Wouldn’t it be great if you could invest in commercial real estate and apartments without dealing with all the hassle of buying, improving, and re-selling real estate? You don’t have to be a millionaire to invest in these types of properties. You can now invest in large-scale real estate for as little as $500 with Fundrise.
Fundrise allows individuals to invest in commercial real estate online through an eREIT (Real Estate Investment Trust). Their crowdsourcing model sets them apart from a traditional REIT allowing the average investor to participate in deals for as little as $500.
The interesting thing about Fundrise is that it lets investors buy into private commercial and residential properties by pooling their assets through an investment platform. Since the eREIT is sold directly to investors cutting out middle-men, they can have fees lower than 90% of the competition.
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Here are some quick facts about Fundrise:
- A diverse portfolio of private real estate deals
- Minimum investment of $500 to $1,000
- Management and advisory fees add up to about 1%
- If you’re interested, I recommend you sign up for more information from Fundrise by clicking here.
|Property Types||Commercial, Residential, Single-Family|
|Regions Served||50 States|
Don’t you wish there was someone who could assist you in making the right kind of investments? Well, real estate companies like Fundrise exist to serve that purpose only. Interestingly, Fundrise is one of the few online real estate companies that let average investors make quality investments into private commercial and residential properties.
As you may realize, most of the online real estate platforms serve only accredited investors. It means they are only available to people who have a net worth of more than $1 million, excluding the value of the houses, and/or to the people who have an annual income of $200,000 as individuals ($300,000 for a couple). However, all the current products and services at Fundrise are available to non-accredited investors as well.
Now talking about the products, the real estate investment trusts, or REITs, are the main products of this real estate company. A REIT usually invests in real estate assets that produce a significant amount of income, either through the purchase and management of buildings or by holding mortgages.
Interestingly, REITs at Fundrise do not trade on a public exchange and are highly illiquid. It means there is no assurance of buyers for those investors who are willing to sell their shares. Fundrise generally offers a redemption program, but even that comes with some limitations.
Since Fundrise is an online service provider, it focuses on the online nature of the REITs (eREITs). However, that is not the only product they offer. There are eFunds as well. They allow the investors to use their pooled money to purchase land, build housing estates and then sell it to buyers and likewise.
There are risks involved with investing in non-traded REITs. However, the benefits are also quite rewarding. Interestingly, the average annual return for the Fundrise investments in the year 2017 was 11.44% (net of fees), as per the company.
As mentioned earlier, Fundrise generally deals with two kinds of portfolios in the domain of real estate investments.
An eREIT or electronic Real Estate Investment Trust is a professionally managed portfolio of commercial real estate assets, like hotels, apartments, shopping malls, office buildings etc. Quite similar to exchange-traded fund or mutual fund, this investment portfolio allows you to diversify across various real estate properties with minimum effort at a cost-effective price.
The eREIT at Fundrise is not very different from the conventional REITs. Generally, an investor purchases share of an eREIT, and that particular eREIT invests that money in the commercial real estate. Over the period, the eREIT generates money through property appreciation, interest on real estate debt, rent payments – all of which are distributed later among the shareholders.
Currently, Fundrise is offering a number of eREIT investment options, and each of them has something unique to offer:
The income eREIT primarily aims to offer consistent cash distributions to the investors. In fact, it focuses on making debt investments in commercial real estate assets that have the potential to generate constant cash flow. The current annualized dividend for this form of investment is around 10.5 percent, net of fees.
The Growth eREIT at Fundrise aims to acquire commercial real estate assets that can draw appreciation. This investment portfolio focuses on paying moderate dividends on a quarterly basis while ensuring a higher return is paid out at the investor’s end as a result of appreciation.
This offers long-term growth in the price per eREIT share. Currently, the annualized dividend for this form of investment is approximately 8 percent, net of fees.
West Coast, Heartland, and East Coast eREITs
As you can guess, each of these eREITs is based on specific geographical locations. These investment options offer a perfect balance between income and growth, making them the perfect choice for investors.
This investment option targets commercial real estate assets situated in the metro areas like San Francisco (CA), Los Angeles (CA), San Diego (CA), Seattle (WA), Portland (OR), etc.
This location-based investment option marks the commercial real estate assets in the metro areas like Houston (TX), Dallas (TX), Austin (TX), Chicago (IL) and Denver (CO).
This option targets the metro areas in the East Coast, including New York, New Jersey, Massachusetts, North Carolina, South Carolina, Florida, and Georgia, as well as Washington (DC), and Philadelphia (PA).
Each of these eREITs has an annual dividend of around 8.5 percent currently.
eFund is a diversified, professionally managed investment portfolio of residential real estate assets, like townhomes, single-family detached homes, condominiums, etc. Just like the eREIT offerings, you can also choose eFunds to invest in various groups of residential real estate assets.
At Fundrise, you get three different choices for the eFund option. Each of these eFund choices differs by geographical locations. All three of these options – Los Angeles eFund, Washington (DC) eFund, and the National eFund aim to acquire residential properties for the development of For-Sale Housing.
The primary objective of these eFund options is to target debt and equity investments in homes, condominiums, and townhomes in each of these geographical locations. Fundrise aims to build and sell the residential housing properties that may help generate revenues for the eFund shareholders.
Fundrise has adopted an interesting way of evaluating real estate properties that allow them to cherry-pick the potentially valuable properties. They follow the strategy of “value investing” which lets them purchase real estate assets with lesser acquisition cost and comparatively higher replacement cost or intrinsic value.
In this aforementioned approach, the main objective is to acquire a real estate property at an attractive price and then improve its value through renovation, strategic positioning and partnerships. After adding value to the existing property, Fundrise generates revenue from the particular property through interest payments, profits from a potential sale and rental income.
While choosing a property for investment, Fundrise checks four crucial areas to make the final call:
- Economic Analysis: As the name gives away, this is a thorough economic study that includes return sensitivity checks and several other stress tests to ensure the viability of the particular project.
- Loan Sponsor Analysis: In this analysis, the loan applicant needs to pass a credit and background check. This is carried out in order to get a decent idea about the person, his/her prior loans, track record, and experience.
- Property Analysis: In order to evaluate the property, Fundrise conducts a review of the project budget and its schedule, cost basis, and appraisal and the estimated property performance.
- Market Analysis: The properties that are shortlisted for acquisition by Fundrise go through a supply-and-demand analysis, comparison of the local properties, and on-site reviews.
It is because of this strict evaluation process that Fundrise is one of the successful real estate companies in the market. Interestingly, Fundrise reviews more than 2500 prospective real estate deals every year. However, only 1 percent of those deals are approved for investments.
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The basic idea of creating the eDirect platform was to serve as a fully automated investment solution that allows the users to evaluate and invest in private-market real estate assets. It also provides significant support with accounting and reporting through the online dashboard.
Once you try investing through Fundrise, your portfolio will be compared against a variety of eREITs and eFunds to see which strategy is going to suit your profile. Fundrise has three different strategies to offer. Each of these strategies varies depending on the underlying real estate holdings.
This particular income portfolio is ideal for the investors that are searching for an additional option for passive income. This supplemental income involves a huge allocation to eREITs that produce significant incomes. Its performance is primarily driven by annual dividends.
|Investment||Allocation of Percentage|
|East Coast eREIT||18.22%|
|West Coast eREIT||18.22%|
|Los Angeles eFund||4.44%|
|Washington DC eFund||4.44%|
This form of a balanced portfolio is meant for investors who want to maximize diversification. Interestingly, it also offers an equal allocation across all forms of eREIT and eFund investments. In fact, its performance is driven by the combination of dividends and appreciation.
|Investment||Allocation of Percentage|
|East Coast eREIT||14.29%|
|West Coast eREIT||14.29%|
|Los Angeles eFund||14.29%|
|Washington DC eFund||14.29%|
If an investor wants to maximize his/her total return over time, this investment portfolio is the perfect match for them. This option involves a larger allocation to growth eREIT and a smaller allocation to income eREIT. Quite similar to the balance investing option, its performance is also driven by appreciation and dividends.
|Investment||Allocation of Percentage|
|East Coast eREIT||12.89%|
|West Coast eREIT||12.89%|
|Los Angeles eFund||17.78%|
|Washington DC eFund||17.78%|
The Fundrise platform has a great user experience to offer, regardless of which portfolio you choose. As you log on to your Fundrise account, you will find your investment dashboard, where you can learn about your account balance as well as the detailed overview of the real estate holdings you have.
Fundrise explains the risks involving each of the investments quite explicitly with colorful graph and letter ratings. In fact, the platform also uses a grading system, ranging from A to E, which allows the investors to compare and evaluate various assets across their particular portfolio. The rating system at Fundrise is supposed to be objective and driven by facts and data about investments.
The dashboard also allows you to have a better idea about each investment as it offers a professionally designed invest summary for each option. As you navigate through the page, you can even view the exact location of the property apart from the detailed investment summary. The whole platform is designed to provide users with a rich experience.
Since Fundrise banks on investor capital to make most of the deals, it usually prefers to collaborate with long-term investors, not the individuals who look for frequent trades. This explains why the private-market approach of the company is fairly illiquid.
Here, the five-year liquidity schedule works in the following manner:
|Holding Period from Date of Settlement||Effective Redemption Price (in the percentage of per-share redemption price)|
|90 days – 3 years||97%|
|3 – 4 years||98%|
|4 – 5 years||99%|
Fundrise allows its investors to liquidate their shares on a quarterly basis. However, the redemption value depends on the holding period as mentioned above. So if you are planning to sell your Fundrise shares before the completion of the 5-year holding period, you should be ready to experience a small amount of loss during the redemption.
As an investor, you are supposed to receive income from an eREIT and/or eFund, depending on your Fundrise portfolio. Interestingly, both these forms of income are tax-inefficient.
- eREITs: As the law, dictates, (e)REITs must distribute more than 90 percent of all earnings to the shareholders. The dividend payments from Fundrise are, however, taxed as ordinary income. Also, the dividend payments are reported on tax form 1099-DIV every year.
- eFunds: Since the underlined tax structure is a partnership, the income from eFunds is taxed as ordinary income. In fact, any income that you receive is going to be reported on tax form K-1.
Fundrise allows you to open a taxable brokerage account quite easily. However, the income will be taxed like any other ordinary income during the year it is received. You can easily reinvest any dividends to buy additional shares of each investment through Fundrise Dividend Reinvestment Program (DRIP). However, the taxation remains unchanged. Whether you take the dividend as cash or reinvestment, it is always taxed during the year it is received.
Funrise also allows its investors to open an individual retirement account (IRA) through Millennium Trust Company that protects all dividends from taxation. The IRA charges an annual fee of $75 per Fundrise investment held in the account.
Fundrise charges only 1 percent of the assets under their management on a yearly basis. That 1 percent is broken down into two parts:
- Investment Advisory: This segment covers automated distributions, investor relations, automatic asset rebalancing, composite tax reporting – basically, everything that falls under the digital platform. The fee amounts to 0.15% per year.
- Asset Management: This particular segment oversees the real estate properties in the portfolio and covers the ongoing operations like accounting, financing, construction, marketing of all properties, sales, zoning and much more. The fee for asset management amounts to 0.85% per year.
One of the good things about Fundrise offerings is that there’s no transaction fee or sales commission applied to them. Each and every reported dividend and return is net of fees.
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Since its inception, Fundrise has made more than 100 real estate investment deals which accumulate the net worth of $1.2 billion (approximately). Interestingly, these investments have also provided investors with a return of $20 million, which is undoubtedly an impressive figure.
As mentioned previously, Fundrise invests in private-market real estate offerings. And quite contrary to the publicly-traded REITs, Fundrise demonstrates an approach that is quite similar to a private equity fund. It originates, underwrites, negotiates and finally closes on debt and equity investments.
Fundrise, as it appears, expect their private-market dealings to generate a continuing return premium. This practice certainly puts them way ahead of their publicly traded alternatives.
Pros and Cons of Investing in Fundrise
Like any other service out there in the market, even the Fundrise products and services also have a mixture of benefits and disadvantages. What makes Fundrise stand out in the crowd is its array of features that offers the users a seamless and rewarding experience.
Is Fundrise Legit?
As mentioned earlier, like every other service provider on the internet, Fundrise also has its own share of pros and cons. While some of the cons may be worrisome, most of its pros seem quite impressive and we would say Fundrise is a legit real estate investing option.
Even though it is a new company, it has already made its name in the market with unique features and services. So it is up to the investors to how they are going to utilize this platform to find potential real estate properties and multiply their capital through smart investment plans.
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