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Fundrise Review 2018

April 16, 2018
Investing, Investments
fundrise-review

Fundrise is an online real estate company that lets average — read: not wealthy — investors buy into private commercial and residential properties by pooling their assets through an investment platform.

While some online real estate platforms are available only to accredited investors — defined in U.S. securities law as having a net worth of more than $1 million, not including their home’s value, or annual income of at least $200,000 for individuals or $300,000 for a couple — all of Fundrise’s current products are available to nonaccredited investors.

The company’s main products are real estate investment trusts, or REITs, which generally invest in income-producing real estate, either through buying and managing buildings or by holding mortgages. These are REITs that don’t trade on a public exchange — they’re highly illiquid. That means there’s no guarantee there will be buyers for investors who want to sell shares. (Fundrise offers a redemption program, but it comes with caveats; more on that below.) Fundrise highlights the online nature of its process by calling its product “eREITs.” Fundrise also offers eFunds, in which investors’ pooled money is used to buy land, develop housing and then sell it to home buyers.

Investors buy into these products via one of four portfolios: Starter, Supplemental Income, Balanced Investing or Long-Term Growth. Fundrise determines the mix of eREITs and eFunds in each plan, as well as the underlying properties.

There are significant risks to investing in non-traded REITs — risks that we outline below — but there can be rewards, too. The average annual return for all Fundrise investments in 2017 was 11.44%, net of fees, assuming dividend reinvestment, according to Fundrise. (Historical returns reflect investment performance as calculated by Fundrise, not necessarily what was paid out to investors. Fundrise assumed a weighted average amount invested in each product; that is, some products were given more weight than others when the average was calculated.)


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Quick facts

  • Diverse portfolio of private real estate deals
  • Minimum investment of $500 to $1,000
  • Management and advisory fees add up to about 1%, but be aware of other fees

Fundrise is best for

  • Investors with a long-term outlook. These investments are not traded on a public exchange — that means they’re illiquid. The idea is to hold them for at least five years. There is a fee to exit early in some cases. (If you’d rather stick with liquid investments, consider investing through an online broker. We round up the best brokers for stock trading here.)
  • Investors seeking diversification from the stock and bond markets. Unlike publicly traded REITs, which tend to correlate to some extent with the stock market, the performance of individual properties in Fundrise’s portfolios generally is disconnected from stock market performance.
  • Investors willing to take on the risk of investing via a model that hasn’t yet been tested by a significant real estate downturn
  • Investors able and willing to do diligent research. Each of Fundrise’s products has its own 200+-page offering circular filed with the Securities and Exchange Commission, describing fees and other details. It behooves investors to walk in with their eyes open.
  • Investors who don’t want to choose or manage properties on their own. Fundrise finds properties, conducts underwriting and determines which properties go into each of its investment vehicles.

Fundrise at a glance

OfferingDetails
eREITs and eFundsInvestors choose among four investment portfolios, which hold a varying assortment of five eREITs and two eFunds.
Return potentialAverage return for all Fundrise investments in 2017 was 11.44%, net of fees, assuming dividend reinvestment, according to Fundrise (returns reflect investment performance as calculated by Fundrise, not necessarily what was paid out to investors).
Investment minimums
  • $500 minimum for Starter Portfolio

  • $1,000 minimum for the Supplemental Income, Balanced Investing and Long-term Growth plans.
FeesAsset management fee of 0.85% and advisory fee of 0.15%, but other fees may apply.
90-day money-back promiseAccording to its website, Fundrise will “buy back your investment at the original amount” if you request a redemption within the first 90 days (restrictions may apply).

Products

You can choose to invest in one of four Fundrise portfolios, based on your investing goals: the Starter Portfolio, Supplemental Income plan, Balanced Investing plan or Long-Term Growth plan. In turn, each of these accounts invests in a different combination of the Fundrise eREITs and eFunds described below.

Five eREITs

  • Income eREIT: Focuses on debt investments in commercial properties
  • Growth eREIT: Focuses on commercial properties, particularly multifamily buildings, that will appreciate over time
  • East Coast eREIT: Focuses on debt and equity investments on the East Coast
  • Heartland eREIT: Focuses on debt and equity investments in the Midwest
  • West Coast eREIT: Focuses on debt and equity investments on the West Coast

Two eFunds

Fundrise’s eFunds invest in the development and sale of residential real estate in major U.S. cities, aiming to profit on millennials’ demand for urban housing and the shortage of such housing. The company plans to tap into its existing investor network to find potential home buyers. Fundrise’s current two eFunds focus on Washington, D.C., and Los Angeles. With each of the eFunds and eREITs, you are investing in a limited liability corporation that conducts the deals.

Portfolio details

Starter Portfolio

  • Minimum investment: $500
  • Advisory fee: 0.15%
  • Management fee: 0.85%
  • Invests half of your money in the Income eREIT and half in the Growth eREIT

Supplemental Income plan

  • Minimum investment: $1,000
  • Advisory fee: 0.15%
  • Management fee: 0.85%
  • Invests 25% of your money in each of four eREITs — East Coast, Heartland, West Coast and Income

Balanced Investing plan

  • Minimum investment: $1,000
  • Advisory fee: 0.15%
  • Management fee: 0.85%
  • Invests 20% of your money in the Income eREIT, 18.33% of your money in each of three eREITs (East Coast, Heartland, West Coast), 15% in the Los Angeles eFund, and 10% in the Growth eREIT

Long-term Growth plan

  • Minimum investment: $1,000
  • Advisory fee: 0.15%
  • Management fee: 0.85%
  • Invests 20% of your money in the Growth eREIT, 20% in the Los Angeles eFund, 16.67% in each of three eREITs (East Coast, Heartland, West Coast), and 10% in the Washington DC eFund

Retirement account

  • Minimum investment: $1,000
  • Investors who have an IRA with Millennium Trust Company (an outside company that maintains self-directed IRAs for people seeking to invest in alternative assets) can invest in any of the eREITs, for a $75 annual fee per eREIT, paid to Millennium Trust (fee capped at $200 annually).

Where Fundrise shines

Low investment minimums: If you like the idea of getting into private real estate deals but don’t have big money to play with, Fundrise might suit you.

90-day money-back promise: According to its website, Fundrise will “buy back your investment at the original amount” if you are dissatisfied with the service and request a redemption within the first 90 days. This lets you dip your toes in the water. Restrictions may apply, including a 60-day waiting period after submitting your request, according to Fundrise’s offering circulars.

Easy-to-use platform: Signing up takes about 10 minutes, if that — assuming you’ve already read the lengthy investor disclosures (and you should read those first). You provide your address, phone number and Social Security number, and then choose whether to fund your account via an ACH transfer (i.e., linking your bank account), by entering your bank information on your own or by using a wire transfer.

To see how the platform works, I opened a Starter Portfolio with $500. It took a few days for my investment to fund. The website is easy to use, but also fairly simplistic. You won’t find tools or calculators, but you can review information about each property in your portfolio.

Where Fundrise falls short

Fee transparency: Fundrise says it saves investors money by creating a relatively direct link between investors and real estate. For example, unlike some crowdfunding sites, there’s no broker-dealer acting as a middleman at Fundrise, and that saves on costs.

However, there are upfront costs that are difficult for investors to see. While Fundrise clearly notes its asset management and advisory fees, you need to do some burrowing into its lengthy offering circulars to learn about other costs.

Fundrise is not alone in this regard. In the brave new world of online real estate investing, companies post links to offering circulars and other documents that are hundreds of pages long, buried in which there are fee details investors should know about. (Check out this warning from the Financial Industry Regulatory Authority, or FINRA, for more on risks to watch for with non-traded REITs.) Meanwhile, company websites are loaded with flashy pictures of properties and charts of projected returns that inevitably go up and to the right.

For example, I invested $500 in August 2017. When I log into my account, I see a chart that shows my “hypothetical projected return” from 2019 through 2034:

Fundrise account screenshot, April 5, 2018.

Fundrise account screenshot, April 5, 2018.

Meanwhile, this page shows the status of my portfolio:

Fundrise account screenshot, April 5, 2018

Fundrise account screenshot, April 5, 2018

The charts are pretty, but a clear detailing of fees and upfront costs would make it easier for investors to make smart choices. Until then, here are some fees to consider:

  • Shares in Fundrise’s products may be sold at a premium to their value, which means you could pay, say, $10 a share for an eREIT that has a net asset value of $9.50. That differential acts as a type of sales load.
  • As with any real estate deal, there are organizational and offering costs to bring the eREITs and eFunds into existence. Fundrise says these run 0% to 2% of the money raised from investors. The manager is reimbursed for these offering costs out of the eREIT or eFund in monthly installments that don’t exceed 0.5% of the fund’s total proceeds.
  • With the eFunds, there’s a potential development fee of up to 5% of total development costs, excluding land, says Kendall Davis, vice president of investments at Fundrise. This fee would apply if Fundrise were to develop a project itself, rather than using an outside developer, she says.
  • In the future, when one of the eFunds sells a property, there may be a potential disposition fee of 1.5% of the gross proceeds, after repayment of property-level debt, Davis says, noting that Fundrise would aim to reduce costs by acting as its own listing agent, without going through a traditional real estate broker. (If Fundrise did go through a broker, the broker’s fee would come out of the gross proceeds.)

Before diving in, consider:

  • Crowdfunded real estate investing has yet to be tested during a downturn. In the event of another housing crash like the one that began in 2006, it’s possible investors in a Fundrise product would essentially make a run on the bank — all seeking to redeem their shares at once. In that situation, Fundrise could be forced to postpone redemptions for some investors. There are unknowns here, so if you’re risk-averse, stay away. (There’s more than one way to invest in real estate — find out which type is right for you: 5 ways to invest in real estate.)
  • How diversified are you? Consider all of your real estate holdings, including your home and publicly traded REITs in your investment portfolio, when assessing the degree to which your portfolio is diversified. Read our story on how diversification can reduce investing risk.
  • Fundrise’s parent company has not yet generated any profits and is incurring net losses, per the company’s July 2017 offering circular. Still, each real estate deal is its own entity, separate from the parent company. “Investors would lose money only if the actual real estate deals went bankrupt,” says Mark S. Roderick, an attorney at Flaster Greenberg, who specializes in online real estate and crowdfund companies.
  • Investing with Fundrise means tying up your money for a while. You can request to redeem your shares on a quarterly basis, but you may owe a fee, depending on how long you’ve held the investment. The fee, which is paid into the eREIT or eFund, is calculated as a discount to the share price value: 0% if in the first 90 days; 3% discount if the shares were held at least 90 days but less than three years; 2% if shares held at least three years but less than four years; 1% if shares held at least four years but less than five years. There’s no discount to redeem shares held five or more years. There may be other fees associated with redemption, and the redemption plan may be suspended without notice. If too many investors request redemptions at any one time, payouts may be delayed.
  • When I decided to redeem my shares, I couldn’t find instructions on the website, so I emailed Fundrise at their general email address. After a couple of days, I received an email with a link to a Fundrise page to redeem my shares and a chart detailing how my shares would be sold at a discount (I held them longer than the introductory 90-day period). At that point, the process to initiate the redemption was simple and took just a few minutes. I have to wait until the end of the quarter for my request to be processed. But as the offering circulars note, Fundrise “cannot guarantee that the funds set aside for the redemption plan will be sufficient to accommodate all requests made in any calendar quarter.”

For more details, check out the Fundrise website.

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