Real estate investing has traditionally been reserved for those with deep pockets. However, with the advent of crowdfunding sites like Fundrise, it is now an option for the average investor. In particular, Fundrise offers investors the opportunity to create a diversified portfolio and to earn some extra cash flow in the form of dividends in exchange for a low minimum investment. Keep reading to see if this real estate crowdfunding platform is the right fit for you.
At its core, Fundrise is a real estate crowdfunding platform that's meant for individual investors. While private real estate investment has traditionally only been available to institutional and accredited investors (big companies and individuals with a high net worth), Fundrise was one of the first crowdfunding platforms to bring this opportunity to the masses.
Since its founding in 2012, Fundrise has gone through significant changes, but has maintained its focus on cutting out the middleman and making real estate assets accessible to the everyday investor. As of the time of writing this review, you can invest with Fundrise for as little as $500.
Overall, It’s a great fit for those who are looking to create a diversified portfolio at a low-cost. However, Fundrise’s investments are particularly illiquid, which means that this platform is not the best match for those with a short-term investment strategy in mind.
How does Fundrise work?
Like most sign-up processes, creating an account with Fundrise starts with clicking a “Get Started” button and putting in an email address. However, once you’ve done that, there are a few more steps to follow before your account is officially up and running.
Plan selection is where Fundrise differentiates itself from other crowdfunding sites. Rather than allowing its users to invest in individual projects or funds, the platform uses a proprietary model, where it allocates your portfolio for you based on the plan you select and your investment objectives.
Each plan is designated by its required minimum investment. While we'll get into specific costs later, it's important to note that a bigger investment will create a more diversified portfolio. In this case, as your initial investment grows, so does the total number of projects that your funds will be allocated towards.
In addition, if you select one of the two higher investment tiers, you’ll also be given the option to select an investment plan. Here is where you specify your investment goal. In particular, you will choose between three investment options: supplemental income, long-term growth, or balanced investing, which offers a mix between the two other options.
Create an account
Next, it's time to get into the nitty-gritty of creating your account. First, you'll be asked to provide some basic information, including your name, an account password, your country of origin, and place of current residence. You’ll also need to provide additional personal information, such as your address, phone number, social security number, and birthdate.
Then, you’ll be asked to select what type of account you would like to open. With Fundrise, you’ll have your choice between an individual account, a joint account, an entity account, a trust account, or a self-directed IRA.
Finally, you’ll be asked to confirm how much your initial investment will be and whether or not you would like to auto-invest on a recurring basis.
Fund your account
Once your account has been created, you'll be asked to find your account. For most people, this will be as easy as selecting your bank from a list of options and signing into your bank account using your login credentials. However, if you bank with a smaller institution, you may need to physically type in your account and routing information.
Disclosures and dividend reinvestment
The last step in this process is to acknowledge that you've read a few disclosures and to decide whether or not you want to enroll in dividend reinvestment. As the name suggests, dividend reinvestment involves reinvesting any money you make from the platform into your portfolio as opposed to going directly into your bank account.
How much does Fundrise cost?
The costs behind Fundrise Investments can be broken down into two types: your initial investment and ongoing fees. We’ve broken them down further below for your convenience.
As we mentioned above, Fundrise has three separate investment tiers. They are as follows:
Starter Portfolio: The Starter Plan requires an investment of $500 - $1,000 and allocates your portfolio into between 5 - 10 properties.
Core Portfolio: The Core Plan is for investors who plan to invest between $1,000 - $10,000 and it promises to allocate your portfolio across at least 40 properties.
Advanced Portfolio: The Advanced Plan is for investors who have more than $10,000 to put towards their portfolio and it will spread your investment into over 80 properties.
In addition to your initial investment, Fundrise also charges two separate advisory fees, which you will need to consider when weighing whether or not this platform is right for you. These fees are:
Management fee (O.85%): This fee is charged on an annual basis and goes toward covering the operating expenses of the company’s various real estate assets. It amounts to $8.50 for every $1,000 you have invested in your account.
Servicing fee (0.15%): this is the fee you pay Fundrise in exchange for having them manage your portfolio. It’s also charged annually and amounts to $1.50 for every $1,000 that you invest.
Finally, in the company’s blog post on pricing, Fundrise notes that it reserves the right to charge certain fees that are specific to the funds in which you are invested. These fees include development fees and liquidation fees. However, the company does not specify how much each of these fees will cost its investors.
The company’s proprietary investment products and its redemption method are its defining features. At the end of the day, they are what makes investing through fundrise so different than any other investment platform. With that in mind, we've gone into detail about each of them below.
In real estate, real estate investment trusts (REITs) are companies that own, operate, or finance income-producing properties. REITs are publicly traded, meaning that they are sold on an exchange for a certain share price and can be purchased through a broker.
In contrast, it can be helpful to think of an eREIT as being more similar to a real estate ETF than a traditional REIT. These products are not publicly traded and, instead of being purchased through a broker, they can only be purchased directly through Fundrise.
According to Fundrise, a eREIT is a REIT that intends to invest in a diversified pool of commercial real estate assets from across the country, such as apartments, hotels, shopping centers, and office buildings.
Similar to eREITs, eFunds are a proprietary product trademarked by Fundrise’s parent company, Rise Companies Corp. Again, rather than being purchased through a broker, you must use Fundrise in order to invest in one of these funds.
According to Fundrise, each eFund invests in residential real estate, including attached and detached single-family homes, townhomes, and condominiums.
Redemption request process
Since Fundrise products are not publicly traded, they do not have as much liquidity as other Investments. In this aspect, Fundrise is more similar to a traditional private equity fund. First, investors must file a redemption request with the company rather than simply selling their shares whenever they see fit.
Additionally, while investors are technically able to request redemption of their shares at any time, any eREIT or eFund shares that have been held less than five years may be subject to a penalty of up to 3% of the total share value.
Portfolio allocation is one of the hardest aspects of investing for beginner investors to conquer. Put simply, it requires a lot of time and research. However, Fundrise handles all the legwork of allocation for you. With this platform, you simply need to to have a firm idea of your investment strategy and Fundrise will handle the rest.
Typically, investing in real estate requires a lot of money. Whether you are making a down payment on a home, investing in shares of a traditional REIT, or joining a private equity fund, the costs can add up. However, Fundrise does itself apart by offering the opportunity to invest in real estate with a relatively small investment minimum. In this case, you can get started or as little as $500.
If you’re looking to build a truly custom portfolio, Fundrise is not the right investment platform for you. Since Fundrise allocates your portfolio for you based on your investment strategy, you're ultimately locked into the funds they choose for you. If you have the experience and capacity to do your own research, you may be able to achieve higher returns with other investment options.
Fundrise is ultimately meant to be a long-term investment. Any investments that are held for a period of fewer than five years may be subject to a hefty penalty, which does not make it the best fit for those who are looking to cash in on their investments in the near future.
Pros & cons
Opportunity for passive income. Fundrise offers an investment opportunity that is much less labor-intensive than traditional real estate investing. In particular, those who focus on a growth eREIT, or fund that invests in real estate assets that have the potential to appreciate over time can expect to see regular dividends.
Low minimum investment. Investors can get started with fundrise for as little as $500. Plus, the investment platform offers the opportunity to automatically invest funds on a recurring basis, which makes it easy to grow your portfolio over time.
Illiquidity. You must hold your investment with Fundrise for a minimum of five years. Otherwise, you could be subject to a penalty that’s worth up to 3% of your total share value.
Dividends are non-qualified. Non-qualified dividends are taxed at the same rate as ordinary income, which is higher than some other investment vehicles.
Fundrise vs. competitors
Open to Non-Accredited Investors
If you have a little bit more money to invest, you might consider looking at RealtyMogul as an alternative to Fundrise. In particular, the three-year holding period makes it a better option for investors who are working with a shorter-term horizon, Plus, as an added benefit, the platform also offers a REIT buy-back option, which allows investors to sell their shares back to the company after a period of one year.
DiversyFund is similar to Fundrise in that it has a low minimum investment and small-scale investors might be attracted by the fact that this particular platform does not have any management fees. However, there is one big catch. Any profits you make on DiversyFund are automatically reinvested. Investors only receive payment once the property is sold, which happens after a five-year holding period.
What type of real estate investments does Fundrise make?
Fundrise eREITs invest in commercial real estate properties while eFunds invest in residential real estate holdings.
Where can I learn more about the eReits and eFunds in my portfolio?
You can learn more about the specific investments that Fundrise makes on your behalf by visiting the platform’s investment offerings page.
Does Fundrise have a mobile app?
Fundrise currently has a mobile app that is available for both Apple products and Android phones, which makes it a good fit for those who want to invest on the go.
The bottom line
At the end of the day, Fundrise is a solid option for beginner investors who want to add real estate holdings to their portfolio. It’s an opportunity to dip your toe into the world of real estate at a low cost and to generate some passive income.
However, more experienced investors may want to look for an alternative. Fundrise does not offer the opportunity to customize your portfolio and it has a long holding period. If you have the ability to research funds and investments on your own, you may be better served by a traditional REIT, which may offer higher returns and more liquidity.
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