commercial real estate.
Most REITs available on the market play in the commercial real estate world, which is hard to get into as an individual investor because property prices are so high, but with a REIT you get no flexibility. The REIT is like a mutual fund, you just buy and sell shares.
It's also subject to the whims of the stock market – which is something you're probably looking to avoid by investing in real estate!
Fundrise is a private market real estate investing platform where you invest in eREITs (electronic REITs) that aren't traded on the public markets.
What is Fundrise?
Fundrise is a crowdfunded real estate investing platform that was founded in 2012 by two brothers (Ben and Dan Miller) in Washington D.C. Their father, Herb Miller of Western Development Corporation, developed 20 million square feet of real estate in the Washington D.C. area. Fundrise's first project was a $325,000 raise from 175 investors (minimum of just $100) in the H Street NE Corridor in D.C.
Today, you don't invest directly in real estate but you instead invest in eREITs and eFunds. They are portfolios of private real estate located across the United States and focused on your investment goal. Some investments are designed for income, others are designed for equity growth, and the fund will be tailored to that goal in mind.
Crowdfunded real estate has gotten very popular lately because it allows you to diversify your risk. Fundrise is different from some other crowdfunded real estate marketplaces because you invest into funds, not directly into properties. This is also why you don't need to be an accredited investor, since you're investing into a fund and not into a private placement.
As an investor, I think this is a difference without a distinction. It's still diversified even if it's not directly into properties.
What is an eREIT?
An eREIT is like a regular REIT except it's only available on Fundrise's platform. This makes it less affected by the market since it's not available on the open market. This also means they're less liquid because the market is smaller. With Fundrise, the eREITS are all in commercial real estate – so hotels, apartments, shopping centers, and office buildings. There aren't single-family homes or other residential properties, these are commercial real estate properties that generate income.
The eREITs acquire commercial assets and loans, look to add value and then collect cash flow from the interest payments, rents, and other profits from the commercial assets.
For the eREIT, you have no transaction fees since you're buying and selling directly on Fundrise. You pay a 0.85% annual asset management fee. (if you use the investment services and management system, that's an extra 0.15% annual investment advisory fee).
Finally, the minimum investment in an eREIT is only $500. You don't have to be an accredited investor, unlike with larger minimums on other platforms, because more like buying a mutual fund than a piece of a property.
What is an eFund?
The eFund is similar to an eREIT except it's invested in residential real estate assets like single family homes, townhomes, and condominiums. It's structured as a partnership, rather than a corporation so you avoid any double taxation. Like the eREIT, it's only available directly from Fundrise itself so not subject to the whims of the stock market. The minimum on an eFund is $1,000 and you do not have to be an accredited investor to invest.
The way eFunds work is that they buy land for sale in various areas, develop it with residential homes, and then sell it for a profit.
As of November 2017, they were offering an Urban Housing Development eFund™ that would acquire properties in urban areas, develop and then sell them. The fund had a minimum investment of $1,000. The fees were the 0.85% annual asset management fee and you could expect both periodic distributions as well as distributions when assets were sold. There was a time horizon of five years.
What is Goal-Based Investing?
Fundrise lets you, as an investor, pick one of three goals:
- Supplemental Income – Earn additional passive income, have a moderate-term investment horizon, and may be planning for retirement in the near future
- Balanced Investing – Get general investing with max. diversification, have a moderate to long-term investment horizon, and may be newer to investing outside the stock market
- Long Term Growth – Want to maximize returns over the life of the investment, have a long-term investment horizon, and are comfortable with more potential variability year to year
(there is a questionnaire if you aren't sure which type of investor you are)
For these plans, you simply pick one type, open an account, and deposit money. Fundrise handles the rest.
The Long-Term Growth Plan projects annual returns of 10.3-11.4% (about half as income, half as appreciation) and would put you in 38+ assets in a mixture of risk categories (they tell you exactly how much of your portfolio would be going where!).
Who Can Invest and How?
Any US resident over the age of 18 can become an investor on Fundrise. You do not have to be an accredited investor! (international investors cannot invest directly on Fundrise)
Fundrise currently supports personal and joint investment accounts as well as Trusts, LLCs, LPs, C and S corporations. If you want to invest with your IRA, you will have to set up an agreement with the Millennium Trust Company but it's possible.
What are the Pros and Cons?
The Pros are pretty straightforward – you get involved in commercial real estate investing (with eREITs) without having to pitch in a large up front investment, you don't need to be accredited, and the fees are reasonable at 0.85%. You don't have to analyze individual investments, which I personally know I'm going to be bad at, but you just have to pick an approach.
What are some cons? It's real estate investing so it's going to force you into long-term investing (which is good for investing unless you face a financial pinch and need to access those assets) and redeeming your shares must follow a schedule. You have a 60-day waiting period after submitting your redemption request, then you get liquidity on a monthly basis. It's not like selling a stock and getting the proceeds almost immediately.
The true competitor to Fundrise is a low-cost REIT like what you'd get at Vanguard. The Vanguard REIT ETF (VNQ) has an expense ratio of 0.12% (this is on top of what the REITs charge). The difference is that Fundrise is looking to find opportunities that are too small for public-traded REITs (what VNQ invests in) but bigger than what individuals might be able to do on a regular basis.