When it comes to investment options, the private real estate market has been a steady performer over time. Unfortunately, average investors often lack the high amount of capital necessary to invest in property, leaving them locked out of one of the best ways to diversify an investment portfolio.
This Fundrise review will explain how the company is trying to upend that script by lowering the barrier to entry. We’ll bring you up-to-speed on how the platform works, and run down when it makes sense to consider leveraging the platform as part of your overall investment strategy.
Fundrise Review: The Basics
Fundrise is the first private market platform for real estate investing. Simply put, it’s a crowd-funded real estate investing option.
The company invests in commercial properties and real estate assets like office buildings, shopping centers, and apartment buildings. It also occasionally invests in select residential real estate projects, such as single-family homes and stand-alone rental property.
There are two primary investment products available on Fundrise: eREITS and eFunds.
Fundrise eREITs are like traditional real estate investment trusts, with the big difference being that they allow would-be real estate investors to try their hand at real estate with relatively small amounts of money.
Fundrise’s eREITs contain a mix of debt (i.e., loans made to a property developer) and equity (i.e., shared ownership in property). By contrast, eFunds contain only equity.
How your investments are allocated in Fundrise’s eREITs and eFunds depends on your particular investment plan. The company offers goal-based plans including a starter plan, a supplemental income plan, a balanced investing plan, and a long-term growth plan. We’ll cover these in more detail later in the article (or you can jump to that section now).
Minimum Investment Requirements
Fundrise allows you to invest in real estate without being an accredited investor. U.S. residents 18 or older can start investing in Fundrise’s Starter plan with $500, or in one of its Core plans with $1,000.
This is part of what makes the platform so attractive to many potential investors. In the past, the types of real estate investments that Fundrise provides have largely been restricted to accredited investors — people or businesses specifically permitted to invest in assets that are not registered with the SEC.
The requirements to become an accredited investor (as an individual) are quite rigorous. You generally must meet one of two requirements:
- Net worth: Your net worth must exceed $1 million, either individually or jointly with your spouse.
- Income: Your annual income for the last two years must have exceeded $200,000 per year individually, or $300,000 jointly with your spouse. Additionally, you must expect to earn the same amount of income or more in the current year.
Why such high minimums? The SEC believes that investors with sufficient assets or income are better able to bear the risks of unregulated investments. In other words, it’s a way to protect everyday people from gambling their money on ultra-risky properties (or from getting fleeced by scammers).
However, the Jumpstart My Business Act of 2012 changed federal regulations to open up many new options for non-accredited investors. This occurred in large part because of the emergence of crowdfunding platforms like Kickstarter, which created a realistic and relatively safe way for individuals to buy into companies and projects with small sums of money. Fundrise is a product of that regulatory change.
How You Make Money
On Fundrise, you don’t invest in specific, individual real estate projects. Instead, you invest in one of the company’s eREITs or eFunds. As noted previously, the eFunds contain only equity, while the eREITs contain mixes of debt and equity.
You can make money on your investment in two ways: through dividends and appreciation.
Your dividends consist of rental income generated on properties and interest income earned from mortgages. These dividends are calculated based on the total rental and interest income received by Fundrise, not the value of your shares.
Fundrise pays out dividends — which are a great source of passive income — quarterly. You can either have Fundrise transfer your earnings to your bank account or reinvest them into your portfolio using its Auto Invest DRIP.
Properties don’t just earn rental income — they also appreciate in value. As individual properties within an eFund or eREIT increase in value, so too does the Net Asset Value per share of the eFund or eREIT.
For example, let’s say you invested $1,000 into an eREIT at the beginning of the year. If your holdings were $1,100 at the end of the year, your account grew 10% thanks to appreciation.
You don’t necessarily have to sell your shares to realize gains. If Fundrise sells a property that was part of a fund you own, it pays you a certain amount of the proceeds based on how many fund shares you have.
However, the primary way to profit from appreciation is to sell your shares once their Net Asset Value has increased.
Debt can also contribute to appreciation, albeit in a reduced manner. For example, Fundrise may put a portion of their interest earnings back into the respective eREIT, increasing the eREIT’s total value.
How You Take Profits
Remember, Fundrise’s eREITs and eFunds are not publicly traded, which means that your Fundrise investments are less liquid than some other investment options. As a result, cashing out your holdings to realize gains is not as easy as selling shares of stock.
Fundrise limits the number of shares you can redeem at once (each eREIT’s and eFund’s offering circular details these limits). For example, the Heartland eREIT (which pays a 3.5% dividend and invests in commercial real estate property in Austin, Chicago, Dallas, Denver and Houston) limits share redemption to the lesser of 5,000 shares or $50,000 per redemption request.
You can submit a redemption request at any time, but you must wait 60 days before Fundrise processes your request. Once that waiting period ends, Fundrise pays out your proceeds within three to five business days. You can find the expected payout date in the transactions section of your dashboard.
One important thing to note is that when you sell shares, you’ll receive their value at the time the order is executed, not the time the order is placed. That means, in theory, that it’s possible to lose a significant amount of money if the share value declines within that 60-day window.
Also, you aren’t guaranteed the ability to liquidate your shares. Fundrise reserves the right to limit your liquidity further if too many investors sell at once. Otherwise, Fundrise would be forced to sell assets at a considerable discount, harming other shareholders.
Fundrise also charges up to a 3% penalty on the Net Asset Value of holdings if you liquidate “early.”
The penalty structure is as follows:
|Age of Shares||Penalty (% of Total Share Value)|
|90 days to three years||3%|
|Three to four years||2%|
|Four to five years||1%|
|Five or more years||None|
You are not penalized for selling shares that you’ve held for less than 90 days — which Fundrise calls introductory shares — since the company updates the Net Asset Value once per quarter.
Fundrise Auto Invest (DRIP)
Fundrise offers a dividend reinvestment plan — also known as a DRIP — that allows you to automatically reinvest your dividend earnings into whichever offerings you’d like.
Reinvesting your dividends enables you to earn compounded returns. As you reinvest your dividends, your principal grows, which in turn entitles you to a larger dividend payout next time.
As of 2020, Fundrise earned cumulative returns of around $130 million for its investors.
We should also look at average annual returns in comparison to other options, however.
Fundrise’s annual returns have been reasonably consistent over the years compared to other investment options, as seen in the graphic below:
At first glance, you might think that Vanguard’s Stock Market ETF outperformed Fundrise’s portfolio — after all, Vanguard had higher annual returns in three of the five years.
However, Fundrise had a higher average return over the entire five-year period from 2014 to 2018, coming it at an average of 10.79%.
This performance demonstrates Fundrise’s ability to create strong yet consistent returns.
Why Invest In Fundrise vs. REITs
Let’s take a closer look at Fundrise vs. traditional REITs.
REITs work like this: the REIT as a whole owns the real estate, but individual investors own REIT shares. The investors then earn dividends from those shares.
Most REITS are publicly traded, which makes them highly liquid investments. When you need an infusion of cash, you can sell off your shares and get out. REITs offer great liquidity, which means investors don’t have to worry about their money being tied up.
The downside of REITs is the scale they operate on. The biggest REITs need to close on very large real estate deals to move the needle. This severely limits what they can invest in. Additionally, REITs typically grow slowly and are thus viewed primarily as a source of dividend income.
Fundrise, on the other hand, operates on a much smaller scale and can thus invest in much smaller commercial real estate deals. These smaller deals typically have greater rewards compared to the kind of deals REITs invest in.
However, what you lose out on is liquidity. As we discussed earlier, you can’t just sell your Fundrise shares with the click of the button.
Fundrise Account Levels
Fundrise offers four account levels. At each of these levels, investors have access to a different set of options (including different investment “plans,” which we’ll go over in the next section). There is no additional cost to upgrade to a higher account level — you just have to meet the minimum investment requirements.
The Starter account level, which is built for new investors, is accessible with just a $500 investment. However, your only investment choice at this level is the starting portfolio, made up of around 20 different properties throughout the U.S. The Starter portfolio is split 50/50 between debt and equity investments.
Starter investors can upgrade to one of the Core plans (described below) at no additional cost once they have $1,000 to invest.
For a minimum of $1,000, the Core account level opens up the Balanced Investing, Long-Term Growth, and Supplemental Income plans.
Alternatively, Core investors can invest directly into individual eREITs, allowing for a higher degree of portfolio diversification and customization.
Investors need at least $10,000 to upgrade to the Advanced level, at which point they unlock the “Plus” version of each of the Core plans.
The Plus plans follow the same strategies as their respective Core counterparts. However, Advanced investors also gain access to three growth-focused eFunds, each of which contains 100% equity holdings and pays no dividends.
These three funds are:
- Washington DC eFund
- Los Angeles eFund
- National eFund
In the Balanced Investing Plus and Long-Term Growth Plus plans, eFunds make up 30% of the portfolio. In the Supplemental Income Plus plan, they make up 25%.
Advanced investors can also invest directly in the eFunds.
One benefit to these eFunds containing more equity than debt is their tax advantage. You may be able to take a larger depreciation tax deduction. If you choose to invest in an eFund, Fundrise will send you a Form K-1 around mid-March for taxes.
Advanced investors can also have Fundrise waive 180 days of fees for each new user they refer to the platform. (You can learn more about the company’s fees and penalties in this section.)
Premium is open to investors with at least $100,000 on the platform. At the time of publication, the only benefit of the Premium level is the ability to have Fundrise waive a year of advisory fees for every investor you refer to the platform.
However, Fundrise says it plans on adding more exclusive features to both the Premium and Advanced tiers. We’ll update this review if and when that happens.
Fundrise Investing Plans
As explained earlier, Fundrise has a Starter plan for those with only $500 to invest. Once you reach $1,000, you can access the Core level. Here, you can choose between Supplemental Income, Balanced Investing, and Long-Term Growth.
Supplemental Income Plan
The Supplemental Income plan prioritizes income over growth. The portfolio is weighted towards debt investments that pay interest income, but it also contains equity investments that generate consistent rental income.
Growth isn’t dismissed entirely though. Fundrise works to improve property values, but mostly so that they can increase rental income.
Less aggressive investors will find that out of the three Core plans the Supplemental Income plan’s consistent dividends best meets their needs.
Balanced Investing Plan
Balanced Investing falls between Supplemental Income and Long-Term Growth, aiming to provide a blend of appreciation and dividend income. This portfolio leans slightly towards debt investments but is close to 50/50 debt to equity proportion.
Balanced Investing will be your best choice if you want to maximize investment diversification. You generate more income than the Supplemental plan without experiencing as large of value fluctuations as you might see with the Long-Term Growth plan.
Long-Term Growth Plan
The Long-Term Growth plan is a growth-oriented strategy. This portfolio is weighted towards equity investments, which are riskier than debt investments but which tend to appreciate more.
Consequently, you’ll receive less dividend income if you invest in this portfolio. Instead, a substantial portion of your gains will come from increases in property value.
Fundrise says it attempts to capture maximum growth potential by buying ahead of significant cultural or demographic shifts, as well as by gaining an understanding of emerging neighborhoods. It’s then able to build new urban housing in areas it predicts will be popular (as well as renovate old buildings).
The Long-Term Growth plan is best suited to more aggressive investors, such as younger investors. Younger investors have a long time horizon, so they can afford higher risk if it means higher returns over time.
How Fundrise Chooses its Investments
Each property that Fundrise adds to one of its eREITs or eFunds must pass a strict screening and underwriting process.
Fundrise starts by digging deep into the credentials and experience of the sponsor — the individual or company that acquires and manages the property Fundrise is looking to add to its portfolio.
Fundrise analyzes the sponsor’s financials and credit history, but they also want sponsors with a strong track record.
Overall, Fundrise looks for companies with plenty of capital and an ability to do well in top U.S. markets.
Initial Project Due Diligence
If the sponsor makes it past the first step, Fundrise evaluates the sponsor’s particular project to ensure it meets several criteria. It reviews each project from a very conservative point of view, making pessimistic projections to account for the worst-case scenario.
Fundrise then moves on to underwriting if it believes these estimates are good enough.
Once Fundrise determines that the sponsor and project both meet its requirements, it begins the underwriting process. An underwriter analyzes the project in detail to see if its potential risks and returns match what Fundrise is looking for by seeing if the project passes the 350 data points on its underwriting checklist.
The underwriter then presents their findings before Fundrise’s Investment Committee.
The Investment Committee’s job is to hunt for potential risks and downsides to taking on the project, as well as determine whether these risks are worth taking. Additionally, the committee brainstorms ways to reduce or eliminate risks where possible.
Finally, Fundrise moves forward to the closing process. While closing, it attempts to negotiate other rights that can protect its investments, such as foreclosure rights.
Occasionally, Fundrise gains new information about a particular project during the closing process. If it receives further information that renders its original analysis moot, it will still back out of the deal.
Fundrise and IRAs
IRAs enable you to invest money in a tax-efficient way. Traditional IRAs typically allow only stocks, bonds, mutual funds and similar investments. You must have a “self-directed” IRA — IRAs that let you invest in assets prohibited by regular IRAs — to invest in real estate.
Fortunately, Fundrise investors have access to self-directed IRAs through Fundrise’s partner, Millenium Trust Company.
Fundrise offers three types of IRAs:
- Traditional IRAs. Contributions are pre-tax, while withdrawals are taxed as ordinary income.
- Roth IRAs. Contributions are made with after-tax income, but withdrawals are tax-free.
- SEP IRAs. SEP IRAs are designed for small business owners and self-employed people. Contributions are pre-tax, while withdrawals are taxed as ordinary income.
IRAs are not compatible with eFunds (only eREITs). You can either invest your IRA directly into an eREIT or into one of Fundrise’s plans.
Further reading: Roth IRA vs. traditional — which one is right for you?
Fundrise Fees and Penalties
Fundrise charges a total of 1% in fees on your investments. This 1% figure comes from two separate fees: an advisory fee and an asset management fee.
Fundrise charges a 0.15% advisory fee for managing your portfolio, as well as to provide you with the Fundrise eDirect investment platform. Compared to traditional services — which tend to charge between 0.25% and 1.45% annually — Fundrise keeps the advisory fee low.
Additionally, Fundrise charges a 0.85% annual asset management fee — much lower than other services, which may charge between 1% and 3.8% in fees.
Fundrise does not charge commissions or transaction fees, nor does it charge you for features such as the DRIP plan.
However, there are a few other fees of which you should be aware.
- Development and liquidation fees. Fundrise reserves the right to charge development and liquidation fees, but claims to rarely do so. Fundrise charges these fees to cover the costs of managing the development of for-sale housing.
- IRA fee. Millennium Trust Company charges $125 annually for IRA management.
- Origination/acquisition fee. Origination/acquisition fees allow Fundrise to acquire new real estate investments for its eREITs and eFunds. Fundrise charges a 0-2% fee on the purchase price of new investments so that they can compensate the sponsor.
Four Benefits of Investing in Fundrise
There are quite a few reasons investors may want to check out Fundrise.
- It’s an easy way to learn about the intimidating field of real estate investing, a time-tested strategy that has helped many people build huge fortunes.
- Dividend income is paid quarterly.
- It lets you participate without deep pockets. Fundrise is one of the few crowdfunded real estate investment options that doesn’t require you to be an accredited investor.
- You can invest in an IRA: Your dividends will be taxable, but if you funnel them into a Fundrise IRA, it will give you a tax shelter.
The Two Biggest Disadvantages of Fundrise
- Lack of liquidity: As with any investment vehicle, there are disadvantages to Fundrise. The biggest is the lack of liquidity. Fundrise is illiquid compared to REITs. With Fundrise, you won’t have access to your money immediately if something goes wrong in your life and you need to get fast cash out of your investments.
- The possibility of losing money when you sell your shares. Because there’s a 60-day lag between when you request to sell your shares and when that order is processed, you can suffer a loss if the value of your investments declines within that window.
Who Should Invest in Fundrise
Fundrise isn’t the right type of investment for everybody. That’s not because it isn’t a good place to park your money and watch it grow, but because there are other basics you should take care of before you add this to your portfolio.
Let’s look at who should consider investing in Fundrise.
- Those who have an emergency fund in place. Because you’ll need access to money with total liquidity in case of an emergency, you should make sure you have sufficient emergency savings before you invest in Fundrise.
- Your high-interest debt should be paid off. It doesn’t make any financial sense to begin investing in vehicles like Fundrise if you still owe on high-interest credit cards. The rate of return you earn via Fundrise will be less than what you’re paying in interest on your credit card balance. Before you begin investing with Fundrise, you should pay off your credit cards and any other consumer debt (other than your mortgage).
- You should be maxing out your 401(k). You should first be maxing out your 401(k) up to your full company match. If you’re not doing that, you’re leaving free money on the table (which is never a good wealth-building strategy).
- You want to use Fundrise as a learning tool. Fundrise really shines by giving motivated investors a relatively safe way to learn and hone their craft.
- You want to diversify your IRA or taxable investments.
Fundrise Review: Final Thoughts
As I noted a couple of times in this review, I think Fundrise is best utilized as a way to diversify your portfolio while learning about real estate investing. While it has a decent track record of returns, I would still recommend putting the bulk of your investment into index funds, which have consistently proven to be among the safest and most effective options.
That said, I think it’s perfectly fine to take 5-10% of your available investment funds and place them into something you find interesting — whether that’s individual stocks or a real estate crowdfunding platform like Fundrise.
If you’re interested in real estate and think you might want to pursue it further at some point in the future, this can be a great way to learn the language and methodology in a reasonably safe way; since Fundrise chooses the properties, you’re less likely to make a bad decision or get swindled.
If you’re interested in learning more about my investment philosophy and why I think index funds are the way to go, check out this post I wrote about the lessons I learned from buying Tesla shares at just $26 each.