Have you ever wanted to invest in real estate? Or, maybe you’ve already tried your hand at it once, and it didn’t exactly go the way you were expecting.
I’m not sure what the appeal is to investing in real estate – being a landlord is not for me – but I do get asked the question quite a bit.
Let’s face it, investing in real estate takes time. You first have to find the right piece of real estate – land, house, duplex, apartment complex, etc. – then you have to determine what work needs to be done, and if free cash flow can actually be generated, then you have to find somebody who’s actually going to pay you for it – if you’re flipping it – or find someone who will rent it.
And, that’s just the simplified version of it. There are plenty of other steps I didn’t even mention (even though that was just about the longest sentence I’ve ever written).
I know a lot of people do it and are successful at it, but, to me personally, that just doesn’t sound like a lot of fun or something I want to spend my time doing. More power and God bless to those who do.
If you are more like me or heck, even if you already invest in real estate, I have found a really interesting way to get started that doesn’t take a whole lot of capital and, my favorite, it’s hands off.
Plus, it will add diversification to your portfolio, which can be a good thing if you’re a believer in Modern Portfolio Theory – I won’t bore you with that right now, but it’s what we believe in at NextGen Wealth when it comes to investing.
So, today, I want to dig into a relatively new way to invest in real estate called Fundrise. I’m going to comb through it from A-Z.
In the video below, I give some additional thoughts and review the website. Be sure to stay tuned as well because I’ll be updating this blog on a quarterly basis with how my investments are going.
So, with that introduction, let’s dig into Fundrise.
What is Fundrise?
Fundrise is a way to invest in real estate through, what they call, eDirect Investments – eREITs or eFunds. In laymen’s terms, it’s a way for you to purchase real estate through a mutual fund or ETF style investment.
They have pretty much done all of the hard work for you. They put together various properties across the country and package them in these eREITs and eFunds, making it easy for the individual to invest in real estate.
In the past, most of these types of investments have been reserved for institutional and accredited investors, or you had to purchase them through a broker that would charge a pretty sizable front-end load (commission).
In most cases, though, these types of investments were and still are very illiquid – meaning, your money would be locked up for a certain amount of time before you could take it back out.
While there are some restrictions with Fundrise’s eREITs and eFunds, they do offer more flexibility than actually purchasing a physical property.
What is an eREIT?
An eREIT – electronic Real Estate Investment Trust and created by Fundrise – is basically various real estate properties grouped together to provide diversification, much like you would think of stocks in a mutual fund or ETF.
They are not traded on the open market and can only be purchased and sold through Fundrise. They are registered with the SEC, so they are subject to the same regulations as a non-traded REIT or exchange-traded REIT.
What is an eFund?
An eFund is very similar to an eREIT, and they are both exclusive to Fundrise. However, they are formed as a partnership rather than a corporation – which means they avoid the double taxation of distributions.
It also appears that eFunds are geared more towards growth while eREITs are geared a little more towards income.
Now that you have a better idea of what you’re dealing with when investing in a Fundrise eREIT or eFund, let’s take a look at what they call their goal-based approach to investing in real estate.
Before I go on though, like any other investment, there is risk involved. The investments at Fundrise are only meant to be a portion of your portfolio – 1 to 25% for most individuals – rather than your sole investment. My point is, there are risks to investing in real estate.
With that small disclaimer out of the way, let’s take a look at the way they recommend their investments through a goal-based approach.
Fundrise has narrowed it down to three different goals.
- Supplemental Income – This portfolio is geared towards generating income
- Balanced Investing – This portfolio is geared towards a mix of income and growth
- Long-Term Growth – This portfolio focuses on capital appreciation
To make it easy, they’ve created their handy-dandy questionnaire to get you going in the right direction.
What Has Been The Performance?
Their track record goes back to 2014, which means the funds haven’t gone through the toughest of times. That being said, the performance has been solid with returns coming in annually, for the most part, in the lower double digits/higher-upper single digits.
While the performance has been good, relatively speaking, I think what’s more important is how uncorrelated the eREITS and eFunds are to a normal stock and bond portfolio – which is a good thing for the believer in Modern Portfolio Theory and anyone seeking diversification.
As with any investment, there are certain risks associated with these as well. Things won’t always go as planned, and there will be tough times just as there are with any investment.
Here’s some more information about historical performance. Be sure to click on the Learn More link on this page to find out exactly how they determined these numbers.
If you really want to get into the weeds to learn more about performance and how it’s calculated, amongst a number of other details, then check out their disclosures.
To find out more about each funds dividend yield as well as more general information about the fund, then check out a list of all the eREITs and eFunds here.
As I say with any investment, past performance is no guarantee of future returns – rather, it just tells a story up to this point in time. It’s up to you to determine where you believe the story goes from here.
What Are The Fees?
From all the research I’ve completed, it looks like the fees are pretty straightforward. Each fund has an internal expense ratio, and that’s it (as 01/2018, it is .85%).
When compared to other types of real estate investments in a similar style, it is extremely fair in particular with the low minimums they offer to get started. Plus, there’s no 1-10% commission up front as there are with many traditional REITs.
How Much To Get Started?
They recently lowered their minimum to get started to $500. When it comes to investing in real estate, this qualifies as a very reasonable minimum. Many traditional REITs start at a much higher cost.
- The biggest benefit that I can see from Fundrise’s eREITS and eFunds is that they cut out the middleman, saving you commissions like you would pay in your normal non-traded REIT
- Low fees
- 90 days guarantee – you are able to sell your investment back for a full refund within 90 days
- Because these types of investments have a low correlation to stocks and bonds, they will add diversification to a traditional stock/bond portfolio
- More liquidity than your typical non-traded REIT
- Low minimum
- Open to anyone, no accreditation needed
- Quarterly redemptions – you can make redemptions quarterly; however, they are not guaranteed and may be subject to redemption fees. Most REITs require holding your money for a certain number of years
- Redemption fees – while only a slight con because they are much more liquid than most non-traded REITs, there are publicly traded REITs that can be liquidated at any time. Click on each fund and scroll to the bottom to find out more about their redemption fee schedule.
- Distributions are taxed at ordinary income tax rates rather than the lower capital gains tax rates.
As you can tell from above, the pros do outnumber the cons. By no means am I endorsing Fundrise – my compliance department wouldn’t like that – but I am saying it is an interesting way to get started in real estate.
There is a very low barrier to entry, and best of all, in my opinion, you don’t have to get your hands dirty or worry about collecting rent on the first day of the month.
As with any investment, perform your due diligence to determine if it’s right for you and your goals. As always, I’m happy to help address any additional questions as well.
Want More Great Information Like This Sent To You Monthly?
Disclaimer: The information contained herein neither constitutes an offer for nor a solicitation of interest in any securities offering; however, if an indication of interest is provided, it may be withdrawn or revoked, without obligation or commitment of any kind prior to being accepted following the qualification or effectiveness of the applicable offering document, and any offer, solicitation or sale of any securities will be made only by means of an offering circular, private placement memorandum, or prospectus. No money or other consideration is hereby being solicited and will not be accepted without such potential investor having been provided the applicable offering document. Joining the Fundrise Platform neither constitutes an indication of interest in any offering nor involves any obligation or commitment of any kind.