In-Depth Real Estate Investment Reviews
Fundrise aims to make provide simple, low-cost, real estate investing but does it live up to the hype? We dove deep into their offering to find out.
Pros & Cons
Makes it easy to invest in real estate with a well designed platform and low entry costs
Their stated fee structure is low, starting at just 1% per year
They've been around since 2010 and has acquired billions worth of real estate
Expected investment time window is at least 5 years
They make a big deal about their low 1% fees. But they've disconnected the value of their REIT shares from the true value of the properties in their portfolio, giving them opportunities to capture returns before they appear in their investor's accounts
Typical returns of 10.70% per year is average compared with returns from other real estate investment options (typically 5-15% in rent yield per year) and the stock market (average 10% per year)
Only pays rent to investors a few times a year - much less often than other real estate investment options. This hurts cash flow and makes it harder to reinvest and access compounding returns
Figuring out where to invest your money is hard enough. Stocks, bonds, and even crypto all have their places in the modern portfolio, but the most misunderstood asset class has always been real estate.
Over the last few years, several companies have appeared claiming to make it easier for people to invest in real estate by removing down payments, increasing liquidity, and breaking properties up into fractions. In such an environment, knowing who to trust and what you're really agreeing to when you invest is more difficult than ever.
by digging into key areas investors need to know about before going all in: How easy it is to invest, how much you can earn, and how you can get your money back once you've made the gains you wanted.
Full disclosure - we're Lofty, and we're one of those fractional real estate investment companies. We believe that a rising tide lifts all ships, and that providing an unbiased look at other fractional real estate companies through the lens of our industry expertise will help serve both investors and the companies serving them.
Fundrise has positioned itself as the biggest retail real estate investment platform on the market. They focus on creating low-cost, flexible real estate investment vehicles that are accessible to all U.S. investors, just like any online stock market investment platform.
Fundrise offers REITs (Real Estate Investment Trust) with a software interface that allows them to service investors directly. You can only access them on the Fundrise platform, and they aren't available to buy on stock market exchanges.
They purchases buildings with their investor fund and allows users to buy shares of that fund just like they can buying an ETF or stock. Investors then earn dividends and appreciation of their share value over time.
They have multiple funds in operation, and have several Account Levels which offer varying degrees of service and features depending on how much an investor invests.
Fundrise decides which funds an investment buys when an investor's balance is below $5,000 USD. When investment crosses that threshold, they begin allowing investors to choose funds that better fit their financial goals. Fund options vary based on features like geographic areas, or whether they're focused on cash flow or appreciation.
Fundrise is currently open to all U.S. citizens or permanent residents aged 18 or over. They don't require investors to be accredited, and all investors receive US 1099 documents yearly for tax purposes.
Investors can also invest through traditional and Roth IRAs, as well as entities, joint accounts, and trusts.
Fundrise's investment strategy segments their property acquisition into four buckets arranged on a scale from low risk, low return to high risk, high return.
Their Fixed Income properties aim to generate above-market yields by providing creative and comprehensive financing solutions underpinned by high-quality real estate. Their Core Plus features stabilized real estate with a long investment horizon and moderate leverage. Value Add properties focus on acquiring existing properties below replacement cost and investing capital to increase their competitiveness, while Opportunistic seeks to acquire underutilized, well-located properties in their most dynamic markets.
Fundrise has been around since 2010. Since then, they've acquired $7 billion in real estate assets, and has serviced 330,000 investors. They're likely the biggest player in the direct-to-consumer real estate investing world.
Ease of Use
Before investing, it's crucial to ask yourself what you're really investing in. It's not always as clear-cut as you might think.
Fundrise doesn't allow investors to invest in individual properties. Instead, they allow users to invest into REITs (Real Estate Investment Trusts) that represent a stake in the financial upside (or downside) that the properties acquired within it produce.
To be clear, Fundrise investors don't own any real estate. They instead own stock in a fund that finances the purchase and management of a portfolio of real estate.
Fundrise's REITs are arranged based on their maturity. A fund's maturity influences how profitable one might be at a given moment. They're also quick to point out that a fund's profitability is not guaranteed, and many of them take some time to reach stability. To this end, funds are flagged as being in one of three stages - Ramping Up, Stabilizing, and Operating.
Most Fundrise properties are located in the southern half of the United States, with the exception of the Washington DC area. California, Texas, Georgia, and Florida are their most well represented states.
Fundrise allows their investors to start investing with as little as $10, but they reserve their premium features for investors with bigger investments. Referral bonuses rise as investment increases, along with access to specific funds and customizable portfolio strategy.
Fundrise features in-depth documentation on all of their funds. Each fund contains a strategic overview, a list of all the individual properties held with in it, current share prices and expected dividends, historical performance, and detailed net returns.
Investors can even click-through to see specific details about individual properties held by each fund.
Investing with Fundrise is fairly straight forward. Simply create an account, upload your identifying information, and invest in the account level of your choosing directly from your bank account.
There's really one core reason for investing in real estate: to leverage your current capital to create more capital. When it comes to choosing investing platforms, their expected yield and fee structure are the two core levers that determine how well they do that for their customers
Fundrise doesn't pay out rent in the same way a wholly-owned property would. Instead, Fundrise offers "Dividend" payments to investors based on any loan interest payments and rental income the properties in their REIT produced. This Dividend is split between every circulated share of the REIT, so payments are in proportion to how many shares an investor owns, and how long they've been held.
According to their Client Returns page, Fundrise's current average annual dividend return is just 1.92%.
Fundrise does not provide dividend gain estimates for future investors. In fact, they explicitly state that "Dividends are expected to fluctuate throughout the year and we do not have a guaranteed dividend." They do, however, guarantee that they pay out at least 90% of earned taxable income in dividends yearly.
Fundrise's investment strategy focuses more on realizing property appreciation gains rather than producing a lot of ongoing cash flow. This means that most of their projected gains aren't realized until after the five-year mark when a building is sold. This influences the types of buildings they bring into their portfolio, and obscures any projections on any cash flow you might make from your investment.
Their homepage states that they have paid out $194 million in dividends to their 330,000 investors since their founding. These numbers may sound impressive, they buckle a little bit when we run a little math with them.
According to these figures, the average Fundrise investor has only made $587 in dividends in Fundrise's 12 year history. For comparison's sake, an investor putting $100/month into a fund mirroring all 12 equity REIT sub-sectors for five years would have netted $2,434 in yield - over 4x as much – assuming the average return over the last 10 years.
Fundrise pays out their "Dividend" quarterly, but only if the fund has earned a dividend that quarter. Dividend payments are typically made by the middle of the month after a quarter's end, i.e. by mid-April for Q1's earnings.
Due to the magic of compound interest, real estate investments perform better in the long term when cash flow (or "Dividend") yield is paid out more frequently and reinvested by investors. Quarterly dividends like the kind Fundrise pays mean that investors miss out on a bigger portion of compounding interest than they could if they received their payments more often, like monthly or daily.
As Einstein said, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it."
Fundrise doesn't publish their specific Appreciation return numbers, but we can piece together some of their averages using other numbers they publish. They state that their average yearly Income Return (total investment yield) over the last 6 years is around 10.7%. If we subtract their average Dividend/Income Return of 5.42%, investors are left with an average yearly appreciation of 5.28%
It's important to use the average numbers Fundrise provides when calculating returns rather than the performance return chart they provide. Their performance chart limits view-through to the last few years, which provides a skewed perspective on how investments perform in the long term.
Fundrise conveys appreciation through their composite NAV (Net Asset Value) number. This is meant to communicate the value of a share in a fund over time (similar to a stock's price), but in Fundrise's case it hides key investment information we go over in our Fees section.
NAV numbers are updated quarterly to help investors track changes in their portfolio's unrealized value over time.
Fundrise has made their name by providing a low-fee alternative to help would-be real estate investors get into the market at their desired price point. They've positioned themselves as the real estate equivalent to low-fee stock brokerages like Vanguard.
Fundrise publicly makes their money through fees, but we've found multiple areas where Fundrise is likely capturing returns before reporting to investors.
First off, their fees. Investors are charged 1% of their total investment value yearly. That fee is broken out into 0.15% for Account Fees (meant to cover expenses like client performance reporting, customer support and investor relations, and other company overhead) and 0.85% for Fund Fees (for their service of managing the funds they create).
On top of fees, Fundrise has several opportunities to earn revenue using investor money without reporting it to them. Fundrise doesn't publish anything about making money from investors in any way but fees, but there are several problematic areas where we believe revenue may be being generated before it is displayed in investor's accounts.
First off, Fundrise (along with all REITs) are only required to pay out 90% of earned taxable income as dividends to investors annually. This means that Fundrise can keep up to 10% of their portfolio's quarterly dividend payment before the rest is distributed to investors. Since Fundrise pays a dividend rather than straight-forward rental income, they don't have to disclose to their investors how much cash flow their portfolio produced.
They've also created a lucrative opportunity hidden within their NAV (Net Asset Value) reporting structure. Fundrise explicitly states that the NAV represents the estimated value of one share in a fund "based on a variety of factors", and not one share of the portfolio's actual real-world value.
Only Fundrise knows the real value of their properties, and the NAV is likely published to control investor expectations and separate it from any additional appreciation their portfolio may produce. Using this bit of creative accounting, Fundrise has disconnected the value of their investor's shares from the true value of the real estate in their portfolio. This means that they essentially reserve for themselves the right to earn bigger portions of the appreciation and other revenue from properties it sells without disclosing it to investors.
Even though NAV is the most important number in a Fundrise investor's account, they publish next to nothing about it. The absence of more documentation here speaks volumes.
Fundrise also likely earns brokerage fees on properties they buy and sell, which would net them between 2.5%-6% on every property transaction they make. Not only that, but help section also states that "...[Fundrise] could potentially charge other fees, such as development or liquidation fees, for our work on a specific project."
In summary, their "Fees" are indeed low, but they've created a structure that is likely helping them earn multiples on top of their investor fees at their investor's expense.
While we lack a crystal ball that can tell us how real estate markets will act in the long term, we can make some assumptions to help understand the true return of an investment in Fundrise funds.
If we generously assume that Fundrise's expected quarterly Dividend and appreciation historical numbers hold constant for the first five years of a five year investment term, an investment of $10,000 would compound in the following way without reinvesting dividends:
→ End of Year 1: $11,070.00
→ End of Year 2: $12,254.49
→ End of Year 3: $13,565.72
→ End of Year 4: $15,017.25
→ End of Year 5: $16,624.10
At 10.7% yearly yield, a $10k investment would earn you $6,624.10 in additional yield.
If you'd invested that same $10,000 into corporate bonds (which are similarly illiquid) and drawn Moody's long-term average (6.53%), you'd have earned $3,824.59 in yield - about 60% of your Fundrise investment.
If you'd invested that same $10,000 into a fund mirroring all 12 equity REIT sub-sectors (real estate investment trusts) over the last 10 years (13.2%), you'd have earned $9,142.84 in yield - about 30% more than your Fundrise investment.
If you'd invested that same $10,000 into the stock market and drawn the S&P 500's average yield over the last decade (14.7%), you'd have earned $10,581.68 in yield - almost double your Fundrise investment.
One of the most important things to keep in mind when deciding which real estate investment platform to use is to ensure you understand how easy it is to sell your stake when you want to.
In short, liquidity is a way to measure how much control you have over your money after you've invested it. Traditional real estate is illiquid because selling buildings is difficult and time consuming. On the other hand, cash is as liquid as it gets since you can exchange it for goods at any time.
Fundrise explicitly states that their investments are meant to be held for 5+ years, even though their funds are constantly in a state of buying and selling properties. As far as we can tell from their documentation, Fundrise's holding period is designed to help them maintain liquidity so they can purchase more properties, not to help their investors get more out of their investment.
If you don't want to wait a full 5+ years for your investment to mature, there may be an option for you. Investors are able to submit a liquidation request to ask for your money to be returned sooner. Requests are reviewed quarterly, and early withdrawal is charged an additional 1% of the investment's value.
Even so, there is no guarantee that investments will be paid out early. Fundrise avoids using language that implies that early liquidation will be possible in every case.
Fundrise has quite a bit of control when someone invests in one of their funds.
→ They decide if you can sell sooner than 5 years later
→ They charge fees if they let you sell those shares sooner than 5 years later
→ They decide what properties they acquire with it and when they sell them
Investing with Fundrise is fairly hands-off, but investors pay for that convenience with control.
The Final Verdict
Fundrise is a good hands-off investment option for novice real estate investors looking to gain real estate exposure without having to know (or learn) anything about real estate investing. Low fees and convenience is the primary reason to use Fundrise, but investors pay for it with very low liquidity, paltry rent dividends, and appreciation gains disconnected from the true value of the properties they help fund.
Fundrise's investing system and software product is user friendly and easy to use, and their flexible account levels are enticing. On the other hand, their nice user experience hides some concerning lack of transparency and accountability when it comes to how they frame their investor fees by excluding other potential revenue they earn from their investors capital without their investor's knowledge.
We rate this opportunity a 3 out of 5. Steady, but quite flawed.
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In 2016, Fundrise's CFO Michael McCord came forward saying he was ousted from the company after alerting their CEO of some "serious fraudulent behavior".
According to the Washington Post, Fundrise later responded by stating that McCord had attempted to extort the company for $1 million in exchange for not alerting regulators over the alleged impropriety.
In two public filings published with the Securities and Exchange Commission, Fundrise alerted investors that it had parted ways with McCord after nearly two years. The company said that McCord “abruptly and without notice” had requested $1 million and his outstanding stock awards, threatening he would alert regulators about the company “improperly handling two real estate transactions” unless he was paid within two hours. In response, the company states it placed McCord on administrative leave and later fired him when he made the same threat again.
After being reviewed by an independent accounting firm and investigated by the SEC, it was concluded that no crime was committed.
Fundrise has a Subreddit where investors can discuss Fundrise and other real estate investments.
You can reach Fundrise by emailing [email protected] or by calling 1-(202) 584-0550.