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

A comparison of Fundrise vs. REITs that will show you how to build passive real estate income with as little as $500.
Last updated Sep 29, 2020 | By Lee Huffman
Fundrise vs. REITs

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Real estate investing doesn't actually require buying a building or taking out a loan. You can invest in real estate without buying property by taking advantage of online platforms and a type of investment called a REIT (real estate investment trust). 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 how to invest money in real estate, similar to how a mutual fund invests in stocks and bonds.

So how do you know if using Fundrise to invest would be a good strategy for you? Keep reading to learn whether Fundrise vs. REITS is the better real estate investment for your situation, and whether investing is just a personal finance goal or you have a dream to become a realty mogul.

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Fundrise vs. REITs

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 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 because we value low-cost investments, the reputation of Vanguard, and the ability to buy and sell shares quickly.

Fundrise Vanguard Real Estate ETF
Minimum investment $500 One share. Fractional shares if your brokerage account allows it.
Management fees 1% annual fees (as of Aug. 27, 2020) .12% annual expense ratio (as of Aug. 27, 2020)
Asset classes Real estate Stocks of REITs and companies that buy real estate
Account types available
  • Individual
  • Joint
  • Entity
  • Trust
  • IRA
  • Individual
  • Joint
  • Entity
  • Trust
  • IRA
  • Self-directed brokerage accounts within company retirement accounts
Features
  • Diversified portfolio
  • Owns real estate properties
  • Offers three investment objectives
  • Low-cost index fund
  • Diversified portfolio
  • No minimum investment
  • Liquidity like a stock
  • Vanguard's reputation
Distributions
  • Quarterly dividends
  • Return of capital
  • Quarterly dividends
  • Return of capital
Taxes
  • Separate 1099-DIV and K-1 for each fund you invest in
  • 1099-DIV for dividends and capital gains
  • 1099-B for sale of shares (if applicable)
Best for...
  • Long-term investors who want a diversified real estate portfolio customized to their needs.
  • Long-term investors who want liquidity and simplicity while tracking a low-fee REIT index

Fundrise: what it is and how it works

Real estate crowdfunding platforms like Fundrise allow individual investors to participate in larger real estate transactions normally reserved for accredited investors. Becoming an accredited investor requires a lot more money than the average investor has. Instead, Fundrise participants can invest in a low-cost, diversified portfolio of institutional-quality real estate without the time, effort, and money required to buy multiple individual properties.

Through the Fundrise platform, users can start investing in a diversified pool of real estate properties through the Fundrise Starter Portfolio with as little as $500. Fundrise offers three additional account levels depending on your goals and how much money you want to invest.

Account level Investment minimum Features
Starter Portfolio $500
  • Low initial investment
  • Diversified portfolio
  • Upgrade to Core at no cost
Core $1,000
  • Dividend reinvestment
  • Auto-invest
  • IRA account support
  • 3 months of advisory fees waived for referrals
Advanced $10,000
  • Ability to allocate directly to most funds
  • Access to more sophisticated strategies
  • 6 months of advisory fees waived for referrals
Premium $100,000
  • Priority access to investments
  • Exclusive opportunities to private funds
  • 12 months of advisory fees waived for referrals

When you invest with Fundrise, your money gets invested into different funds that acquire commercial real estate. Your money is pooled with other investors to fund these real estate deals, similar to how Kickstarter might fund the launch of a product. Each of these funds are known as a Fundrise eREIT or a Fundrise eFund, depending on the structure of the investment.

Fundrise identifies ideal properties, acquires them, and manages the properties on your behalf. You simply invest your money and let the experts lend their expertise. This is truly a passive real estate investment, unlike owning individual rental properties or becoming a wholesaler.

Fundrise Benefits

  • Build a portfolio investing in real estate without being a landlord
  • Invest in million-dollar deals without writing million dollar checks
  • Lowest-ever $500 minimum investment plus special offers

Who can invest in Fundrise?

Fundrise is open to all U.S. residents who are 18 years or older. With a minimum required investment of $500, investing in a well-diversified portfolio of real estate properties through Fundrise is open to everyone.

Investors may use a variety of account types to invest with Fundrise, such as:

  • Individual account
  • Joint account
  • Entity account
  • Trust account
  • IRA

What kind of real estate do they specialize in?

Fundrise investments offer two different types of real estate properties: eREITs and eFunds. eREITs invest in commercial properties, such as office buildings and large apartment buildings. eFunds purchase residential real estate that they can rent out and possibly sell at a later date.

Do you need to be an accredited investor?

No, you do not need to be an accredited investor to invest with Fundrise. The only requirement is that you are a U.S. resident who has at least $500 to invest in one of its funds.

How do you get started with Fundrise?

To sign up with Fundrise, you'll need to provide some personal information for identification and tax purposes, select your investment objective, and fund your account. This is simple to do and can all be done online. Fundrise’s mobile app is among the best investment apps that allows you to start investing and monitor the growth of your portfolio.

Pros and cons of Fundrise

Although there are many benefits to investing with Fundrise, there are some downsides.

Pros Cons
  • Low minimum investment required
  • Open to all U.S. residents 18 and older
  • Account is diversified from day one
  • Benefit from company expertise
  • Completely passive income
  • Regular quarterly dividends
  • Dividends can be reinvested
  • Investments are not liquid
  • Expenses are 1% per year
  • May receive numerous tax documents each year
  • Penalties for early withdrawals

REITs: what they are and how they work

REIT is an abbreviation for real estate investment trust. A REIT is a company that owns and operates income-producing properties on behalf of real estate investors. These real estate investments generate income that is distributed to investors as dividends.

For tax purposes, a REIT must pass at least 90% of its taxable income to shareholders annually and meet other criteria. By qualifying as a REIT, it can deduct all shareholder dividends from its income to reduce its taxable income to zero. The dividends that shareholders receive are taxed as ordinary income; therefore, it makes sense to invest in REITs through a tax-advantaged account like an IRA or 401(k).

Who can invest in a REIT?

The ability to invest in a REIT depends on which REIT you are focused on. REITs that are stocks, ETFs, and mutual funds can be purchased by anyone with a brokerage account. You are not typically required to be accredited and the minimum investment amounts vary. For REIT stocks and ETFs, you can usually start with one share. Mutual funds may require a minimum investment of $1,000 or more.

Non-traded or private REITs may require an investor to be accredited. Accreditation means the investor has at least $200,000 in income ($300,000 for married couples) or $1 million in net worth (excluding equity in a home). These income and asset levels indicate the investor has achieved a level of financial savviness at which they should be able to determine the risks involved in investing without the typical disclosures of a publicly-traded company.

What kind of real estate do they specialize in?

REITs can invest in a variety of real estate types. Typically, a REIT will specialize in a certain niche depending upon its employees' expertise or opportunities in the real estate market.

Examples of REIT property specialties include:

  • Health care
  • Hotels and resorts
  • Office buildings
  • Residential
  • Retail

Do you need to be an accredited investor?

It depends upon the type of REIT you are investing in. Some REITs do require investors to be accredited, however, the Vanguard Real Estate ETF does not.

How do you get started investing in REITs?

To get started investing in a REIT, you first need to decide which type you are most interested in. Publicly-traded REIT stocks, mutual funds, and ETFs can be purchased through a brokerage account. Mutual funds generally can be purchased directly from the mutual fund company that runs the fund. For non-traded REITs, you must speak with an investment advisor or someone who operates the REIT.

Pros and cons of REITs

REITs can be a valuable addition to your investment portfolio. But before you start investing in a REIT, consider these pros and cons to determine if they are right for you.

Pros Cons
  • Many available choices
  • Can start with one share
  • No corporate taxes
  • High-dividend yields
  • Access to commercial real estate
  • Portfolio diversification
  • Liquidity – buy or sell at any time
  • Requires more time and effort to pick the right investment
  • Analysis paralysis could delay the start of your investment
  • Higher taxes on dividends
  • Investments are impacted by interest rate sensitivity

7 important differences between Fundrise and REITs

Although both investment choices — Fundrise and REITs — invest in real estate, there are 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. Features: Fundrise gives customers multiple investment options within its platform. You can choose between supplemental income, balanced investing, or long-term growth. In comparison, investors in the Vanguard REIT do not have any control over where their money is invested. Your money is invested like everyone else who owns this particular ETF.
  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.
  3. Minimum investment: Investors can get started with Fundrise for as low as $500. However, you can start with just one share of the Vanguard Real Estate ETF through a brokerage account.
  4. Fees: Neither Fundrise nor the Vanguard Real Estate ETF charges fees when you invest. However, you may incur fees through your brokerage when buying shares of the Vanguard Real Estate ETF.
  5. Expense ratios: Fundrise has an annual expense ratio of 1%, whereas the Vanguard Real Estate ETF has a much lower expense ratio of .12%. That means you’ll pay fewer fees on your Vanguard investments. That said, both of these options are lower than the 1.2% average expense ratio for funds similar to the Vanguard Real Estate ETF.
  6. Liquidity: Fundrise is meant to be a long-term investment and your investments may not be immediately available if you need to withdraw money. The Vanguard Real Estate ETF is publicly-traded and your money is available immediately after selling through your brokerage account. If you’re worried about cash flow, Fundrise might not be as good a fit for you.
  7. 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'll simply receive a 1099-DIV for dividends and 1099-B whenever you sell shares.

Fundrise vs. REITs: which investment strategy should you choose?

When choosing between Fundrise vs. REITs, think about your experience with real estate and your desired time horizon in regard to 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.

Fundrise offers investors a simple option that takes advantage of more than 100 years of 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.

There are many types of REITs to choose from. The number of choices can be overwhelming and difficult for a new investor to decide where to begin. Because of the risks involved in investing, you should have a long-term view, but there is peace of mind in knowing that most publicly-traded REITs and real estate mutual funds can be liquidated at any time.

For new real estate investors, Fundrise is 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.

FAQs about Fundrise vs. REITs

Can you really make money with Fundrise?

Yes, you can make money with Fundrise. Fundrise has invested $4.9 billion in real estate and its investors have earned 12.25% average annualized returns since 2014. Your personal investment returns will depend on which investment plan you choose and your risk tolerance.

It’s important you understand that investing in real estate can be risky. There is the potential to lose money even if you invest with a well-known name like Vanguard or professionals that have over 100 years of experience like Fundrise. Evaluate your options before you agree to invest.

Does Fundrise pay dividends?

Yes, Fundrise investors may receive quarterly dividends based on the performance of the real estate owned in their eFunds and eREITs. You may choose to have your dividends deposited into your bank account or to be reinvested into your Fundrise account. Additionally, investors will receive a proportional share of the proceeds whenever a property is sold.

Are REITs better than stocks?

When comparing the stock market and REITs, one is not necessarily better than the other. Some investors may prefer real estate, yet others like trading on a stock exchange. A diversified investment portfolio may include a combination of stocks, bonds, real estate, and other asset classes. Diversifying your investments to include real estate and other non-correlated assets can help reduce risk and improve returns.

How do I invest in REITs?

There are many options when it comes to investing in REITs. The simplest way is to invest in REITs that are available on the public market. You can invest in publicly-traded REITs and REIT mutual funds and ETFs through a brokerage account. These investments are very liquid and you can buy or sell at any time. Things like asset management fees and investment minimums will vary from REIT to REIT, so be sure to thoroughly research your options before you commit to a particular investment option.


The bottom line on Fundrise vs. REITs

When it comes to how to invest in real estate, 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 vs. REITs, think about how much money you have to invest, when you'll need the money, and how this investment will impact your tax planning.

Fundrise Benefits

  • Build a portfolio investing in real estate without being a landlord
  • Invest in million-dollar deals without writing million dollar checks
  • Lowest-ever $500 minimum investment plus special offers