Fundrise vs. REITs: Which is Better for Real Estate Investing?

You can invest in real estate without buying property by taking advantage of online platforms and a type of investment called a real estate investment trust (REIT). With this approach, investors can buy properties using professional expertise and without the hassle of managing tenants, collecting rent, or unclogging toilets in the middle of the night.

In this comparison guide, we'll look at the differences between Fundrise and REITs in general. When comparing Fundrise vs. REITs, you need to understand that Fundrise is just one variation of a REIT, which are special purpose entities that concentrate on investing money in real estate, similar to how a mutual fund invests in stocks and bonds.

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Fundrise vs. REITs

Both Fundrise and REITs offer investors the opportunity to diversify their portfolios and invest in real estate with less money than they would need to buy property. Ultimately, I would recommend REIT investing unless you are very new to the world of real estate investing.

In my opinion, the main advantage of Fundrise is that it offers investors a simple option that relies on professional experience. Investors open an account and the professional managers automatically invest your money in a customized portfolio of real estate projects to meet your personal goals. The downside is that these are long-term investments, and it may be years before you can liquidate your investment without a penalty.

With REITs, there are so many to choose from that it can be overwhelming and difficult for a new investor to decide where to begin. However, the fees can be significantly lower than investing with Fundrise, and publicly traded REITs are much more liquid.

Fundrise is a real estate investment platform that allows investors to buy shares of non-publicly traded eREITs and eFunds that hold real estate projects.

When it comes to traditional REITs, there are many different types for investors to choose from. You can buy the stock of a public company that is operating as a REIT, a mutual fund or exchange-traded fund (ETF) that owns REITs and properties, or a closed-end REIT that is not publicly traded.

For this article, we're comparing Fundrise vs. a REIT ETF. We're choosing the Vanguard Real Estate ETF (NYSEARCA:VNQ) because we value low-cost investments, the reputation of Vanguard, and the ability to buy and sell shares quickly.

What both Fundrise and REITs do well

Both Fundrise and REIT investing offer some advantages and will help investors meet some of their goals.

• Access to real estate investing: The biggest advantage of investing with either Fundrise of REITs is the ability to get involved with real estate investing without a huge amount of money. For someone like me, who doesn’t have enough money to put down a huge down payment on a piece of property, both of these are good options to dip my toes into the world of real estate investing.
• Diversification: Maybe you already have a well-diversified portfolio of stocks and bonds. That’s fantastic and a lot more than most people have. However, I would recommend to most people to further diversify through real estate. This can be difficult without a large lump sum of cash, but Fundrise and REITs both allow you to diversify with relatively small amounts of money.
• Dividends: Both Fundrise and most REITs pay dividends, allowing you the option to either reinvest that money or earn a little supplemental income.

6 important differences between Fundrise and REITs

Although both investment choices allow you to invest in real estate, there are important differences between them. As mentioned above, REITs can take many different forms, so we will continue the comparison of Fundrise vs. REITs by using the Vanguard Real Estate ETF as our example.

1. Investment plans

One thing I like about Fundrise is that it gives customers some control over the investment strategy within its platform. You can choose between supplemental income, balanced investing, or long-term growth investment plans, and then Fundrise will adjust your portfolio accordingly.

In comparison, investors in the Vanguard REIT do not have any control over how their money is allocated. If you invest in VNQ, your money is invested like everyone else who owns this particular ETF.

Winner: Fundrise

2. Investments

Fundrise invests in a diversified portfolio of private real estate properties through eREITS and eFunds. Vanguard Real Estate ETF invests in REITs and companies that buy real estate.

In other words, Fundrise owns properties directly, while the Vanguard Real Estate ETF owns companies that buy real estate.

Winner: It’s a tie. This is a difference in strategy and good to know, but one is not inherently better than the other.

3. Minimum investment

Investors can get started with Fundrise for as little as $10. This is really appealing because it is significantly less than a lot of popular publicly traded REITs.

If you want to invest in a REIT, you can start with just one share through a brokerage account. How much you will pay depends on how much the REIT is trading for at the time of your purchase.

Winner: Fundrise

4. Fees

Fundrise charges a 1% annual fee, broken down into a 0.85% management fee and a 0.15% advisory fee. VNQ, on the other hand, has an expense ratio of just 0.13% (as of Sept. 12, 2024). This is significantly lower and a much more appealing cost to me.

However, you may incur fees through your brokerage when buying shares of the Vanguard Real Estate ETF.

Winner: Vanguard Real Estate ETF

5. Liquidity

Fundrise is meant to be a long-term investment, and your investments may not be immediately available if you need to withdraw money. This is something that would give me pause as an investor. At the very least, I would recommend only investing money with Fundrise that you feel confident you will not need for at least five years.

The Vanguard Real Estate ETF is publicly traded and therefore your money is available immediately after you sell shares through your brokerage account.

Winner: Vanguard Real Estate ETF

6. Taxes

You will receive a separate 1099-DIV or K-1 for each fund you are invested in with Fundrise. All these forms may increase the complexity and cost when filing your tax returns. With the Vanguard Real Estate ETF, you will simply receive a 1099-DIV for dividends and 1099-B whenever you sell shares.

Winner: Vanguard Real Estate ETF

Which investment strategy should you choose?

When choosing between Fundrise vs. REITs, think about your experience with real estate and your desired time horizon for the money you’re investing. Although both Fundrise and traditional REITs offer diversification and a relatively low investment to start, these two real estate investments are not equal.

In general, I recommend REIT investing over Fundrise because of the liquidity and the potentially lower fees. However, for those new to real estate investing, Fundrise may be a better option because it relies on the industry knowledge and expertise of its managers.

Just keep in mind that any money you invest with Fundrise may not be accessible for several years until the fund issues distributions, liquidates a property from its portfolio, or approves of your withdrawal. In general, real estate is considered an illiquid asset.

FAQs

Bottom line

When it comes to how to invest in real estate or even just how to invest money, investors who are interested in earning income from rental properties should consider Fundrise or REITs as a good alternative. Professional management, lower minimum investment, and diversification are just a few of the benefits of these real estate investments.

When comparing Fundrise and REITs, think about how much money you have to invest, when you'll need the money, and how these real estate assets will impact your tax planning.