Introduced by Fundrise, an online real estate crowdfunding platform, eREITs are electronic real estate investment trusts (REITs) that merge the traditional structure of REITs with the ease of an online marketplace. Determining if eREITs are right for you depends on your investment goals, risk tolerance, and desired level of liquidity. They offer a unique opportunity to diversify into real estate with relatively low minimums, but they also have less liquidity than publicly traded REITs.
Key Takeaways
- Fundrise is an online financial technology company that invests in the real estate market.
- The company offers a starter plan for a $10 minimum investment and four other plans with minimum investments of up to $100,000.
- Fundrise's investments returned 1.5% to investors in 2022 and -3.21% in the first three quarters of 2023 with 1.0% annual fees. This compares to -25.10% and -5.17% returns for publicly traded REITs in 2022 and the first three quarters of 2023, respectively.
- Investors should remember that Fundrise's offerings are illiquid since they are traded on the private market.
- Investing with Fundrise may have more risk because the company is still relatively new and hasn't been around during a housing market recession.
Real estate is one of the best-performing alternative asset classes for investors who would like to diversify their portfolio or for anyone who simply doesn't enjoy the volatile nature of the stock market. Contrary to popular belief, one doesn't need to be extremely wealthy to have interests in property.
In the past, investing in real estate, especially large commercial properties, was only reserved for high-net-worth individuals. However, the rise of online real estate crowdfunding platforms and publicly traded REITs has made it easier for the average investor to invest in real estate.
Fundrise is an online investment platform that offers access to real estate and assists property developers in financing their projects. Learn more about this platform and whether it fits your investment strategy and is suitable for you.
What Is Fundrise?
Founded as a startup in 2012 by two brothers, Benjamin and Dan Miller, Fundrise is an online crowdfunding financial technology company that invests in the real estate market. According to its October 2023 filings with the Securities and Exchange Commission, Fundrise has 393,000 active investor accounts on the platform and $3.09 billion in assets under management.
Fundrise could be a good fit for people who want to speculate in real estate but don't want the headaches or hassles of owning property. Fundrise compiles research for you and handles the underwriting before investing in specific properties.
Fundrise Offerings
The company offers investments with real estate exposure that include registered and unregistered funds. Available are three funds registered with regulatory bodies and more than 10 unregistered funds. These include several eREITs, which invest in debt or equity for various real estate types, including commercial properties.
The funds have four different real estate strategies: fixed income, core “plus” holdings, value-added, and “opportunistic,” climbing in order of greater risk. Besides these investments, including real estate exposure, Fundrise additionally offers a private credit investment strategy.
Recently, Fundrise has also added venture capital offerings with a focus on private tech firms that haven't yet had their initial public offering.
Important Factors in Investing in Fundrise's eREITs
Here are essential questions to answer when determining whether to put money into Fundrise eREITs.
How Much in Returns Do You Expect?
Even though the company's been around since 2012 and launched the first eREIT a few years later, Fundrise is still relatively new. The Fundrise portfolio delivered an average annual return of approximately 1.50% against -25.10% for publicly traded REITs and -18.11% in the S&P 500 index in 2022.
What Fees Are You Willing To Pay?
Because Fundrise invests directly, it saves its investors money on broker and placement fees. However, it does charge a high asset management fee of 0.85% as well as an advisory fee of 0.15%. Hence, for every $1,000, Fundrise charges investors $10 each year: $8.50 in asset management fees and $1.50 for advisory fees. The company says it uses the fees for operating expenses. For reference, the expense ratio for the Schwab's REIT ETF is 0.07%.
Do You Mind Investing in an Illiquid Asset?
One of the main differences between Fundrise's eREITand traditional REITs is the level of liquidity. Traditional REITs are traded on the stock exchange and have a mark-to-market valuation every minute of a trading day. This gives investors the ability to sell a part or all their REITswithin minuteswhen needed.
Fundrise's eREITs, meanwhile, are not listed on an exchange and are illiquid. These are investment vehicles that can't be quickly sold or traded for cash without a loss in value.
In addition, eREIT units often have a waiting period for redemption and an early-withdrawal penalty. This means you should only invest in Funrise's eREITs if you're looking for a long-term position. This can also be a problem if you need immediate access to cash for an emergency.
Do You Need Steady Income?
Federal law requires that all REITs distribute no less than 90% of their annual income to their unit holders. Fundrise’s eREITs are not excluded from this requirement. As a result, the company says it intends to make high-yield cash distributions at the end of every quarter. This can be great for investors who want to create an additional revenue stream. However, unlike corporate dividends, which are taxed at a low rate, REIT distributions are taxed like regular income. This is why REITs are sometimes called tax-inefficient investments, though how efficient they are depends on your specific tax situation.
In many cases, an investor may end up realizing higher net returns and a lower tax bill by investing in a stock that reinvests the majority of earnings instead of distributing them to shareholders.
How Risk Tolerant Are You?
Before you invest your money, you should develop your risk profile. Your age, income, and goals all factor into how much risk you're willing to take. Fundrise may promise consistent returns, but it may not match your risk profile.
Depending on your age and overall goals, an investment in eREITs might be worth the investment. Meanwhile,other investors might not be comfortable with the risk of these eREITs.Publicly traded REITs may be a much more suitable alternative for conservative investors like retirees, who want a reliable income while protecting their principal.
Fundrise, founded in 2012, has yet to experience a major downturn in the housing and real estate markets.
One important detail to note about Fundrise and its offerings is that the company entered the scene after the financial crisis. It has no experience with a major economic downturn, especially in the real estate market. It's an open question as to the outcome should other investors in its eREITS decide to pull their money from the company at the same time.
Why Do REITs Appeal to Investors?
REITs can provide a way for private investors to speculate in real estate without the need to own, manage, or finance properties. They typically offer attractive dividend yields and the potential for capital appreciation.
How Do You Invest in REITs?
Gaining investment exposure in REITs is often as simple as buying shares in any other company listed on a stock exchange. You can purchase shares through a broker, financial planner, or online trading platform. It's also possible to invest in REIT mutual funds and REIT exchange-traded funds.
What Are the Key Benefits of Investing in REITs?
The main advantages of having REITs in your portfolio are diversification, high dividend income, liquidity, and transparency due to SEC requirements. However, due diligence and a consultation with a financial advisor are highly recommended before making any major investment decisions.
What Are the Significant Risks of REITs?
Some of the most significant risks of REITs encompass market risk, interest rate sensitivity, and property-specific factors such as location and tenant turnover.
The Bottom Line
REITs and property investment platforms have made it easier for the average investor to include real estate investments in their portfolio. Like traditional REITs, Fundrise’s eREITs enable investors to benefit from income-producing properties.
While eREITs resemble traditional REITs, there are several differences between the two. Shares in Fundrise’s eREIT can only be redeemed at the end of each quarter. Additionally, the eREIT may be tax-inefficient for young investors who could benefit more by realizing capital gains rather than investment income. Conservative investors should also note that Fundrise is a relatively new player in the REIT business and, as such, may be riskier than other REITs because of its less extensive track record.
