Fundrise — An Alternative Investment
The Basics
Fundrise is a crowdfunding real estate platform that lets people invest in commercial real estate assets like multifamily homes, retail complexes and office buildings.
In simple terms, Fundrise pools in money from various investors and purchases these real estate assets and the investors get to benefit from the income and appreciation generated by these properties.
Investment Philosophy
Diversification is the core of Fundrise’s investment philosophy with each fund holding at a minimum of 8 to 10 assets. Fundrise has a very conservative investment approach when it comes to deploying funds in real estate assets.
The fund managers choose historically strong real estate markets where there is a strong demand for job and population growth. A vast majority of the assets or properties in their portfolio have relatively lower leverage, reducing the overall risk of the investment.
Who should Invest
Fundrise is a good platform for first time investors venturing into commercial real estate space. It would suit investors who are not looking for astronomical gains and are happy with an average 8% annual return without taking too much risk.
It is also ideal for someone who wants to be a passive real estate investor and also for people who are looking to reinvest & grow their cash flow from other income generating assets.
Getting Started
- Account Creation
Investors can start of by creating an account online with Fundrise (This is an affiliate Link). Fundrise allows three type of accounts — Individual, Joint & Entity and if you have a Living Trust established already, highly recommend opening an entity account in the name of Living Trust.
2. Funding the Account
Once an account is opened, the next step is to fund the account and select an account level. Fundrise has one of the lowest minimums required to get started in the crowdfunding arena. With as low as $500, one can get started on their platform and start investing.
However, as the invested amount increases up to $10,000, the number of fund options available to invest also increases, thus opening up more choices in terms of investing in to different geographies.
Below is a quick snapshot of their current account levels as of February 2021.
3. Building a Portfolio
Once an account is created and funded, next step is to select funds to build a portfolio. Diversification is the key to building a good portfolio in Fundrise. There are 2 main factors in selecting a fund in Fundrise.
· Income vs Growth
. Geographic Focus
Income Funds:
Income funds invest in debt portion of an investment. In simple terms, Fundrise lends money to the owner of these assets for a fixed return and usually for a fixed period of 2 to 3 years.
These funds usually do not bet on the appreciation of the invested asset and hence considered lower in risk and at the same time project a lower average rate of return of 8% per year. The income generated by these funds are usually paid as quarterly dividends.
Growth Funds:
Growth funds invest in the equity part of an asset and as such benefits from both the income generated from the asset and also from the appreciation of the invested asset. These funds carry a higher risk profile and hence project a higher average return of 10% to 12% per annum.
The income generated from these funds are distributed quarterly as dividends and the appreciation of the asset is reflected in the NAV of the fund.
There are also some funds which operates on hybrid model and contains both equity & debt assets within the portfolio.
Geographic Focus
Geographic area funds as the name suggest invests in specific real estate markets across the country. Investors who want exposure to specific markets can consider these funds which are currently spread out as East Coast, West Coast and Heartland funds. Most of the other funds provide exposure to the entire national market.
Following is an example of different fund options in Fundrise.
Quick Tip: Having a good mix of Equity and Debt position assets spread across different geographic regions will help in creating a well-balanced and diversified portfolio in Fundrise.
Portfolio & Performance Tracking
Fundrise is very transparent with their communication about the status of each asset in the portfolio and provides periodic updates about new investments within the fund as well.
Investors can also view the details of each individual asset within a fund and get an overview of their positions in different funds from the portfolio section.
Also, the returns are clearly tracked both by quarter and year for each invested fund within in the portfolio as well as a separate section for overall returns of the portfolio.
Dividend Reinvestment Option
Fundrise has a Dividend Reinvestment option to automatically reinvest the quarterly dividends back into the funds. There is one drawback to this option though, the dividends are not always reinvested in the same funds held by the investor and are invested into newer funds as well.
Over years, this results in investors holding several funds within their portfolio and makes it a bit cumbersome during tax season when one tax form is received for each fund held in the portfolio.
The workaround is to not enroll in the dividend reinvestment option and redirect the dividends manually into existing funds once a quarter.
Fees
Fundrise has relatively lower fees compared to publicly traded REITs. They have two types of fees, first is their advisory fee of 0.15% for managing our accounts in their platform and second is the asset management fees of 0.85% for the funds.
The low fees is also one of the reasons I believe why Fundrise is able to provide a decent return with their funds in spite of having a very conservative approach to investing.
Taxes
Fundrise provides a tax form for each fund invested in their platform. The tax form could either be a 1099 for income funds or a K1 for growth funds and are usually provided by mid-March.
Liquidity
Like most real estate investments, Fundrise should be treated as a long-term investment and as such Fundrise recommends to hold these investments for 5 years or longer to give your money sufficient time to grow. So any investment redeemed within the 5-year period incurs a penalty as shown in the table below.
Also, redemption requests are not always guaranteed and are dependent on market conditions to protect other investors in the fund.
Redemption requests are reviewed at the end of the quarter they are submitted in, so it can take a couple of months to redeem these investments depending on when the request is submitted.
Conclusion
Overall, Fundrise can be treated as a mutual fund of real estate assets. It is a good start for investors venturing into commercial real estate asset class to build a long-term portfolio.
Fundrise provides an easy-to-use platform with a minimum investment of $500 and very low fees. With a very conservative approach and a decent overall return, Fundrise should be a part of any long term investment portfolio.
Disclaimer:
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
