One of the biggest investing trends I’ve seen this past year or so has been accessibility. I’m talking micro-investing platforms, seamless mobile apps, and little to no investing minimums. All of this is good for millennial investors, but there is one investing area that very few of us have gotten comfortable with – commercial real estate. I think our hesitation has come from the cost, but I wanted to give you this Fundrise review to show you how accessible commercial real estate investing has gotten.
If you haven’t heard of Fundrise yet, you may at least have heard of REITs, which stands for real estate investment trust. They offer private investors the ability to buy shares in commercial real estate portfolios. This could be in apartment complexes, retail centers, self-storage, healthcare facilities, etc.
The problem with some online real estate investing platforms and REITs is that they require you be an accredited investor, think high net worth and annual income. And because most of us aren’t hitting that threshold, commercial real estate investing has been inaccessible.
And, for those who are interested in early retirement, or just retirement at a normal age, real estate investing is probably going to be a key feature of your plan.
Fundrise acknowledges that need, and opens up the market for non accredited investors… AKA real people… the chance to invest in commercial real estate. And, you get to reap all of the benefits those higher net worth individuals get from REITs.
Pretty cool, right?
But, before you run out and start investing with Fundrise, here’s my complete 2020 Fundrise review:
What is Fundrise?
Fundrise uses the crowdsourcing mentality that millennials have grown up with and has turned it into an online REIT investing platform. They offer a variety of portfolios for what they call eREITs, emphasizing the online nature of the process.
The eREITs offered by Fundrise focus on income-producing real estate, think collecting income through apartment complexes and housing developments. It’s important to note that these are not publicly traded REITs, and I’ll talk about the potential downsides of this further down in my Fundrise review.
Again, the focus is on average people investing in these real estate ventures, so the buy-in is super low comparatively.
The cost to invest with Fundrise
There is going to be a lot of important stuff in this Fundrise review, but the cost is going to be a big one. You can start investing in Fundrise eREITs for as little as $500 for their Starter Portfolio, but to have access to more options, an upgrade they call their Core Portfolio, you’ll need a minimum initial investment of $1,000.
I’m not sure if that’s giving you some sticker shock vibes or not, but remember that there are a bunch of ways to start earning money to put towards investing. If you’re out of ideas, give this article a read – 12 Ways to Save $5,000 in 2020.
There is a 1% annual fee for investing with Fundrise, which is comprised of a 0.85% asset management fee and a 0.15% advisory fee. They are able to offer low fees by using an online model, and because they own their eREITs, they cut the middleman and pass the savings on to investors.
Fundrise Starter Portfolio vs. Core Portfolio
To help you understand where to start with Fundrise, I want to break down these options.
Their Starter Portfolio takes your $500 minimum investment and puts it towards a mix, read diversified, of eREITs and eFunds (eFunds are used by investors to buy land, then selling it to developers) for projects throughout the U.S. The Starter Portfolio lets you earn quarterly dividends and appreciation on your shares.
The Core Portfolio takes this a step further and gives you the option of three plans:
- Supplemental Income: This focuses on earning dividends for a steady stream of income.
- Balanced Investing: This is earning income through dividends while additionally setting you up for long-term returns.
- Long-Term Growth: This is for the long-term investor, potentially offering the highest returns.
You can switch from the Starter Portfolio and move to the Core Portfolio at any time… as long as you bump up your investment.
What’s in your Fundrise portfolio?
Depending on the portfolio and plan you choose, Fundrise will invest your money into seven different eREITs, which are:
- Income eREITs I and II: These focus on debt investments in commercial properties.
- Growth eREITs I and II: These are commercial properties, like multifamily units, that will collect rents and appreciate over time.
- East Coast eREIT: East Coast debt and equity investments.
- West Coast eREIT: West Coast debt and equity investments.
- Heartland Coast eREIT: Heartland debt and equity investments.
- And three different eFunds focusing on Los Angeles, the D.C. area, and major cities nationwide.
M$M tip: Keep track of all of your investments, know your spending, and keep your eyes on the prize (retirement!) with Personal Capital. This is the free software my wife and I use to manage our money and our financial future. Read my full Personal Capital Review here.
But wait, you said “crowdsourcing” and “not publicly traded,” how do I know my investment is safe?
Great question! And yes, you should be concerned about this! You didn’t think I’d leave this out of my Fundrise review, did you?
Fundrise has a multi-step application and underwriting process for potential investors that works hard to weed out bum investments. This process involves:
- Screening potential investors to make sure they are top performing companies with a record of success, and Fundrise claims that only a quarter of the companies that apply make it past this step.
- Companies must understand their project due diligence that requires investors are paid back before the company realizes profits.
- Fundrise has a 350 data point analysis protocol during their underwriting process to ensure the projects they offer investors will be quality investments.
- Fundrise actually pre-funds the investment before their investors do. This means they are taking on the risk before you do.
What are the returns like with Fundrise?
While you probably already know this, I always find it important to point this out – brokerages can’t promise you returns… ahem, they SHOULDN’T be promising you returns. The best they can do is show you what the historic returns are on a product.
That being said, Fundrise is like any other reputable broker, they tell you about what’s happened in the past, and it does look pretty good… although I should note that the real estate market has seen an upswing in recent years, so keep that in mind.
Here are their averaged annualized returns for the past few years:
- 2014: 12.25%
- 2015: 12.42%
- 2016: 8.76%
- 2017: 11.44%
Fundrise is a long-term investing option
Yes, all… or most… investments are long-term, but considering that this might involve actually building physical structures and finding people or businesses to occupy those spaces, it takes a little longer to see real returns. This means that it will cost you if you want to sell your shares before the end of a five year holding period.
The fees for cashing out early are:
- Up to three years in (after first 90-day period), your shares will be sold back at a 3% discount.
- At three to four years, your shares will be sold back at a 2% discount.
- At four to five years, your shares will be sold back at a 1% discount.
Know that this is trying to sell your shares back to Fundrise, and if they have an influx on requests (think major market downturn), they might not have enough funds set aside to do so. Hopefully, if and when this happens again, everyone will be smart, holding tight to ride it out.
M$M tip: Read Real Estate Investing for Beginners for more real estate options.
Fundrise has a 90-day guarantee
This part is so cool that I decided to give it its own section in my Fundrise review!
If you are unsatisfied at any point in your first 90 days with Fundrise, they will buy back your investment! There may be some circumstances when this doesn’t apply, but this is seriously unheard of in the investment world.
Beyond a want to assure potential investors that Fundrise has their back, I’d say they’re able to do this because Fundrise has pre-funded the projects and because this is a long-term investment model. Still, very cool!
Pros and cons of investing with Fundrise
If you prefer a tl;dr version, here’s the part of my Fundrise review you probably wanted me to lead with:
- Low initial investment. I know investment minimums are what prevent many millennials from starting, especially real estate investing. Starting with as little as $500 means that barrier is a thing of the past.
- Low fees. With a 1% fee for investing, this is much lower than fees you’ll find from some real estate investing platforms, but it’s still higher than competitors like Rich Uncles or Reality Mogul.
- Open to all investors. Needing to be an accredited investor has been an issue with commercial real estate investing, but not anymore with Fundrise.
- Access to a diverse portfolio. Fundrise takes your goals in mind as they help you pick the right portfolio. You can go for quick gains to bigger, long-term ones.
- 90-day money back guarantee. This is insane and should ease many of the concerns you have about investing with Fundrise.
- Passive way to invest in real estate. Real estate investing can take work (think rehabbing houses or managing rentals) but Fundrise is truly passive investing.
- IRA option. I didn’t bring this up in my Fundrise review yet, but Fundrise does have an IRA option held with Millennium Trust Company. You can learn about the fees and more here.
- Not too liquid. If you have ever been tempted to pull money out of your investments, knowing that it can take 3-6 days to get your cash from Fundrise will probably remove this temptation.
- Not liquid enough. I know I just that illiquidity is a good thing, it’s also potentially bad. The goal here is long-term investing, a major point of investing in commercial real estate, so ideally would be planning for when you take that money out. If you decide that you need your money quickly, Fundrise is going to have some roadblocks. The fact that these aren’t publicly traded REITs is one of the causes of this.
- There might be some hidden fees. That 1% fee looks good, but after looking through their circulars, you’ll find some hidden ones, including development fees of up to 5%. Fortunately, these are lower than you’ll find with most REITs.
- The crowdsourcing model is still new. While appealing to millennials, these crowdsourcing investment vehicles have yet to see a major financial crisis rock their boat. The hope is that they hold on and recover, but there just isn’t enough evidence to suggest what will really happen.
- Higher tax liability. This one is kind of a bummer, but this wouldn’t be a true Fundrise review if I didn’t bring it up. Your Fundrise earnings are seen as income in the eyes of the IRS, not dividends, and that means a higher tax liability.