Crowdfunding is the process of connecting borrowers and lenders directly, bypassing any cumbersome (and costly) intermediaries. This new form of financing can benefit businesses and consumers alike, driving down the cost of capital.
Fundrise is a pioneer in the real estate crowdfunding sector. First established in 2012, Fundrise initially offered investments in stand-alone properties. Developers could apply for a construction loan through the Fundrise website. If accepted, the project details would be displayed on Fundrise, allowing individual investors to invest in the project directly.
This structure had a major drawback – all investors had to be accredited. According to the SEC, an accredited investor must meet one more of the following requirements:
- More than a million dollars in personal net worth (not including primary residence)
- Earned income of $200,000 or more if single ($300,000 if married filing jointly) each year for the last two years and have the expectation to make the same amount this year.
Under the original Fundrise structure, Non-accredited investors (most people) were unable to participate in any real estate deals.
FundRise eREIT Review
To reach non-accredited investors, Fundrise completely changed their business model in late 2015. Instead of focusing on individual real estate deals, Fundrise is now focusing on “eREIT” offerings in accordance with Regulation A+ from the JOBS Act. The new regulation allows Fundrise to raise up to $50 million (per eREIT) directly from investors, whether accredited or not.
The Fundrise eREIT(s) function much like traditional REITs (Real Estate Investment Trusts). REITs give average individuals a way to invest in diversified pools of commercial real estate. Investors buy shares of the REIT and the REIT uses that money to make investments in real estate. The REIT then typically earns income from rent payments or interest on real estate debt.
REITs differ by the nature of their underlying investments.
- Equity REITs participate in the ownership, operation, and development of commercial real estate assets.
- Mortgage REITs own large pools of real estate debt, with earnings coming from interest payments on this debt.
In 2015, Fundrise had $525 million in real estate assets under management and provided an average annual return of 13% to their investors.
In an effort to sustain this performance, Fundrise is now offering several different eREIT products for investors. Each offering is discussed below.
Similar to a mortgage REIT, the Fundrise Income eREIT is focused primarily on debt investments in commercial real estate assets. The goal is focus primarily on acquiring debt investments in commercial real estate assets, which typically generate steady cash flow throughout the life of the investment.
In the initial 10 months of operations, the Income eREIT made 16 investments at properties located across the United States.
The Income eREIT paid an annualized dividend equal to 10% for the second quarter of 2016.
Similar to an equity REIT, the Fundrise Growth eREIT is focused on acquiring commercial properties that have the potential for appreciation. The goal is to produce moderate returns during the life of the investment, with the potential for much higher returns paid out at the end of the investment.
The Growth eREIT owns seven properties located throughout the United States with a total of nearly 1,500 apartments and more than $10 million in renovations underway.
The Growth eREIT paid an annualized dividend equal to 8% for the second quarter of 2016.
West Coast, Heartland, and East Coast eREITs
These are the newest Fundrise offerings (recently released in October, 2016). Each of these eREITs are based on geographical location (instead of investment philosophy like the previous offerings).
- West Coast: Aims to invest in commercial real estate assets located in the Los Angeles, CA, San Francisco, CA, San Diego, CA, Seattle, WA and Portland, OR metro areas.
- Heartland: Aims to invest in commercial real estate assets located in the Houston, TX, Dallas, TX, Austin, TX, Chicago, IL, and Denver, CO metro areas.
- East Coast: Aims to invest in commercial real estate assets located in Massachusetts, New York, New Jersey, North Carolina, South Carolina, Georgia, and Florida, as well as the Washington, DC, and Philadelphia, PA metro areas.
Underwriting and Evaluating Properties
Each Fundrise investment property must meet strict underwriting standards in four key areas:
- Loan Sponsor Analysis: Each loan applicant must pass a credit and background check, and must submit detailed information about prior loans, track record, and experience.
- Market Analysis: Each property undergoes a supply-and-demand analysis, on-site reviews, and comparison to other local properties.
- Property Analysis: Fundrise reviews the budget and schedule, appraisal and cost basis, and expected property performance.
- Economic Analysis: Fundrise runs a break-even analysis with return sensitivity checks and other stress tests to determine project viability.
As a result of this process, Fundrise reviewed more than 2,000 potential real estate deals in 2015. Of those, slightly more than 1% were approved for investment.
Fundrise eREIT Fees
Fees are an important consideration when investing. Fundrise fees are currently very low due to several launch promotions:
- Income eREIT: During the first two years of operations (until Dec 31, 2017), you pay $0 in asset management fees unless you earn a 15% annualized return.
- Growth eREIT: Fundrise will pay a penalty of up to $500,000 to investors if the Growth eREIT earns less than a 20% average non-compounded annual return.
- West Cost, Heartland, and East Cost eREITs: Until December 31, 2016, you pay $0 in asset management fees unless you earn an 8% annualized return.
When these promotions expire, fees will increase. At that time, Fundrise anticipates the following eREIT fees:
- Organizational expenses of approximately 2%
- Marketing and distribution expenses up to 1%
- Annual ongoing asset management fees and operational expenses of approximately 1% – 1.5%
In my research, it appears the organizational expenses and marketing fees will be upfront, but not ongoing. Asset management fees are annual, and are consistent with many other managed investment products.
These fees are higher than many index funds, which is a major concern of mine. Despite that, Fundrise has delivered excellent performance thus far. It will be interesting to observe actual fees charged, and net-of-fee investment performance over time. I’m hoping Fundrise understands the importance of fees, and attempts to minimize them moving forward.
Fundrise eREITs Versus Publicly Traded REITs
Beyond Fundrise, there are numerous publicly traded REITs that investors might consider. Most major brokers offer access to these REITs, and the shares are readily exchanged on the secondary markets. When attempting to choose between Fundrise and a public REIT, consider the following:
Publicly traded REITs are going to have fewer fees, with some charging less than 0.50% annually. However, public REITs have been highly correlated with stocks this decade, increasing volatility and reducing any diversification benefits.
While the fees are higher, Fundrise eREITs promise higher overall returns by focusing on smaller deals that fall below the radar of institutional REIT managers.
Liquidity is the ability to turn an investment into cash. On average, investments that are highly liquid yield lower returns than investments that are non-liquid (to compensate investors for the additional risk).
Public REITs are highly liquid, and usually trade at a similar price to their underlying property value. They can be exchanged any time on a secondary market.
The Fundrise eREITs are privately-traded, making them much less liquid. Following a six-month initial holding period, investors in the Fundrise eREIT have the option to redeem their investment (shares) on a quarterly basis, but the redemption rate is less than face value. As such, Fundrise is suitable for long-term investors who want to remain invested for several years.
In general, REITs are tax inefficient. By law, they must distribute more than 90% of all earnings to shareholders (through dividend payments).
As such, REITs belong in tax-sheltered accounts where all dividend earnings are accumulated tax-free until withdrawals are made. This is easily done for publicly traded REITs, but Fundrise does not allow tax-sheltered accounts at this time.
Investors through fundrise will receive dividends that are taxed as ordinary income.
Fundrise Review Summary + Bonus
If you are looking to invest in commercial real estate from the comfort of your home, Fundrise is the best available option. There are nearly 110,000 investors currently on the Fundrise email list, waiting to invest in one or more of the eREIT offerings.
The Fundrise team reached out to us about a review and a promotion for readers. As a result, you can skip the waitlist and begin investing immediately through our link.
If you’d like to get started, here are the steps:
- Visit Fundrise using our tracking link
- Input your email address
- Begin investing immediately (completed 100% online, including ACH transfer from your bank account)
Disclosure: I have several thousand dollars invested in most of the eREIT offerings covered in this review, and have no plans to sell my shares.