Fundrise Vs. Real Estate Investment Trusts (REITs)
April 8, 2021
We are going through one of the craziest real estate markets I have ever seen. Here in the Seattle metro area, homes are routinely selling over $100,000 above asking price. Multiple offers are the norm. Record low inventory and record low interest rates are the perfect recipe for the bidding wars we are seeing.
While investing and flipping real estate may seem like a rich person’s game, crowdfunding entities like Fundrise and REITs make it possible for anyone to invest in real estate. Let us take a moment to understand both so that we can compare them.
Real Estate Investment Trusts (or REITs)
REITs are entities that purchase and manage real estate investments on behalf of their investors and stock units of these entities trade on the exchanges just like regular stocks. The primary difference is that REITs return most of the profits back to investors as dividends. Essentially, anyone can start a REIT. You would need investors to give you a bunch of money in exchange for shares of this REIT. You’d then purchase real estate investments with said funds. These could be malls, warehouses, apartment complexes or single family houses to rent. You’d then return the profits (minus some management fee for yourself) back to your investors. Meanwhile, shares of your REIT could trade freely on the stock market just like any other company. REITs have been around forever. Even self storage companies like Public Storage are in essence, REITS.
Fundrise is a rather new crowdfunded Real Estate investment company that is slightly different than standard REITs. They are similar in the fact that they collect funds from investors and invest in real estate with a promise to pay back profits minus a management fee. That is about where the similarities between the two end. Fundrise allows you to invest starting with $1000 for a basic account. There are other account levels if you invest $5000 or $10,000 that allow different benefits and levels of investment customization. The premium account carries an investment minimum of $100,000 but also allows you to direct funds to specific investment opportunities with the potential for outsized returns.
What I like about Fundrise
They are up front about their long term investing strategy. You will find language that discourages you from investing if your investment horizon is shorter than 5 years. One of my biggest pet peeves with investing is short sightedness. Sadly, it prevails everywhere in today’s world of instant gratification. In short, Fundrise is compiling a community of like minded, patient investors who understand the importance of time when it comes to investing. In my opinion, these types of investors will invariably outperform day traders and get rich quick schemers. As you’d expect, I appreciate this type of a mindset and community. They even make you acknowledge that you understand that the investments they make are inherently illiquid investments. You simply cant sell a house as quickly as a stock.
You can choose to reinvest dividends or have them deposited in your bank account directly creating a potential for steady cashflows.
They penalize early withdrawals and sometimes, even suspend withdrawals. This is the double edged sword of crowdfunded investments. Your investing fate is tied to other investors. Without these rules (as often is the case with REITs), if you need cash in a down market and need to sell, you will force others to participate in the sale and lose out on potential future gains. The converse also holds.
There is an immense level of transparency as to where they invest your money. Whether it is an apartment complex, a single family home flip, or a combination thereof. You can see it. Instantly.
Fees are simple to understand. Simply expect to pay 1% per year.
I love the concept of Fundrise so much, that I’ve invested $5,000 of my own money in Fundrise. Also, since I always say ‘time is the most vital variable in investing and that you need to think long term’, the below image will show that I’ve selected the ‘Long-Term Growth’ investment plan. This plan generates small returns in the first couple of years but targets outsized returns over the longer horizon. You decide your plan when you open the account.
As you can see in the image below, since I chose to invest in the ‘Long-Term Growth’ portfolio, Fundrise has the smallest portion of my account balance (10%) in the Opportunistic category. These are investments that would create regular dividends but lower appreciation long term. The Value Add (35%) on the other hand is where early returns are smaller but they create higher value long term.
Another thing Fundrise takes care of is diversification. A small $5,000 investment is invested in a lot of different projects shielding you from unnecessary risk. My own investment is transparently invested in 18 different active projects. This includes apartments, commercial renovations, single family rentals and new commercial space. Even if one investment doesn’t perform as well, you still are likely to get decent returns over the long run.
Overall, I am really liking the investment platform and their strategy so far. I will write more in future posts as to how the investment performs. If you decide to give it a shot, use my personalized link below to get your investing fees waived for 3 months.