Real estate investing requires a lot of cash and time. Although investing in real estate stocks only costs the price of a single share, you may not like the stock market volatility where share prices fall more than the dividend income. These reasons are why a growing number of investors are choosing to invest in private real estate using Fundrise.
For only $500, you can invest in real estate deals across the United States and let the property manager handle the maintenance and collecting rent payments. With a historical annual return between 6% and 12% and no physical effort required, there has to be a catch. Right?
This Fundrise review will cover how you can invest in private real estate deals that were once only available to the wealthy. You will also be able to decide if this investing idea is worth it for you.
What is Fundrise?
Fundrise opened its doors in 2012 along with several other real estate crowdfunding platforms. In that year, U.S. Congress passed the JOBS Act making it easier for average investors to invest in stock market alternatives that were once only open to wealthy investors and real estate developers. One of these alternatives is directly investing in private commercial real estate like apartments, hotels, office buildings, and shopping centers.
Most of us aren’t millionaires so our only pre-2012 real estate investing options were owning rental property, flipping houses, or buying publicly-traded REITs (real estate investment trusts) that trade on the stock market.
Because you directly invest in real estate projects, you can earn a higher return similar to what you might earn by owning rental property. For instance, Fundrise pays a current annual dividend of 6.19% but most public REITs have a 3% annual dividend. Unlike public REITs, you don’t have to worry about share prices that are affected by the stock market. If the share price drops more than the dividend, you can still lose money with public REITs.
Who Can Join?
Any United States resident at least 18 years or older can join Fundrise. There isn’t a minimum annual income or net worth. Both non-accredited (any investor with less than a $1 million net worth or $200,000+ net worth) and accredited investors can invest on Fundrise.
As long as you have $500, you can open a Fundrise account. Three advanced investing plans become available when you balance reaches $1,000.
After your initial deposit, all future deposits only need to be $100.
How Does Fundrise Work?
Fundrise makes the real estate investing process easy. You deposit money and Fundrise invests it for you into an eREIT that holds multiple properties. You also receive a quarterly dividend you can either reinvest for free or withdraw into your bank account.
These are a few sample properties that Fundrise invests in:
- New apartment development in Los Angeles, CA
- Apartment renovation in Brooklyn, NY
- New commercial development in Denver, CO
- Rent-stabilized apartments in Fort Myers, FL
Most properties are in major cities across the United States. These investment properties tend to have multiple tenants. Owning “multiple doors” helps ensure there is regular monthly income and offsets any income gap from empty units. This way, Fundrise can continue paying annual dividends of at least 6%.
Although you can’t choose which projects you invest in, you can see the list of the current holdings for each fund that Fundrise will put your money into.
How To Make Money
Fundrise makes money through debt financing and equity financing.
Debt financing is less risky but has potentially lower returns. Fundrise either collects rent from tenants in existing properties or from interest payments by lending money to developers. This is how Fundrise pays its quarterly dividend.
Equity financing can earn more money but is riskier and is the Growth eREITs investment strategy. With this deal type, you rely on selling properties for a profit. Because most profits come when a property sells, you won’t earn as much monthly income from rent or interest payments.
All four Fundrise investment portfolios give you exposure to debt and equity deals. The exact allocation depends on which investment plan you pick. You can choose a balanced plan or focus on either debt or equity offerings.
In general, Fundrise’s historical performance for all debt and equity assets is as follows:
- 2014: 12.25%
- 2015: 12.42%
- 2016: 8.76%
- 2017: 11.44%
- 2018: 9.11%
These figures include all income from dividends (debt) and property appreciation (equity).
Fundrise Investment Offerings
With Fundrise, you don’t pick which projects to invest in but you can choose whether you want to place more of your cash in Income eREITs (debt financing) or Growth eREITs (equity financing). Fundrise invests your cash into an “eREIT” of properties across the United States. This makes the real estate investing process simple just like you might use index funds to invest in stocks and bonds.
Unlike other crowdfund platforms, accredited investors won’t be able to “handpick” specific properties for a potentially higher return. All investors have the same plan offerings.
When you invest between $500 and $1,000, your only available plan is the Fundrise Starter Plan. This plan evenly divides your cash between the Fundrise Income and Growth eREITs.
If you invest $1,000, you can automatically choose one of the three core investing plans.
Once your account balance reaches $1,000 you can switch to one of three core investing plans:
- Supplemental Income: 80% debt and 20% equity
- Balanced Investing: 60% debt and 40% equity
- Long-Term Growth: 25% debt and 75% equity
Your potential annual return is different with each plan. For instance, Fundrise projects an annual return between 8.5% and 9.9% for the Supplemental Income plan. The Long-Term Growth plan is projected to earn 9.1 and 10.5% but carries more risk. With any plan, the actual performance may be higher or lower than the projected range.
Even so, the annual return is higher than the historic S&P 500 index return of 7%. And it’s notably higher than the 2% annual yield you can earn with a high-yield savings account or bank CD.
Like investing in index funds, ETFs, or public REITs, Fundrise charges some fees. All funds charge a 0.85% annual management fee. Fundrise also charges a 0.15% annual platform fee that keeps the Fundrise website operating and helps produce your tax documents. The 1% recurring fee is collected from each quarterly dividend payment. For every $1,000 you invest, Fundrise keeps $10 each year.
If you open a Fundrise IRA account, you will also pay up $125 annually to Millennium Plus Company which services all IRA plans.
These fees are higher than most publicly REITs and non-real estate index funds. While you shouldn’t pick investments solely because of the expense fee, you shouldn’t ignore the fees. For instance, the Vanguard Real Estate ETF (ETF symbol VNQ) is only 0.12%.
Fundrise offers a higher dividend because your cash (like private real estate) is highly illiquid. You must wait at least 60 days to receive any cash you wish to withdraw. And Fundrise requires you to request your withdrawal at least 15 days before the current calendar quarter ends.
You will also pay an early withdrawal fee up to 3% on funds that haven’t been invested at least 5 years.
The exact early withdrawal fee depends on how long the money has been invested.
|Time Money Invested||Early Withdrawal Fee|
|Less than 90 days||0%|
|90 days until 3 years||3%|
|3 years to 4 years||2%|
|4 years to 5 years||1%|
|More than 5 years||0%|
Now for that all important question, “Are Fundrise earnings taxed?”
Yes, if you open a non-IRA account. Fundrise IRA accounts aren’t subject to annual taxation. However, you will pay taxes on the withdrawal amount in the future for traditional IRA accounts. You will receive a Form 1099-DIV each January for each eREIT stating you reportable taxable income for your federal and state tax returns.
Your earnings are taxed as ordinary income like your day job earnings instead of the capital gains tax rate that stocks, ETFs, or public REITs.
Is Fundrise Safe?
Like any investment, Fundrise isn’t risk-free but it’s not a scam. The various Fundrise investment funds are registered with the U.S. Securities and Exchange Commission (SEC). Your Fundrise earnings are also reported to the IRS as taxable income.
Also, Fundrise has been around long enough for many real people to make money through Fundrise and show it’s not a scam.
Frank D. shares the following about Fundrise. “I’ve been investing here now for almost 10 months and have continued to see my investment grow. I have had several questions which you can ask through the email they send to you and had them answered in a very timely matter. I have just been able to purchase shares with the company and am excited to see how this takes off.”
Lacy states, “I have been an investor on the Fundrise platform for nearly 3 years. I have really enjoyed this alternative investment and have achieved returns that are definitely worth it. As with any alternative investment, liquidity is difficult (I have no yet tried it). The platform for investing is fantastic and easy to use…investor updates on properties are fund to read and feel like you’re staying involved with the company.”
Fundrise isn’t a good investment idea for every person. Below are some of the investment risks that you will see with Fundrise and other crowdfund real estate platforms. To see all the risks, take the time to read the Fundrise eREITs offering circulars.
Rising Unemployment and Commercial Vacancies
Although your Fundrise returns aren’t affected by how the S&P 500 or other stock markets perform, the job market and commercial vacancies can impact your Fundrise performance. This is because tenants may move out or not pay rent if they can’t earn a regular income.
If a project fails, Fundrise can lose their entire investment. Because you can’t pick individual projects, investors have to trust that Fundrise chooses the right properties.
Fundrise diversifies by investing across the United States in commercial and multifamily residential properties. Owning different property types in multiple local real estate markets helps limit downside risk.
Of course, there’s always the possibility that Fundrise goes out of business. Since they are not FDIC-insured like your bank account, it’s possible you may not recover any of your cash.
Real estate is naturally illiquid. That means you can’t “buy today and sell tomorrow” if you wish. If you have ever tried selling your house, you know how long it can take to find a buyer and complete the closing process. Fundrise only distributes redemptions every quarter.
During the next recession or real estate market downturn, Fundrise may pause the redemptions until market conditions improve. You may have to wait several years to access your money if this happens. Because Fundrise hasn’t been through a recession, we don’t know if Fundrise will pause redemptions when times get tough.
The Good and the Bad About Fundrise
- Easy way to invest in private real estate
- Only need $500 to invest
- Annual returns can be higher than most stock market investments
- Open to all U.S. residents at least 18 years old
- Must invest for at least 5 years to make penalty-free withdrawals
- Can’t choose individual properties to invest in
- Annual fees (1%) are higher than most ETFs and index funds
- Have to wait at least 60 days to receive cash redemptions
Fundrise is an effortless way to invest in private real estate without the time and money required to be a landlord. It’s one way to invest without relying completely on the stock market and ear consistent returns. But the fees, taxes, and illiquidity may not be worth the higher potential returns for some investors.