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Jan
09

Fundrise Review: How to Invest in Corporate Real Estate With a Small Investment

If you love real estate, property-themed reality shows can be both fun to watch and educational.

Watching as old, dreary houses get a brand new look on HGTV’s Fixer Upper might even inspire you to redecorate your own place.

Meanwhile, shows like Million Dollar Listing may leave you wondering if you should add real estate to your own portfolio.

But, let’s face it; most of us will never add shiplap to half of our walls or buy income-producing property.

For the bulk of Americans, “flipping a home” one day or buying real estate as an investment are simple pipe dreams – either due to time constraints or even our own personal abilities.

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Still, I have always thought that adding real estate to your portfolio can be a really smart idea – not only because real estate has proven itself as a solid investment choice, but also because diversity is absolutely crucial for each of us.

To truly get ahead in life – and to build a nest egg that can stand the test of time – we can’t put all of our eggs in one basket, right?

Introducing Fundrise

The good news is, you don’t have to buy actual property to invest in real estate. Thanks to new firms like Fundrise that work similarly to Lending Club and Prosper but focus specifically on real estate, you can invest in commercial property without dealing with the hands-on aspects of owning physical property. Check out other great ways to invest by reading our Motif Investing Review or our Lending Club Review.

Think about how much easier this could be. If you “flip houses,” you’ll have a ton to worry about. You might have to come up with a huge cash payment just to buy a property to begin with, plus hire contractors, oversee construction and workers, then work tirelessly to make sure you sell the home for a profit.

As a residential or commercial landlord, on the other hand, you might have an entirely different set of tasks. For example, you would likely need to spend time finding tenants, planning repairs and maintenance, and collecting rent. And each time a tenant moved out, you would need to start the process over – taking the time to find a new tenant, work up a lease and financial agreement, then manage any issues that arise.

As someone who invests in Fundrise, however, you can take a completely hands-off approach to your investments.

After all, you’re buying notes that list real estate as the underlying investment – not the real estate itself. For a lot of people, this the best (and only) way to invest in real-estate for the long haul. Because not everyone wants to rehab dirty houses or be a landlord, right?

Investing in Real Estate through Fundrise

If you’re looking for a hands-off approach to investing in real estate, Fundrise is a firm you might want to consider. Through their real estate investment products, investors earned an average of 12 – 14 percent on their money last year, and all without painting a wall or dealing with unruly tenants.

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Here’s the part that I think is really smart. Thanks to the new technology that Fundrise offers, they are able to locate and capitalize on real estate investments that hit somewhat of a “sweet spot.”

According to Fundrise founders, large institutional real estate investments tend to be highly competitive, and that push for competition drives down returns over time. Yet, the small “fix and flip” assets you see on shows like Fixer Upper are typically riddled with problems and risk. Not only are these projects comparatively expensive to operate, but there are simply too many things that can go wrong.

As a result, Fundrise focuses its efforts on that “sweet spot” I was talking about – mid-size sub-institutional assets that have less competition and the potential for higher returns.

So, with Fundrise, your dollars won’t be invested in any real estate investment that comes along; instead, Fundrise focuses on investments that fit within certain parameters and offer superior potential for low risks and high returns.

According to the Fundrise team, their stringent vetting process means that only 1 percent of submitted projects get approved for funding.

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Everything You Need to Know About Fundrise

Since I’m highlighting Fundrise and its products in this post, I wanted to include all of the nitty gritty details about how it works and who can invest.

Let’s get started, shall we?

First of all, the minimum investment required by Fundrise is just $500 for investors who invest in their Starter Portfolio, $1,000 in their eREIT™ products, and around $5,000 for those who invest in their other placements. This relatively low barrier for entry makes this type of investment a really good option for people who want to dip their toes into real estate without going full throttle at first.

As of now, any U.S. resident can invest in Fundrise provided they can meet the minimum investment amount and their investment does not exceed the greater of 10 percent of their gross annual income or net worth.

The Starter Portfolio really is one of the more intriguing offerings in the REIT space.  Not only does it only require a $500 investment to get started, but you will be invested across three different REITs; the East Coast, the Heartland, and West Coast eREITs.

In addition to individual placements, Fundrise offers both an Income eREIT™ and a Growth eREIT™ for beginners, both of which have similar goals but a slightly different set-up.

The Fundrise Income eREIT™ was created to provide investors with a low-volatility income stream of “consistent, attractive cash distributions generated from commercial real estate investments.” The Income eREIT™ focuses mostly on debt as an investment and pays returns throughout its investment term, and that’s what sets it apart.
The Fundrise Growth eREIT™, on the other hand, focuses primarily on assuming equity ownership of commercial real estate assets. By focusing on equity instead of debt, the Growth eREIT™ has a greater potential to accrue more value over time. While a dividend is paid quarterly, most of the returns for this investment are paid out toward the end of the investment period.

For a limited time, Fundrise is accepting new investors for their Fundrise Growth eREIT™ product and a new feature that lets you recoup your investment within a 90-day introductory period. During this time, you can redeem your shares at no cost to you. After that, you can redeem up to 25 percent of your shares on a quarterly basis.

Also keep in mind that additional investments may be available to you if you are an accredited investor – a term coined by the Securities and Exchange Commission (SEC) to describe financially sophisticated investors who have high net worth and need little protection.

Benefits of Investing in Fundrise

While no type of investment is perfect, Fundrise does offer some benefits that help it stand out. The best features offered by Fundrise, in my opinion, are summed up below.

Fundrise charges low fees for their services. On average, Fundrise charges investors 0.30 to 0.50 of their invested capital to manage their investments each year. If you’re looking for an investment option with fees that won’t eat away at your earnings too much, Fundrise might be it.
You can potentially invest in Fundrise through an IRA. If you open a self-directed IRA, you can invest your funds into Fundrise notes.
Fundrise lets you search through and filter offers to find the most interesting– and potentially profitable – deals. Just like Lending Club lets you sort notes based on risk level and earning potential, you can browse the Fundrise site for investments that meet your individual criteria. If you like to have some control over your investments, this is a huge deal.
Fundrise accounts are free. Opening your account is absolutely free, and you won’t be charged for browsing investments, either. If you want to dig around their website before you commit, you absolutely can. And actually, I would suggest doing that anyway before you get started.
Fundrise income is as passive as it gets. While investing in real estate the old-fashioned way requires a lot of intensive planning and plenty of hands-on work, Fundrise requires nothing of the sort. Once you choose your investments, nearly everything else is taken care of for you.
Most Fundrise investments offer rolling maturity dates. While not always the case, most of their investment options let you cash out part or all of your investment every few years. So while they are not liquid in a general sense, you will have access to your money periodically.
Fundrise lets you invest from the comfort of your home on their 100 percent secure website. Opening an account and choosing your investments is easy. Plus, you can add funds via electronic check and even sign documents online.

Fundrise Disadvantages

No investment option is perfect, and Fundrise is no exception. While investing in Fundrise can offer high returns and truly passive income, there are some disadvantages to consider as well.

Many Fundrise investments outside of their new REIT products are not available to unaccredited investors. To become an accredited investor, you must meet certain criteria decided by the SEC. One way to qualify as an accredited investor is earning an income of at least $200,000 per year or a joint spousal income of at least $300,000 per year for at least two years. Also, having a net worth of at least $1 million dollars will do, regardless of your income. There are other ways to meet the requirements to become an accredited investor, of course, but those are the two easiest.
Fundrise investments are not liquid until they reach maturity. While Lending Club offers a secondary market where you can sell notes if you need to cash out, Fundrise does not offer this option yet. As a result, your investments are not liquid until they reach maturity. If you feel you might need to access your money at any time, this is a huge disadvantage.
Fundrise offers limited investment options at this point. Even for accredited investors, investment options are somewhat limited. This will likely change as Fundrise grows their platform, but it’s still worth noting that your choices are not plentiful yet.
Fundrise is relatively new, so we don’t have a lot of data to work with yet. While Fundrise investors earned an average of 13 percent on their investments in 2015, the company wasn’t founded until 2012. It will be interesting to see what kind of earnings investors report in 2016, 2017, and beyond.

Final Thoughts

There is so much more to know about Fundrise, and if you want to dig a little deeper, I highly suggest you look over their website, and specifically their FAQs. If you have questions about Fundrise investments or almost anything else, you’ll likely find the answers you’re looking for there.

The best part about investing in Fundrise is the fact that it is a truly hands-off and passive investment – as in, you won’t have to get your hands dirty or do any of the heavy lifting.

Like any other investment, however, there are risks involved. Since investing in real estate in this fashion is a relatively new concept, make sure you know what you’re getting into before you put real money on the table.

The post Fundrise Review: How to Invest in Corporate Real Estate With a Small Investment appeared first on Good Financial Cents.