Investing in real estate might seem like something best left to the pros. After all, you’ve got the stock and bond markets to invest in. That should keep your portfolio diversified enough, right? Maybe not, according to Fundrise. In regards to its service, it says “it’s “the piece of your investment portfolio you didn’t even know was missing.”
As you’re looking for ways to earn money or prepare for retirement, you might want to consider what Fundrise brings to the table and how it could help you reach your goals. After all, real estate can be one of the most lucrative investment options. And while it may not be the cure-all to your investment needs, it’s an option worth considering if you're interested in building a diversified portfolio of investments.
So, let’s find out how Fundrise works and how to invest money using this platform.
- What is Fundrise?
- How does Fundrise work?
- Who can use Fundrise?
- How much can you earn with Fundrise?
- Maximizing your earnings with Fundrise
- How to stay safe investing with Fundrise
- Common questions about Fundrise
- How to sign up for Fundrise
- Other investments to consider
What is Fundrise?
Fundrise is a financial tech company based out of the Washington, D.C. metro area that operates an SEC-registered crowdfunded real estate investment platform. Founded in 2010 by a group of long-time investors with the belief that technology could provide a better way for people to invest in real estate, Fundrise was quickly met with doubt. There’s no way to lower costs and broaden the access to investing in real estate, skeptics said.
But after a year of working through regulations, Fundrise emerged on the other side as a new, “real alternative to investing in the stock market.” It gave people a new option for investing in high-quality real estate deals without having to struggle with all the high costs associated with the conventional real estate industry.
Today, more than 500,000 members use Fundrise, investing in nearly $2 billion worth of real estate across the country. Members saw an average annual return of 9.47% in 2019.
How does Fundrise work?
When you invest with Fundrise, your funds are allocated across a diversified mix of Fundrise’s “eDirect” offerings, known as eREITs and eFunds — both of which are professionally managed portfolios of private real estate assets located throughout the United States.
What’s an eREIT?
An eREIT, short for electronic real estate investment trust, is a type of online investment available exclusively on Fundrise. An eREIT focuses solely on commercial real estate assets, so you’re investments will be in properties such as apartments, hotels, shopping centers, and office buildings. Similar to an ETF (exchange-traded fund) or mutual fund, eREIT investments give you the chance to easily diversify across many properties at a relatively low cost. Fundrise offers two types of eREITs for its real estate investors:
- Growth eREITS: Portfolios of commercial real estate properties that are likely to appreciate in value.
- Income eREITS: Portfolios of debt investments — generally, rental properties in large cities that are generating solid cash flow from rental income, providing an upside for investors.
Unlike other REITs, Fundrise eREITs have no brokers or selling commissions. Since eREITs cut out the middlemen and are sold directly to the investor, they also have much lower fees compared to other REITs. What does that mean for you, the investor? You pay significantly less to invest your money in real estate.
One thing to keep in mind, though, is that since eREITs are non-traded — meaning they aren’t publicly traded on the stock exchange — they generally have less liquidity than REITs, which are publicly traded. Said simply, this means cashing out your eREITs is a little more difficult. As with any investment, make sure to do your due diligence before you invest.
And an eFund?
An eFund is similar to an eREIT but focuses exclusively on residential real estate assets, such as single-family homes, townhomes, and condominiums.
Traditionally, when you wanted to invest in the housing market, the primary opportunity was via publicly traded homebuilders — think Toll Brothers or D.R. Horton, both companies you can buy stock in. But as Fundrise points out, these companies are subject to “double taxation,” which makes them a less-efficient investment than Fundrise’s eFunds. Double taxation is when a corporation is taxed on its earnings (profits), and shareholders are also taxed on the dividends received from those earnings.
Unlike those residential homebuilders, which are publicly traded and structured as corporations, Fundrise’s eFunds are structured as partnerships, so they’re not subject to the same double taxation. In other words, you and every other investor in Fundrise are considered partners with Fundrise. So any cash distributions you receive are not considered income and won’t be subject to double taxation.
Fundrise offers four investment plans: the Starter Portfolio, Supplemental Income, Balanced Investing, and Long-Term Growth. Each of these portfolios offers investments in a combination of the Fundrise eREITs and eFunds. Investments are subject to an annual asset management fee of 0.85% and an annual advisory fee of 0.15% (as of Sep. 1, 2020)*. While Fundrise offers relatively low minimum investments and low fees, it's important to review Fundrise's offering circulars to learn about other fees associated with certain investments.
|Portfolio||Number of active projects||Minimum investment||Fees
(as of Sep. 1, 2020)*
|Starter||Five to 10||$500||
The Supplemental Income, Balanced Investing, and Long-Term Growth plans all also offer the ability to opt into a “plus” plan. This combines the benefits of the standard plan with greater diversification that aims to minimize tax liability and provide higher potential returns. Fundrise does this by diversifying into specialty funds, such as tax-advantaged eFunds.
Who can use Fundrise?
Currently, any U.S. resident over the age of 18 can invest in real estate with Fundrise. You do not need to have a certain net worth or be an accredited investor to use the platform. With four different portfolios to choose from, there’s an option suitable for most everyone.
How much can you earn with Fundrise?
As the saying goes, past performance is not indicative of future results. However, over the last five years — from 2014 to 2018 — Fundrise investments saw average annualized returns of 12.25%, 12.42%, 8.76%, 11.44%, 9.11%, respectively. To compare, the S&P 500 — a benchmark for U.S. stocks — saw average returns of 11.39%, -.073%, 9.54%, 19.42%, and -6.24% for the same years.
As an investor with Fundrise, you can earn passive income through a combination of interest payments, property income, and the potential appreciation in value of the properties themselves. The timing and exact amount of your return will vary depending on your selected plan and the investments within your portfolio.
It’s important to keep in mind that Fundrise investments are illiquid (not easily converted to cash) in nature and are designed to be long-term investments held for a least a few years. According to Fundrise, “[E]ach eREIT and eFund plans to look for opportunities to provide liquidity to its investors after approximately five years of operations.” However, Fundrise does have a redemption plan where you can sell shares monthly. You’ll have to wait a minimum of 60 days after submitting your request to redeem your shares, though. Also, early withdrawals may be subject to a “liquidity penalty” of up to 3% of the proceeds, depending on the length of time you owned the shares.
You can expect potential returns for your investments to be paid out either via quarterly distributions or, for any appreciation in asset value, at the end of the asset’s investment term (which is typically at least five years). All distributions will be deposited right into your bank account unless you opt into the Fundrise Dividend Reinvestment Program (DRIP). This will reinvest any dividends earned back into open offerings — without fees — instead of being deposited into your bank account. Be aware that these reinvested dividends are taxed the same as if you actually received the cash.
Maximizing your earnings with Fundrise
Your potential earnings with Fundrise will vary depending on your portfolio and the investments within it. But there are a few things you can do to help maximize your earnings. Consider these tips before jumping in:
- Look at your options: Fundrise doesn’t offer one catch-all portfolio but rather a handful of options tailored to your specific investment style. Understand each of these plans before you begin so you know you’re choosing the best option for your situation.
- Reinvest your dividends: It might be tempting to take your earnings and do with them what you want, but reinvesting your dividends puts that money straight back into open offerings with Fundrise. There are no fees to reinvest your dividends.
How to stay safe investing with Fundrise
Because of the nature of the investments, Fundrise eREITs and eFunds have lower correlation to the broader market and may therefore offer greater protection from market volatility.
Fundrise doesn’t invest in just any real estate, either. The company’s real estate team only goes after investments that can potentially earn income and safeguard against losses. This is done by investing in either “senior secured debt” — which is among the first debt to be paid back — and “mezzanine debt” — which is the next debt in line to be paid back. So you can rest easy knowing your money is only going toward sound investments, not the riskier forms of real estate investment. Fundrise also uses bank-level security to ensure your information is safe while using the platform.
To give you peace of mind when getting started, the Starter Portfolio comes with a 90-day satisfaction period, where Fundrise will buy back your investment amount at the original price if you’re not satisfied.
Common questions about Fundrise
Is Fundrise a safe investment?
Fundrise eREITs aren’t publicly traded on the stock exchange, so they experience less fluctuation and are less correlated to the stock market. So if the stock market tanks, your eREIT might not be as quick to follow suit.
However, as with any investment, there’s always risk involved. It’s important to keep in mind that there’s no guarantee you’ll earn money — and there’s always the potential for loss.
Can you lose money on Fundrise?
Yes, so it’s important not to invest with funds you can’t afford to lose. While the goal with any investment is to make money, there’s no guarantee you won’t suffer any losses, either.
Does Fundrise pay dividends?
Fundrise pays quarterly dividends to investors. These are the payments of your share of the income that your investment generated during the prior quarter.
How is Fundrise taxed?
Depending on your portfolio, you may receive income from your eREIT or eFund investment (or both).
REIT dividends are categorized either as ordinary dividends or qualified dividends (depending on the operations of your investment). Ordinary dividends are taxed as ordinary income, while qualified dividends are taxed at the capital gains tax rate. This is reported on tax form 1099-DIV each year.
Income from eFund investments is taxed as ordinary income as well, as the underlying tax structure is a partnership. Any income you receive from your eFund investment will be reported on tax form K-1.
Aside from dividends, if the net asset value of your investment appreciates, you’ll have to pay capital gains taxes as well. However, you won’t pay those taxes until you redeem your shares.
What is the minimum investment for Fundrise?
The Fundrise platform has three levels to choose from, and each has its own minimum requirement. However, the absolute minimum to get started is $500, and that’s to invest in the Starter level.
There’s also a minimum of $100 for any subsequent funds added to your account.
How to sign up for Fundrise
If you want to sign up for Fundrise, the process is just as simple as Fundrise makes investing in real estate. You can open a Fundrise account on Fundrise.com or through the Fundrise app.
To get started, you’ll need to choose one of the portfolios we described earlier: the Starter Portfolio, Supplemental Income, Balanced Investing, or Long-Term Growth. Each one gives you a description of the type of investor it’s best for, so you’ll get a good sense of which is right for your situation.
Then you’ll need to provide personal information like your name, email, Social Security number, and citizenship and residency. You can also choose between an individual, joint, or trust account as well. To finish, set up funding for your account by linking to your bank.
Other investments to consider
Wealthsimple, for instance, is an online investment manager that focuses on ETF investments — primarily, low-cost index funds. There are no account minimums, and Wealthsimple handles many of the complexities of investing, such as portfolio rebalancing, dividend reinvestment, and tax-loss harvesting. You can expect to pay 0.5% in fees on investments up to $100,000 and 0.4% on investments over $100,000.*
If you’re looking for a platform that makes investing approachable to new investors, you may want to consider Stash. With plans ranging from $1 to $9 per month, you can start investing with as little as $5. Stash also provides options for banking where you can get rewarded with stock on your normal day-to-day spending.
*All rates and fees are accurate as of September 1, 2020