Fundrise and other real estate crowdfunding platforms that provide access to online real estate investment trusts (eREITs) and eFunds are changing the commercial and residential real estate industries. Understanding how to invest in real estate begins with access to deals, and these companies are providing that access to anyone willing to participate.
Opportunities for real estate investing abound but with all the ways to invest in real estate, how do you know where to start?
Before reviewing a specific platform, it’s crucial to have a basic understanding of real estate crowdfunding, commercial real estate, residential real estate, eFunds, and eREITs. Once we cover these concepts, we will provide a comprehensive Fundrise review so you can decide if it is right for you.
Read on to learn about this budding eREIT and eFund technology, how it works, and why Fundrise is worth considering.
What Is Real Estate Crowdfunding?
A real estate crowdfunding investment platform is an online resource where potential real estate investors can search and review various commercial and residential real estate deals to invest in. This has revolutionized the industry, making these types of deals available to a whole new swath of investors.
Historically, residential real estate deals have been more accessible but commercial real estate investments have been reserved for large corporations or the financial elite. This is because deals of this nature have had high minimum investment amounts in the past. The large amounts of money required to invest made it prohibitive for the general public. Anyone willing to invest a few dollars can now invest in real estate for passive income using a real estate crowdfunding platform.
Investors can look at commercial property investment opportunities on several different available platforms and pick the ones they want to put their money in. The scope and variety are vast, with varying levels of minimum investment required.
What Is Residential And Commercial Real Estate?
The concept of residential real estate is common knowledge to most Americans. After all, most of us have or will buy at least one home during the course of our lives. On the other hand, commercial real estate is a little more unknown to the general public. It’s a good idea to get in the know before diving into commercial real estate crowdfunding.
Residential real estate is defined as property used for - you guessed it - residential purposes. This includes single-family homes, condos, duplexes, townhomes, cooperatives, and multi-family properties with less than five individual units. When a property used for residential purposes has five or more units, like an apartment building, it is classified as commercial real estate.
Sound commercial real estate investing starts with understanding what commercial real estate entails. There are five types of commercial real estate: office, industrial, retail, multi-family, and special purpose. Understanding the similarities and differences between these different types of commercial real estate is essential before investing in any of them.
The most prevalent form of commercial real estate is office space. They come in many shapes and sizes, from high-rise buildings with 50 or more offices to a signal office in one building. For investing purposes, office space is designated into three categories: Class A, Class B, and Class C.
Class A office commercial properties are the cream of the crop. Often located in busy cities with a large workforce, these offices are either recently built or freshly renovated. Class A properties offer the best product in office real estate investing, but they are expensive to buy.
Class B is not quite at the level of Class A but still represents office space in relatively good shape and somewhat profitable. These properties are often appealing investment opportunities. They can be bought at a reasonable price and then renovated into Class A office properties.
Class C Properties represent the bottom of the barrel, so to speak when it comes to office real estate. The job markets are usually weak where they are located, making it hard to find tenants. The condition of the buildings is often subpar as well. These properties can be bought cheaply, but it requires a lot of work to make them profitable.
Now that you understand how individual commercial properties are categorized, let’s look at a few ways to invest in them. This will include an overview of eREITs as well as a Fundrise review.
What Is Fundrise?
Fundrise is an eREIT founded in 2010 by a group of real estate investors, including current CEO, Ben Miller. They are based in Washington D.C. and are registered with the SEC as a crowdfunded real estate investment platform.
According to Miller, the goal of Fundrise is to “build a better financial system for the individual investor - one that is simpler, more reliable, lower cost and transparent.”
They are accomplishing this goal by building and maintaining an online platform where individual investors without vast sums of capital can find, research, and invest in commercial real estate investment opportunities.
In terms of Fundrise’s performance on attracting new investors, so far, so good. More than $7 billion worth of real estate investment has been made by over 210,000 investors using Fundrise.
How Does Fundrise Work?
When you invest using Fundrise, your money is invested in many different investment offerings that the platform presents. These are professionally managed portfolios of properties known as eREITs and eFunds.
Depending on the performance of these portfolios, you can gain profits or losses on your initial investment. All investing comes with some risk, but recently using Fundrise has proven to be a sound investment strategy. In 2020, the annual rate of return for investors was 7.31 percent. In 2021, it was 22.9 percent. That’s pretty favorable compared to trading on the traditional stock market.
What’s An eREIT?
Real estate investment trusts (REITs) bring funds from various investors together to buy and manage real estate. eREITs do this with an online platform. Commercial REITs and commercial eREITs focus on commercial investments. There are residential REITs and eREITs available to investors as well.
If you are interested in investing in real estate without becoming a landlord, you may want to invest in a real estate investment trust. It allows you to make money in the real estate industry without purchasing a property yourself and managing the day-to-day operations.
eREIT platforms like Fundrise find deals, vet them, and allow you to “shop” online for investment opportunities. The amount and types of eREITs depend on the specific crowdfunding platform you use.
Fundrise offers a wide array of eREITs to potential investors, and they each offer different pros and cons. Some focus on achieving cash flow, and others focus on long-term investment growth. eREITs focused on cash flow invest in properties with good monthly income. eREITs focused on long-term investment growth focus on properties with a high likelihood of appreciation or potential for added value through renovations and repairs.
Some eREITs also like to balance their portfolio between growth-based and cash flow-based investment properties. There are also eREITs that are regionally focused.
Here is a look at the types of eREITs Fundrise offers and their focus:
How do you choose the right electronic real estate investment trust? It all depends on your specific investing goals. For example, if you are looking for supplemental income-producing real estate, an income eREIT is the way to go. If you don't mind having your money tied up for an extended period as you wait for the benefits of property appreciation, a long-term growth eREIT might be best for you. Think about your short and long-term financial goals with any investment opportunity before deciding.
What’s An eFund?
eFunds focus exclusively on residential real estate. This provides a number of key benefits over previous methods of investing in residential real estate.
Historically, residential real estate investing was limited to putting money into homebuilding companies by purchasing their stock. This had a significant flaw, though, as these companies created double taxation (when the companies are taxed on their profits and the stockholders are also taxed on their earnings).
With eFunds, you are considered a partner in the business. This means the cash profits you receive are not considered income, which avoids double taxation.
Fundrise Review: Levels Of Investment
The eREITs and eFunds you can invest in using Fundrise depend on what type of account you have. These are split into five different plans: Starter plan, basic plan, core plan, advanced plan, and premium plan. Here’s a look at the various levels and what they entail so you can see where your potential Fundrise investments should start.
Rise Companies, the parent company of Fundrise, has stock for sale, creating yet another way for investors to invest with the company. Only people who have invested with Fundrise can buy stock in Rise Companies. This means it is not publicly traded on the stock market, but it still must report to the SEC.
Offerings of the stock have occurred periodically, with the price increasing each time. This has helped Fundrise raise a great deal of capital during its initial growth. The stock has performed well, but there are no guarantees of returns. In addition, it is not as liquid as most eREITs, so you will need to hold your stock in the company for a while before cashing in.
Fundrise Pros And Cons
Now that you know the nuts and bolts of Fundrise, you are probably wondering if you should start investing with them. Well, all potential investments should involve a thorough assessment of the benefits and drawbacks.
Some self-assessment is required as well. How much risk are you willing to take? How long can your investments be tied up before you become uncomfortable? What level of investment are you ready to make? These are the questions to ask yourself as you review the pros and cons to see if Fundrise investment is suitable for you.
Hopefully, by now, you have a good understanding of how Fundrise works and some of the pros and cons of using a fundrise account. That said, you still might have a few questions before getting started. Here are a few frequently asked questions about Fundrise.
It looks like Fundrise is here to stay.
Given the success and popularity of Fundrise, it appears to have become a strong, durable real estate investment company. It was one of the first crowdfunding eREIT and eFund businesses to be established and continues to innovate, evolve and thrive.
The public nature of Fundrise and Rise Companies adds to this sentiment. Both companies file regular reports with the SEC, so it’s easy for potential investors to see their balance sheets and other financial disclosures. This transparency is unique in the real estate investment crowdfunding space.
As previously stated, more than $7 billion worth of real estate investment has been done by over 210,000 investors using Fundrise. In addition, the company has paid out more than $100 million to its investors in the form of dividends.
The performance of Fundrise has been solid, and it’s easy to track it, with results published regularly on their website. Here’s a look at the returns Fundrise provided for investors from 2014 to 2020.
These indicators of low volatility and positive returns make Fundrise a solid investment choice for investors looking to make money in the real estate industry.
How have they accomplished this success? Through a deliberately conservative approach. The managers of Fundrise believe that investors seek stability and the low risk of losing money instead of the highs and lows of other investment strategies.
This approach has resulted in the platform's consistent performance since its inception. They have not had a down year and have weathered economic fluctuations that have hurt other investment strategies.
Fundrise’s current CEO is Ben Miller, one of the platform's most prominent investors. That means he has some “skin in the game” and is personally tied to the success of the company. Ben and other members of the Miller family and several Fundrise executives also own a controlling stake in Fundrise’s parent company, Rise Companies.
Another reason this management structure benefits Fundrise investors is because they are protected from outside sources taking control of the company. In other investment companies, sometimes a venture capital fund or other outside investors can become the controlling entity by investing more than the management team. That leads to the external company influencing the decisions made by the management team regarding how to run the company.
However, there is a downside to this management structure. Fundrise makes a hefty profit from its asset management fees. This sets up a dynamic where part of the company's operation has incentives for the management team (fundrise's fees) that are not aligned with the incentives for investors (fewer fees).
When you are investing with Fundrise, you are putting your faith in them to select the right investment opportunities for you. Other crowdfunding platforms focused on real estate allow you to select specific properties or portfolios of properties to invest in. This gives you more control over where your money goes once it leaves your bank account - which is not the case with Fundrise..
So much of what Fundrise does involves letting them do the investment decision-making for you. That means understanding how they sect their investments is essential.
The first step for Fundrise is researching a specific real estate company and their sponsors. Criteria for evaluation include how well capitalized the company is (how much money is invested in it) and whether or not they have a track record of success. Fundrise says that only 25 percent of sponsors make it past the screening stage.
The next step is looking under the hood, so to speak. This entails a thorough analysis of the potential investments goals and strategies. Fundrise looks for opportunities that will ensure their investors get back their initial investment and promised returns before the investment company sees any profits.
Once the screening and due diligence phases are complete, the proposed project moves to underwriting. You may be familiar with this term when it comes to lending. Loan underwriters use a considerable number of data points to review and verify the financial information of a potential borrower.
Fundrise uses a similar approach to its underwriting process. Their underwriters complete a comprehensive analysis using more than 350 different data points. These data points include things like capitalization, cash flow, and investment history.
You don’t actually fund the eREITs you select when you put money in your Fundrise account. Fundrise purchases them first. Since they prefund the deal, that adds some assurance that they believe it will be a good investment. If the screening, due diligence, and underwriting processes uncover red flags, you can be sure Fundrise will decide not to fund the proposed investment.
With all this talk about Fundrise, you might wonder if they are the only game in town for real estate crowdfunding platforms. Well, they are not. Several other companies are also operating in this space, including leading Fundrise competitors Realty Mogul and Equity Multiple. Let’s take a quick look at these two companies to compare them as you do your Fundrise review.
Founded in 2012, Realty Mogul offers REIT investments for both accredited investors and non-accredited investors. They focus primarily on class A retail and apartment buildings. They also offer access to private REITs.
Private real estate investments can be appealing because a limited number of people can take advantage of them, creating less division of potential profits. However, REITs that deal with private real estate assets don’t have to register with the SEC, so oversight can be minimal.
Realty Mogul has a similar vetting process to Fundrise and has only accepted 1.1 percent of the deals submitted to them since they were founded in 2012. They have offered $4.7 billion worth of property on their platform and have a minimum investment amount of $10,000.
Equity Multiple offers a similar platform to Realty Mogul and Fundrise, complete with potential investment due diligence and underwriting. They tout the expertise of their management team, citing vast experience in real estate finance, technology, law, and private equity. They also convey a commitment to customer support and transparency. Like Fundrise, they offer a number of tiered investment levels, with the minimum starting at $5,000.
Equity Multiple focuses on large-scale commercial projects like apartments, retail, and office buildings. Their past performance speaks to a high level of success.
The short answer is pretty much anyone. You don't need to be an accredited investor. You don't need to have experience with the stock market, real estate projects, or real estate investments. You don't need to have a high net worth or any existing real estate funds. Anyone who wants to become a real estate investor can invest with Fundrise.
When you invest in an eREIT, your money is pooled with many other investors to fund a variety of different real estate investments. This means it is not liquid (easy to access whenever you want). The funds are tied up in the various investments until they come to fruition and provide a return as outlined in their structure.
However, since Fundrise actually funds these eREITs before you invest your money, you are actually paying Fundrise, not the eREITs directly. That means Fundrise can disperse funds to you at their discretion. You can request all or part of your money back, and they may or may not honor that request. In addition, they may charge fees based on the amount of time you have invested with them (the longer, the better, of course). Fundrise has approved nearly all withdrawal requests in the past, but this is no guarantee that they will continue to.
Simply open an account on the Fundrise website or using the Fundrise app. Next, you will be asked which account level you want to participate in (starter, basic, core, income, advanced, or premium). Descriptions of each of these account levels are provided to help you select the one that’s right for you.
Fundrise needs to verify your personal information, of course. You’ll need to give them your name, email, citizenship, residency, and social security number. The last step is linking your bank account, and then you are ready to start investing!
Fundrise and other crowdfunding platforms focused on eREITs have changed the way people think about real estate investing. Access has been expanded exponentially, the diversity of options has grown, and the amount of money it takes to get involved has shrunk dramatically.
Using these platforms is not for everyone. If you like to know exactly where your money is going and have access to it at all times, eREITs are probably not for you. However, it might be a great investment strategy to consider if you are interested in making money off of real estate, have a long-term investment approach, and trust these companies to put your money in the right places.