There are a lot of passive real estate investment options out there.
From real estate investment trusts (REITs) to real estate crowdfunding platforms, passive investments in real estate are easier than ever.
Crowdfunding platforms typically invest in residential real estate and REITs usually invest in commercial real estate. One area that hasn’t gotten as much attention in the crowdfunded world is commercial real estate.
If you want to invest in commercial real estate it can be difficult. Commercial real estate can be very expensive, so it’s hard to get into as a private investor. And REITs are traded on the market so they are subject to the whims of the stock market – which is something you’re probably looking to avoid by investing in real estate!
Enter Fundrise.
Fundrise is a private market real estate investing platform where you invest in eREITs (electronic REITs) that aren’t traded on the public markets.
We earn a commission from Fundrise partner links on WalletHacks.com. We are not a client of Fundrise. All opinions are my own.
Table of Contents
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. 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.
They’ve come a long way since then – as of 9/30/2022, Fundrise has over 371,000 active investors with $7 billion total asset transaction value and over $226 million in net dividends earned by those investors.
Today, you don’t invest directly in real estate property – you contribute to eREITs or 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.
Some prefer this approach over investing directly in real estate because you avoid the problem of taxable events. When you own property directly, each sale results in a capital gain. You don’t have that with a fund approach.
Additionally, crowdfunded real estate has gotten very popular lately because it allows you to diversify your risk across multiple properties.
Fundrise is different from some other crowdfunded real estate marketplaces because you invest in funds, not directly into properties. This is also why you don’t need to be an accredited investor since you’re investing in a fund and not into a private placement.
It is one of the few real estate crowdfunding options for non-accredited investors.
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 traded on the open market. This also means they’re less liquid because the market is smaller.
With Fundrise, the eREITS are invested in commercial real estate – 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, there’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.
Selling Your eREIT
Fundrise warns investors upfront that they need to think of real estate as a long-term investment. The typical holding period for an eREIT is expected to be five years. However, should you choose to liquidate your position sooner, you may be able to do so on a quarterly basis.
The explanation on this liquidation process does emphasize “subject to certain limitations”. Those limitations will vary with the eREIT you are invested in, but you can expect to pay a 3% penalty for the early liquidation. And depending on market conditions, the liquidation feature may not be available.
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.
Early redemption with eFunds is similar to that of eREITS, in that you’re expected to hold your investment for at least five years. But if you need to liquidate your position sooner, you can do so after a 60-day waiting period, and then monthly thereafter.
Once again, withdrawals prior to 5 years will be subject to a 3% penalty, and may not be available at all based on certain market conditions.
Learn more about Fundrise
(This is for both accredited and non-accredited investors)
What is Goal-Based Investing?
Fundrise lets you, as an investor, pick one of three goals:
Supplemental Income – This is for those who want to earn additional passive income, have a moderate-term investment horizon, and may be planning for retirement shortly. Income-focused assets represent 70% to 80%, and growth-focused assets are the remaining 20% to 30%.
Balanced Investing – This is for investors who want maximum diversification, have a moderate to long-term investment horizon, and may be newer to investing outside the stock market. Income-focused assets represent 40% to 60%, and growth-focused assets are the remaining 40% to 60%.
Long Term Growth – This is for those who 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. Income-focused assets represent 20% to 30%, and growth-focused assets are the remaining 70% to 80%.
(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 9.7% to 11.6% (about half as income, half as appreciation) and would put you in 12 active projects in a mixture of risk categories (they tell you exactly how much of your portfolio would be going where).
Four Fundrise Porfolio Options
Fundrise offers four different portfolio options, each with its own investment methodology and minimum initial investment.
Starter
You can begin investing with as little as $10 and select a Fundrise eREIT to invest in. As the name implies, this is just a starter portfolio. You can upgrade to the next three portfolios by increasing the investment in your account.
This portfolio is taxable and you can reinvest your dividends. You invest in the Fundrise Flagship Fund that holds positions in several asset types, including single-family rental homes.
Other platforms may require you to have a substantial account balance before you can invest in single-family homes.
Basic
The Basic portfolio requires a $1,000 balance. Additional benefits include being able to invest with a self-directed IRA.
Another benefit is the ability to create personal goals. The platform calculator can recommend your minimum monthly investment to earn your desired monthly income and project your potential portfolio value growth.
Core
You’ll need a minimum initial investment of $1,000 for the Core portfolio, and it is available for IRA accounts (traditional and Roth). At this plan level, you can diversify between Supplemental Income, Balanced Investing, and Long-term Growth goals.
The Core portfolio option also provides dividend reinvestment and auto-invest features. And as a bonus, three months of advisory fees are waived for each friend you invite to Fundrise who signs up and funds an account.
Advanced
This portfolio comes with all the features of the Core portfolio but also gives you the ability to allocate your investment across most funds offered by Fundrise. The minimum initial investment is $10,000, and it also offers a referral bonus, but one that provides six months of free advisory fees.
LIke the Core portfolio, you’ll be able to invest in a mix of the Supplemental Income, Balanced Investing and Long-term Growth goals.
Premium
This portfolio option has a minimum investment requirement of $100,000 and is designed for investors with a higher risk appetite. You’ll be able to invest in one-of-a-kind investments in private funds that periodically become available. Fundrise warns that the investments are highly specialized and “truly illiquid”, with even longer time horizons than their other investments. But they expect these investments to provide much higher returns.
Premium portfolios come with all the features of the Advanced portfolio, but also provide priority access to the Fundrise investment team, and waive advisory fees for a full 12 months when you refer a friend to the platform.
Like Core and Advanced portfolios, you can spread your investment across Supplemental Income, Balanced Investing, and Long-term Growth goals.
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 Fundrise Returns?
From the chart above, the annual returns from Fundrise investments are broken down as follows:
- 2014: 12.25%
- 2015: 12.42%
- 2016: 8.76%
- 2017: 11.44%
- 2018: 9.11%
- 2019: 9.47%
- 2020 (first half): 2.41%
When it comes down to it, what matters are the returns you get from the various funds? They claim real estate investing returns of 8 – 11% per annum.
Two things to note from those returns.
From their disclosures, “Performance information is presented net of all management fees and expenses unless marked otherwise.” So it’s a true 8 – 11% return and not 8 – 11% less management fees (there are no commissions), so it’s a fair representation of what you will take home at the end of the day.
8% – 11% is a pretty wide range but it is well informed.
The low end is based on:
- The weighted average of the annual interest rate of each debt asset plus,
- The annual preferred return for each preferred equity asset plus,
- The base case projected annual return for each equity asset.
Then, it is discounted by ~15% to account for downside scenarios…
Then they take off 1% to account for the 0.15% annual advisory fee and 0.85% annual asset management fee.
The high end is based on: (this is the same as the low end)
- The weighted average of the annual interest rate of each debt asset plus,
- The annual preferred return for each preferred equity asset plus,
- The base case projected annual return for each equity asset.
Then, it is discounted by ~2.5% to account for downside scenarios…
Then they take off 1% to account for the 0.15% annual advisory fee and 0.85% annual asset management fee.
So the difference is in the discounting. But it’s a pretty robust calculation that takes into account many of the factors.
What are the Pros and Cons?
Pros:
- You do not have to be an accredited investor.
- Begin investing with as little as $500.
- Low investment management fees of up to 1% per year (0.15% advisory fee, up to 0.85% asset management fee).
- Three different investment goals – Supplemental income, Balanced Investing, and Long-term Growth – designed to meet your own investment goals and risk tolerance.
- A solid track record of investment growth, ranging from 8.76% to 12.42% since 2014.
- Opportunity to redeem your investment after just 90 days, which is extremely unusual in the crowdfunding industry.
- Fundrise pays distributions on a quarterly basis.
Cons:
- Though Fundrise offers a generous (for the real estate crowdfunding industry) investment redemption program, the funds they provide are private offerings. But publicly traded real estate investments, like REITs, can be traded quickly and easily through major brokerage firms, similar to stocks and investment funds, and without liquidation penalties.
- As real estate investments, Fundrise funds are expected to provide the projected returns over a minimum of five years.
Fundrise Alternatives
Fundrise is good but here are some solid Fundrise alternatives in case you’re looking for something else:
Streitwise
Streitwise works much the same way Fundrise does, in that it’s a real estate investment trust. That also makes it less of a true real estate crowdfunding platform and more of a traditional REIT, though it isn’t publicly traded. You can begin investing with as little as $5,000, and you can be either an accredited investor or non-accredited, subject to certain limitations.
The benefit of investing with Streitwise is in their investment methodology. They look for properties located in “non-gateway markets”, which means they’re lower priced than properties in high-cost coastal markets. Properties must also have high-quality construction, and a record of sustained high occupancy, with high-quality tenants. They also limit leverage to reduce risk.
Liquidity is more limited, however, in that you cannot redeem your investment for the first year. After that, you’ll be subject to a redemption fee of up to 10%, which will decline to zero after five years. The company charges a 2% annual management fee.
RealtyMogul
RealtyMogul is another real estate crowdfunding platform that’s available for both accredited and non-accredited investors. And you can similarly invest with as little as $1,000. They also provide an opportunity to invest in various real estate asset classes, including commercial, retail, residential, multi-family, and other property types.
For non-accredited investors, they offer the the Income REIT fund. It’s a mix of both equity and debt investments in commercial property, with an annual distribution target of 8%.
But for accredited investors, RealtyMogul offers direct investments in individual properties. These investments require a minimum of $25,000, and have more substantial long-term projected returns, though they also come with high fees.
EquityMultiple
EquityMultiple requires accredited investor status, and a minimum initial investment of $5,000. Investments are in institutional commercial real estate, with both debt and equity investments.
They have a unique fee structure, perhaps due to the nature of the investments they make. There is an annual fee of 0.5%, plus 10% of the profits after you’ve received a return of your initial investment. There may be other fees that will apply to each individual investment.
Don’t have the cash right now? Here are a few fast ways to make $500 so you can invest in some real estate today.
Summary
The real estate crowdfunding space has added many competitors in the last few years. But Fundrise stands out as one of the leaders in the field because they offer small investors an opportunity to invest in one of the best real estate investments there is, commercial real estate.
Best of all, you can do so with as little as $10, and no requirement to be an accredited investor. You’ll not only get the benefit of a fully diversified real estate portfolio, but Fundrise provides the ability to liquidate your investment early – though with certain limitations and a penalty fee. But that stands out because very few real estate crowdfunding platforms offer any opportunity for early redemption at all.
If you’re new to real estate crowdfunding investing, or you only want to commit a small amount of money to a diversified portfolio, Fundrise is one of the best options in the industry.
Fundrise
Strengths
- Low $500 - $1,000 minimum
- Non-Accredited Investors Allowed
- 0.85% annual asset management fee
- 90-day guarantee
Weaknesses
- Illiquid
- Distributions are ordinary income (1099-DIV)
Blake says
VNQ does not have a $3000 dollar minimum. It is an ETF. You can buy one share if you’d like. You are thinking of a mutual fund.
Yes! You’re right, thanks and I’ll update the post.
Alex says
Jim,
I think the average annual returns are a bit tricky to assess. I have been on the platform for 18 months, have about $20k invested I have only seen about 4% annual return. Also, the return depends on the type of investment…balanced, income or growth. Even though the returns are less than stellar at this point, it is a long-term investment I plan on holding for many years. What I like about the platform is the well thought out website, the IPhone app and the flexibility of making your minimum investment which is $100.
I think you’re right, especially during a time like this when rents are less likely to be paid and everyone accepts that is the new normal for the time being.