It’s fun watching HGTV and imagining how it would feel to make money flipping houses.
There must be a huge sense of accomplishment when you uncover a home’s original charm beneath decades of bad interior design choices, not to mention the cash that seems to result from all this work.
But let’s face it: Most of us don’t have the time, the resources, or the home improvement skills to make this work.
You’d have to buy the property up-front, along with the building materials and the skilled labor. Then, you’d have to wait until the property sells to see any profit.
Still, adding real estate investments to your portfolio can be a really smart idea – not only because real estate has proven itself as a solid investment choice, but also because diversity is absolutely crucial for each of us.
To get ahead in life – and to build a nest egg that can stand the test of time – we can’t put all of our eggs in one basket, right?
Wouldn’t it be great if you could invest in real estate without dealing with all the hassle of buying, improving, and re-selling real estate?
Now, thanks to new firms like Fundrise, you can. Fundrise works similarly to Lending Club and Prosper but focuses specifically on real estate.
With Fundrise, you can invest in commercial property without dealing with the hands-on aspects of owning physical property. Check out other great ways to invest by reading our Motif Investing Review or our Lending Club Review.
Think about how much easier this could be.
If you “flip houses,” you’ll have a ton to worry about. You might have to come up with a huge cash payment just to buy a property to begin with, plus hire contractors, oversee construction and workers, then work tirelessly to make sure you sell the home for a profit.
As a residential or commercial landlord, on the other hand, you might have an entirely different set of tasks. Finding tenants, planning repairs, and maintenance, collecting rent, paying taxes. It can be a full-time job by itself.
And each time a tenant moved out, you would need to start the process over – taking the time to find a new tenant, working up a lease and financial agreement, cleaning up after the former tenant, then managing any other issues that might arise.
When you investing using Fundrise, however, you can take a completely hands-off approach to your investments. You provide the money but not the elbow grease or the asset management.
This is possible because you’re buying notes that list real estate as the underlying investment – not the real estate itself.
Here’s how it works: You invest in Fundrise which in turn invests in real estate development projects. If the projects you invest in make money, you see a return on your investment.
For a lot of people, this the best (and only) way to invest in real-estate for the long haul. Not everyone can rehab dirty houses or be a landlord, right?
Investing in Real Estate through Fundrise
If you’re looking for a hands-off approach to investing in real estate, Fundrise is a firm you might want to consider.
Through their real estate investment products, investors earned an average of 12 – 14 percent on their money last year, and all without painting a wall or dealing with unruly tenants.
Here’s the part that I think is really smart: Fundrise uses technology to locate and capitalize on real estate investments that are most likely to earn income, projects inside a “sweet spot” that exists between the large institutional investments and the smaller, higher-risk individual investments.
According to Fundrise founders Ben and Dan Miller, it’s harder to earn income on large, institutional real estate investments because competition drives down profits over time.
At the same time, the small “fix and flip” assets you see on shows like HGTV’s Fixer Upper are typically riddled with problems and risk.
Not only are these smaller projects comparatively expensive to operate, but there are simply too many things that can go wrong.
What if you discover asbestos? That will probably add another six-figure line item to the budget, for example, which cuts directly into your profits.
To remedy these limitations in your ability to earn income from real estate, Fundrise focuses its efforts on that “sweet spot” I was talking about: mid-size, sub-institutional assets that have less competition but the potential for higher returns.
So, not only can you invest in real estate without doing all the leg work, but you can also have the knowledge that your investment is well positioned to earn income.
Everything You Need to Know About Fundrise
If you’re still reading, I’m guessing you are interested in investing through Fundrise and would like to know some of the nitty-gritty details about how it works and who can invest.
So let’s get started, shall we?
First of all, the minimum investment required by Fundrise is just $500 for investors who invest in their Starter Portfolio, $1,000 in their eREIT™ products, and around $5,000 for those who invest in their other placements.
Fundrise has trademarked new terms for its investment vehicles. Here’s how they work
What is an eREIT™?
To understand Fundrise’s eREIT™ products, let’s first define a traditional REIT, or Real Estate Investment Trust. People have been investing in REITs for about half a century. REITs own real property and you can buy and sell shares at any time through a broker, just like you would with stocks.
Fundrise’s eREIT™, or electronic Real Estate Investment Trust, products work similarly except you don’t need a broker because shares are not publicly traded. You buy shares directly from Fundrise when you open an account.
This is good because investments are not subject to the volatility of the market, but keep in mind it’s also harder to sell shares since they’re not publicly traded.
What is an eFund™?
Fundrise’s eFund™ is a diversified fund comprised of residential real estate projects such as single-family homes, apartment complexes, condos, etc. These funds are structured as partnerships, not corporations, to avoid double taxation, and they’re sold exclusively through Fundrise.
Like eREITs, they are not publicly traded.
This relatively low barrier for entry makes this type of investment a really good option for people who want to dip their toes into real estate without going in full throttle.
As of now, any U.S. resident can invest in Fundrise provided that:
- they can meet the minimum investment amount
- their investment does not exceed 10 percent of their gross annual income or net worth.
The Starter Portfolio really is one of the more intriguing offerings in the REIT space.
Not only does it only require a $500 investment to get started, but you will be invested across three different REITs; the East Coast, the Heartland, and West Coast eREITs, and Fundrise is offering a 90-day buy-back period so you can try it out with no risk.
In addition to individual placements, Fundrise offers both an Income eREIT™ and a Growth eREIT™ for beginners, both of which have similar goals but a slightly different set-up.
- Fundrise created its Income eREIT™ to provide investors with a low-volatility income stream of “consistent, attractive cash distributions generated from commercial real estate investments.” The Income eREIT™ focuses mostly on debt as an investment and pays returns throughout its investment term, and that’s what sets it apart.
- The Fundrise Growth eREIT™, on the other hand, focuses primarily on assuming equity ownership of commercial real estate assets. By focusing on equity instead of debt, the Growth eREIT™ has a greater potential to accrue more value over time. While a dividend is paid quarterly, most of the returns for this investment are paid out toward the end of the investment period.
Also keep in mind that additional investments may be available to you if you are an accredited investor – a term coined by the Securities and Exchange Commission (SEC) to describe financially sophisticated investors who have high net worth and need little protection.
Understanding Fundrise’s new goals-based plans
Fundrise now offers another way to categorize your investments: by choosing one of three goals-based plans. Each plan’s name can tell us a lot about how it works, and Fundrise offers a questionnaire to help you decide on a strategy if you’re not sure.
- Supplemental Income Strategy — this approach should yield the highest stream of income from your investments.
- Balanced Investing Strategy — this approach leans more toward long-term growth by reducing the emphasis on earning immediate income.
- Long-Term Growth Strategy — this approach invests more in higher-risk projects which means immediate income will likely be lower but that there’s also a greater opportunity for your investments to grow in the long run.
Benefits of Investing in Fundrise
While no type of investment is perfect, Fundrise does offer some benefits that help it stand out. The best features offered by Fundrise, in my opinion, are summed up below.:
- Fundrise charges low fees for its services. There’s a 0.85 percent fee annually on assets and a 0.15 percent management fee. Naturally, this compares favorably with traditional approaches that cost 5 or 6 percent a year. If you’re looking for an investment option with fees that won’t eat away at your earnings too much, Fundrise might be it.
- You can potentially invest in Fundrise through an IRA. If you open a self-directed IRA, you can invest your funds into Fundrise notes.
- Fundrise lets you search through and filter offers to find the most interesting – and potentially profitable – deals. Just like Lending Club lets you sort notes based on risk level and earning potential, you can browse the Fundrise site for investments that meet your personalized criteria. If you like to have some control over your investments, this is a huge deal.
- Fundrise accounts are free. Opening your account is absolutely free, and you won’t be charged for browsing investments, either. If you want to dig around their website before you commit, you can. And actually, I would suggest doing that anyway before you get started.
- Fundrise income is as passive as it gets. While investing in real estate the old-fashioned way requires a lot of intensive planning and plenty of hands-on work, Fundrise requires nothing of the sort. Once you choose your investments, nearly everything else is taken care of for you.
- Most Fundrise investments offer rolling maturity dates. While not always the case, most of their investment options let you cash out part or all of your investment every few years. So while they are not liquid in a general sense, you will have access to your money periodically.
- Fundrise lets you invest from the comfort of your home on their secure website. Opening an account and choosing your investments is easy. Plus, you can add funds via electronic check and even sign documents online.
No investment option is perfect, and Fundrise is no exception. While investing in Fundrise can offer high returns and truly passive income, there are some disadvantages to consider as well.
- Many Fundrise investments outside of their new eREIT products are not available to unaccredited investors. To become an accredited investor, you must meet certain criteria decided by the SEC. One way to qualify as an accredited investor is earning an income of at least $200,000 per year or a joint spousal income of at least $300,000 per year for at least two years. Also, having a net worth of at least $1 million dollars will do, regardless of your income. There are other ways to meet the requirements to become an accredited investor, of course, but those are the two easiest.
- Fundrise investments are not liquid until they reach maturity. While Lending Club offers a secondary market where you can sell notes if you need to cash out, Fundrise does not offer this option yet. As a result, your investments are not liquid until they reach maturity. If you feel you might need to access your money at any time, this is a disadvantage. Fundrise has recently introduced a stopgap measure to make it easier to cash out investments.
- Fundrise offers limited investment options at this point. Even for accredited investors, investment options are somewhat limited. This will likely continue to change as Fundrise grows its platform, but it’s still worth noting that your choices are not plentiful yet.
- Fundrise is relatively new, so we don’t have a lot of data to work with yet. While Fundrise investors earned an average of 13 percent on their investments in 2015, the company wasn’t founded until 2012. Earnings dipped into the single digits in 2016 but bounced back to 11.44 percent in 2017. It will be interesting to see what kind of earnings investors report in 2018 and beyond.
There is so much more to know about Fundrise, and if you want to dig a little deeper, I highly suggest you look over their website, and specifically their FAQs. The site is starts off with general information, but you can drill down to the fine print even without opening an account. If you have questions about Fundrise investments or almost anything else, you’ll likely find the answers you’re looking for there.
The best part about investing in Fundrise is the fact that it is a truly hands-off and passive investment – as in, you won’t have to get your hands dirty or do any of the heavy lifting, either the physical kind that results in pulled muscles and splinters or the mental heavy lifting that’s necessary when you’re actively managing an investment project.
Like any other investment, however, there are risks involved. Since investing in real estate in this fashion is a relatively new concept, make sure you know what you’re getting into before you put real money on the table.