Table of Contents
- Fundrise Real Estate Investments
- Underwriting and Evaluating Real Estate Properties
- FundRise eDirect Real Estate Platform
- Reviewing Your Fundrise Investments
- Fundrise Liquidity
- Fundrise Taxation
- Fundrise Performance
- Fundrise Fees
- Fundrise Review Summary
When first established in 2012, Fundrise offered individual real estate deals. Developers could apply for loans through Fundrise, and if approved, individual investors could invest in each project directly.
This structure had a major drawback – all investors had to be accredited. Non-accredited investors (most people) were unable to participate in any real estate deals.
Fundrise recently overhauled their entire investment platform. Instead of focusing on individual real estate projects, Fundrise is now offering proprietary “eDirect” real estate investments in accordance with Regulation A+ of the JOBS Act. This regulation allows Fundrise to raise up to $50 million (per investment offering) directly from investors, whether accredited or not.
Fundrise Real Estate Investments
The available Fundrise real estate investments include eREITs and eFunds.
An eREIT (electronic Real Estate Investment Trust) is a professionally managed, diversified portfolio of commercial real estate assets, such as apartments, hotels, shopping centers, and office buildings located across the country. Similar to an ETF or mutual fund, an eREIT allows you to diversify across many real estate properties at a relatively low cost with minimal effort.
The Fundrise eREIT(s) function much like traditional REITs. Investors buy shares of the eREIT, and the eREIT uses that money to make investments in commercial real estate. The eREIT then earns income from property appreciation, rent payments, and interest on real estate debt, which is later distributed to shareholders.
An eFund is a professionally managed, diversified portfolio of residential real estate assets, such as single-family detached homes, townhomes, and condominiums tailored to first-time, move-up and active adult homebuyers. Similar to the eREIT offerings, eFunds allow you to invest in a diversified group of residential real estate assets.
Fundrise is now offering several different eREIT and eFund investments, which are discussed below.
The Fundrise Income eREIT is focused primarily on making debt investments in commercial real estate assets that generate steady cash flow.
To date, the income eREIT made 16 investments in properties located throughout the United States.
The current annualized dividend is approximately 10.5% (net of fees).
The Fundrise Growth eREIT is focused on acquiring commercial real estate assets that have the potential for appreciation. The goal is to provide moderate income while offering the potential for long-term growth in the price per eREIT share.
The Growth eREIT owns seven large apartment complexes located throughout the United States with more than $10 million in renovations underway.
The current annualized dividend is approximately 8% (net of fees).
West Coast, Heartland, and East Coast eREITs
These eREITs provide a balanced approach to investing, with the overall investment objective including both income and growth.
Each of these eREITs is based on geographical location:
- West Coast: Aims to invest in commercial real estate assets located in the Los Angeles, CA, San Francisco, CA, San Diego, CA, Seattle, WA and Portland, OR metro areas.
- Heartland: Aims to invest in commercial real estate assets located in the Houston, TX, Dallas, TX, Austin, TX, Chicago, IL, and Denver, CO metro areas.
- East Coast: Aims to invest in commercial real estate assets located in Massachusetts, New York, New Jersey, North Carolina, South Carolina, Georgia, and Florida, as well as the Washington, DC, and Philadelphia, PA metro areas.
The current annualized dividend for each eREIT is approximately 8.5% (net of fees).
Los Angeles, Washington D.C., and National eFunds
Fundrise offers three eFunds, which differ by geographical location. Each eFund plans to acquire residential properties for the development of For-Sale Housing. The primary goal is to target debt and equity investments in homes, townhomes, and condominiums in each geographical location. Fundrise plans to develop and sell the residential housing properties, creating revenue that will be distributed to eFund shareholders.
Investment performance is not yet available because each eFund has made limited investments to date. I will update this review when data is made public.
Underwriting and Evaluating Real Estate Properties
Fundrise follows a “value investing” strategy, meaning they only purchase real estate assets if the acquisition cost is less than the intrinsic value (i.e. replacement cost).
The goal is to acquire real estate properties at an attractive price and then add value through renovation, partnerships, and strategic positioning. After improving the existing property, Fundrise then collects revenue through interest payments, rental income, or profits from a potential sale.
Each Fundrise investment property must meet strict underwriting standards in four key areas:
- Loan Sponsor Analysis: Each loan applicant must pass a credit and background check, and must submit detailed information about prior loans, track record, and experience.
- Economic Analysis: Fundrise runs a break-even economic analysis, including return sensitivity checks and other stress tests to determine project viability.
- Property Analysis: Fundrise reviews the project budget and schedule, appraisal and cost basis, and expected property performance.
- Market Analysis: Each property undergoes a supply-and-demand analysis, on-site reviews, and comparison to other local properties.
As a result of this process, Fundrise reviews more than 2,500 potential real estate deals each year. Of those, approximately 1% are approved for investment.
FundRise eDirect Real Estate Platform
The Fundrise eDirect platform is designed to be a fully automated investment solution, allowing users to review and invest in private-market real estate assets while providing comprehensive accounting and reporting through the online dashboard.
When you invest through Fundrise, your portfolio is allocated across a diversified mix of eREITs and eFunds.
Fundrise offers three different diversified strategies to choose from, and each strategy differs with respect to the underlying real estate holdings.
1) Supplemental Income:
Designed for investors who are looking to create an additional passive income stream, the income portfolio includes a large allocation to income producing eREITs.
The projected performance is driven largely by annual dividends.
2) Balanced Investing:
Designed for investors who are looking to maximize diversification, the balanced portfolio includes an equal allocation across all eREIT and eFund investments.
The projected performance is driven by a combination of dividends and appreciation.
3) Long-term Growth:
Designed for investors who are looking to maximize their total return and who many comfortable with moderate volatility, the growth portfolio includes a larger allocation to the growth eREIT and eFunds (and a smaller allocation to the income eREIT).
The projected performance is driven by appreciation and dividends.
Reviewing Your Fundrise Investments
Once you establish your desired portfolio, the Fundrise platform offers an incredible user experience.
I have investment accounts scattered across multiple financial institutions, and I can confidently say that the Fundrise user experience is the best that I have found.
When you log into your Fundrise account, your investment dashboard is displayed. Here you will find your account balance and a detailed overview of your real estate holdings.
The colorful graph and letter ratings are designed by Fundrise to explain the risk of each investment.
Fundrise uses a rating system ranging from A to E, allowing investors to easily compare different assets across their portfolio. The Fundrise rating system is meant to be objective and is driven by factual information about the investment — for example, whether an investment is “stabilized” or undergoing “ground up development.”
Within your dashboard, you can select any of the investments to read a professionally designed investment summary.
For example, when I select the Jacksonville, FL apartment complex the following information is displayed:
If you continue scrolling down the page, you can read a detailed investment summary and view the exact location of the property.
The whole experience is intuitive, informational, and beautifully designed.
Liquidity is the ability to turn an investment into cash, and the Fundrise private-market approach is fairly illiquid.
Because Fundrise relies on investor capital to make deals, the company wants to partner with long-term investors, not individuals looking to speculate or trade frequently.
Fundrise provides a five-year liquidity schedule.
Investors can liquidate their shares on a quarterly basis, but the redemption value varies by holding period. If you expect to sell your Fundrise shares in the first five years, you will take a small loss during the redemption.
Depending on your Fundrise portfolio, you might receive income from an eREIT and/or eFund. In general, both forms of income are tax inefficient.
By law, (e)REITs must distribute more than 90% of all earnings to shareholders. The dividend payments from Fundrise are taxed as ordinary income and are reported on tax form 1099-DIV each year.
Income from eFunds is also taxed as ordinary income because the underlying tax structure is a partnership. Any income that you receive will be reported on tax form K-1.
Investors can easily open a taxable brokerage account through Fundrise, but all income will be taxed as ordinary income in the year received. The Fundrise Dividend Reinvestment Program “DRIP” allows you to automatically reinvest any dividends to purchase additional shares of each investment, but taxation remains the same. Dividends are always taxed in the year received, whether taken as cash or reinvested.
Fundrise investors can also choose to open an Individual Retirement Account (IRA) through Millennium Trust Company, where all dividends would be sheltered from taxation. The IRA carries a $75 annual fee per Fundrise investment held in the account.
To date, Fundrise has completed more than 100 real estate investment deals worth an approximate $1.2 Billion. These investments have returned almost $20 million to investors.
In the chart below, you will see the cumulative dollar return and the annualized returns.
The annualized returns are net of fees. This is the actual return paid to investors.
Fundrise invests in private-market real estate offerings. Unlike publicly traded REITs, which act primarily as holding companies for assets that have already been acquired, Fundrise is similar to a private equity fund that originates, underwrites, negotiates, and closes on debt and equity investments.
This is an important distinction because Fundrise expects their private-market dealings to generate an ongoing return premium, allowing the company to outperform publicly traded alternatives. For more information on this topic, you can read the latest Fundrise research paper.
Fundrise charges 1% of assets under management annually. The fee is broken down as follows:
- Investment Advisory Fee: 0.15% annually
- Asset Management Fee: 0.85% annually
The advisory fee covers the digital platform, including automated distributions, composite tax reporting, investor relations, and automatic asset rebalancing.
The asset management fee covers the ongoing operation and oversight of the real estate properties in your portfolio, including the accounting, construction, financing, zoning, sales, and marketing of all properties.
There are no transaction fees or sales commissions applied to any Fundrise offerings. All reported dividends and returns (shown in a previous section) are net of fees.
Fundrise Review Summary
If you are looking to invest in private-market real estate deals from the comfort of your home, Fundrise is a great option. The platform is intuitive and easy to navigate, and the investment performance has been impressive to date.
To get started, create a Fundrise account and design your personalized portfolio.
Disclosure: I have several thousand dollars invested in most of the eREIT offerings covered in this review, and have no plans to sell my shares.