In my very own Fundrise review, I’m breaking down why private real estate investing is now a popular way to earn reliable passive income.
Until a few years ago, the only option for most people was buying rental property or flipping houses. But, both of these require large amounts of time and money.
However, with the use of technology and deregulation of the government and real estate, there is now an option for everyone to become a real estate investor.
It’s called crowdfunded real estate.
This sector used to only be available to the wealthy. Now, you can invest in private real estate deals and earn potentially more than regular stock investments.
If you want to gain exposure to a new real estate sector, and, you can invest $500 for at least five years, Fundrise can be the answer you’re looking for.
Fundrise Review: Start Investing in Real Estate for $500
Description: Fundrise is the first investment platform to create a simple, low-cost way for anyone to invest in real estate starting with a $500 minimum investment.
Historical Returns with Fundrise
Barrier of Entry for Investors
Fundrise is a real estate crowdfunding site that services over 250,000 investors and manages $2 billion in real estate investments. They also have a A+ rating with the BBB.
If you don’t know, 2012 was a big year for private real estate investing. In this year, the JOBS Act opened the doors for regular non-accredited investors (i.e. non-millionaires) to invest in private real estate deals.
With Fundrise, you’re somewhere in between being a commercial real estate landlord and investing in real estate stocks. Instead of investing in companies that own apartments, office buildings and shopping centers, you directly invest in these properties.
In short, you are the bank.
Since you’re directly investing in real estate projects, you get paid before public investors. And, you can earn more because you’re assuming more risk.
With public real estate investing, the tenants pay the bank their monthly payment. After the company or real estate investment trust pays their bills, you (the investor) gets the remaining profit as a dividend.
As Fundrise only requires $500 to open an account, you own a tiny piece of real estate projects.
Advantages of Private Real Estate Investing
Since you’re a “stakeholder” instead of a “shareholder,” your investment can earn more dividends and equity appreciation than investing in public real estate.
More importantly, stock market dips don’t affect private real estate returns to the same extent as public real estate investment returns. Private real estate has its own set of risks, but you can expect monthly dividend payments each quarter.
Disadvantages of Private Real Estate Investing
There are two large downsides of real estate crowdfunding.
Private Real Estate is Illiquid
With Fundrise, you need to invest for the long haul. The reason you can earn more with private real estate than public real estate is the long-term investing horizon. If you want to sell your investment, it takes at least 60 days to get your money back. This is because Fundrise has to find another investor.
If you’ve ever tried selling a house, you know how long the closing process takes. Investing in private real estate is very similar.
Returns are Ordinary Income
One key difference between Fundrise and public stocks is how your earnings are taxes.
Under current tax law, private real estate earnings are considered ordinary income. This means they are taxed at your regular tax bracket. If you earn $100 from Fundrise, it’s like your boss gives you a $100 raise. So, you may have to pay 22% federal income tax on your earnings if that’s your tax bracket.
While more money is better than no money, your public real estate investments are taxed as capital gains. For most investors, that’s up to 15% on positions you own for at least one year. And in an IRA, you avoid the tax each year. Although public real estates stocks can be more volatile, you pay fewer taxes on your earnings when compared to private real estate.
Who Can Join Fundrise?
Any U.S. resident at least $18 years old can join Fundrise and it’s open to accredited and non-accredited investors.
Note: Accredited investor means you make at least $200,000 a year and/or you have a $1 million net worth.
Most private real estate investing sites only allow accredited investors, which is what makes Fundrise so popular.
The year 2012 was very important for private real estate investing. In this year, the federal JOBS Act opened the doors for regular non-accredited investors to invest in these same deals.
Who Should Join Fundrise?
Perhaps the more important question to ask is if you can benefit from investing in Fundrise.
Although there are many similarities, Fundrise is different than investing in real estate stocks and ETFs on Vanguard or with your favorite investing app.
You should only invest money with Fundrise that you don’t need for at least five years. This is because you pay a small early redemption fee before this mark. The one exception is during the first 90 days. And, it takes at least 60 days to get your investment money back in your bank account.
By nature, private real estate investing in highly illiquid.
Term: illiquid means your money cannot be easily converted back into cash
You can’t decide to sell your investment today and instantly get paid. As a reward for your commitment, you can earn more passive income than other investments.
This illiquidity is why Fundrise and crowdfunded real estate shouldn’t be your only investment. Most of your investments should still be in liquid assets like stocks, bonds, and higher earned-interest bank accounts. With these three options, you have immediate access to cash if you need it.
Fundrise vs. Owning Rental Property
Maybe you’re already in a position to own rental property outrigh. But, you might like Fundrise too because you can in invest in private commercial property. And, you can also own out-of-state rental property as well. This allows you to focus your efforts on local real estate and leave the rest to Fundrise.
Owning rental property can produce better results than Fundrise since you own the entire property. However, you know that rental properties require “sweat equity.” You also need to determine how valuable your time is.
If Fundrise can offer slightly less returns with minimal effort required, it can be a better option.
How Much Money Can You Make on Fundrise?
Before you think you’re going to become the next millionaire real estate mogul, let’s clear the air:
- Fundrise is a great alternative to owning rental property
- It’s also a good alternative to only owning stocks, bonds, and a savings account
- Crowdfunded real estate doesn’t replace investing in stocks and bonds
Investing in private real estate is another way to earn passive income. It’s a good way to hedge against stock market volatility. And, you can gain exposure to another investing sector. But, its returns are similar to the broad stock market.
Most Fundrise investing plans have a projected return between 8% and 10% per year. This is slightly higher than the historic 7% annual return of the S&P 500, but you won’t become wealthy overnight.
In other words, don’t head to the Ferrari dealership yet.
Two Ways to Earn Income on Fundrise
Your investments earn passive income in two ways:
- Loan interest and tenant rent payments
- Appreciation of investment property values
You can either reinvest your dividends to earn more money. Or, Fundrise can distribute them to your bank account. To earn compound interest, you need to reinvest the dividends.
Loan interest and rent payments provide consistent monthly payments. Being able to sell properties at a profit helps Fundrise outperform the broad stock market.
Fundrise vs. Public REITs
For non-accredited investors, your two investing options are Fundrise eREITs and Public REITs. Both options invest in a basket of real estate properties. The largest difference between both options is that Fundrise invests in private real estate. And, public REITs invest in companies that manage properties.
Term: REIT stands for Real Estate Investment which is simply a company that owns, operates or finances income-producing real estate.
It’s not quite an apples-to-apples comparison because Fundrise eREITs invest in different assets than public REITs.
The U.S. REIT index includes residential and commercial properties. But, there are a few other property types that Fundrise doesn’t invest in like self-storage complexes.
Fundrise Historical Performance
According to Fundrise, this is the average annual return for the whole portfolio:
- 2017: 11.44%
- 2016: 8.76%
- 2015: 12.42%
- 2014: 12.25%
For these four years, your average annual return is 11.21% with Fundrise.
These annualized returns are net of fees and assume you reinvest dividends. Fundrise bases these numbers on the dividend income and property appreciation.
There are several eREITS to choose from, so you might not earn 10% every year. Plus, fund performance changes each year as market conditions change.
Never assume any investment will earn a profit each year.
Public REIT Historical Performance
To be fair, the public US REIT index had an average return of 11.64% for the same time period. That’s about equal with Fundrise once you include fund fees.
But, you will notice more volatility in the returns:
- 2017: 5.07%
- 2016: 8.60%
- 2015: 2.52%
- 2014: 30.38%
Past performance doesn’t predict future results for any investment. From 2014, it doesn’t look like you “lose” money with Fundrise. If you missed the 2014 U.S. REIT boom, your Fundrise returns can be notably higher.
Fundrise vs Public REITs in 2018
It’s not a Fundrise review without a peek at some real returns.
I joined Fundrise in December 2017 with a $500 starter portfolio. These are the YTD returns as of mid-October 2018.
The screenshot below is the projected return for my Fundrise portfolio in 2018.
As you can see, I’m “up” 7.6% for the year so far on my investments. But, one fund had a negative return for the first quarter of 2018. So, you will have a few bad quarters.
Even yet, Fundrise is outperforming most public real estate investments in 2018. This might not happen every year. But, it’s a strong reason to consider investing in private real estate.
So far, investing in US REITs in 2018 have a negative 3.96% return. At the same time, Fundrise has a positive return. With my portfolio, it’s a positive 7.96% return year to date.
Fundrise investments can decline in value too. But, as you can see, 2018 hasn’t been the best of years so for for public REITs. In this case, investing with Fundrise helps offset the underperformance of public REITs.
How Does Fundrise Work?
Not every real estate project receives fudning from Fundrise. In 2015, only 2% of over 2,000 proposals received funding. This high rejection is on par with other crowdfunding sites.
Before Fundrise approves a project, it undergoes this vetting process.
Real estate companies send funding requests to Fundrise.
Fundrise removes all proposals that don’t meet basic underwriting criteria.
A Fundrise team visits the potential property. An in-depth analysis of the local area and investment potential is performed too.
If the project passes the in-depth analysis, Fundrise offers financing. The interest rate and is determined by the borrower’s risk rating.
When possible, Fundrise tries to be the primary lender. This reduces risk of loss if the project goes bankrupt.
Fundrise Risk Rating
Each approved property receives a risk rating. The system ranges from A to E with “A” being the least risky. Most properties either have a “B” or “C” risk rating. While the income potential isn’t as high as a “D” or “E,” the chance of default is lower too.
You can browse the active and past properties in each eREIT. In the property listing, you can see the risk rating, the rate of return, and the debt type.
Although you can’t invest in individual properties, looking at the portfolio before you invest is helpful. With this information, you know what property types you invest in. And, it helps you know Fundrise is legit.
If you live near a project, take the time to inspect it yourself. Then compare your thoughts to Fundrise in-depth analysis.
What Does Fundrise Invest In?
Before you invest in any stock, bond, or real estate project, you must understand the investment. You need to know what you’re investing in. And, you need to know how the investment makes money. More importantly, you need to understand how it loses money.
What makes Fundrise unique is that you invest in private real estate. You own a direct stake in many real estate projects. With each investment, Fundrise divides your money among the different properties.
However, Fundrise doesn’t let you invest in single properties. This privilege is still reserved for accredited investors on sites like RealtyShares.
You Might Like: Realty Shares Review: Crowdfunding with Higher Returns
Because Fundrise is open to non-accredited investors, your only investment options are real estate investment trusts (REITs). Fundrise calls them eREITs, but they’re basically the same thing. With a Fundrise eREIT, the Fundrise team picks which properties to invest in.
Each eREIT has a different investing theme and strategy. Some focus on earning monthly dividends and others emphasize appreciating property values. Also, some eREITs only invest in certain geographic areas like the U.S. East Coast, Midwest, or West Coast.
Fundrise invests in these U.S. property types:
- Multifamily Apartments
- Single Family Townhomes
- Shopping Centers
- Office Buildings
By owning commercial and residential property, Fundrise diversifies your investment. Both real estate markets perform differently.
Many people have ambitions of owning rental property. But, they don’t have the time, cash, or desire to own physical property. Fundrise helps bridge the gap. You can directly invest in residential and commercial real estate projects with a $500 minimum initial investment.
The above image is an example of the properties you invest in with the Fundrise Growth eREIT.
We’ll cover the different Fundrise eREITs in a little bit. For now, you need to know there are two different investment types. Each real estate project is either an equity or debt structure.
Debt vs. Equity Real Estate
When you look through the different properties, you will see either debt or equity financing in the description.
To new real estate investors, these two terms are confusing. So, let’s cover them first.
Debt Investments (Income)
- Lower risk and lower reward
Think of debt investing as getting a bank loan. In this case, you’re the bank and receive a monthly interest payment from the borrower. Most Fundrise debt investments are to improve apartments. Each month, Fundrise collects a fixed payment until the loan is paid in full.
Fundrise calls these payments dividends. It’s like the money you get from an interest-bearing savings account each month. And, the dividends deposit in your account quarterly.
Debt investments are less risky, but they have less income potential too. If a project fails, debt investors are usually the first to get paid.
Equity Investments (Growth)
- Higher risk and higher reward
With equity investments, you own a piece of the property. Instead of receiving fixed monthly dividends from interest payments, you earn money in two different manners:
- Rent payments
- Appreciation after the property sells
There are a few different types of equity investments Fundrise participates in. Some projects are “Preferred Equity” that’s more of a medium-risk financing. You still earn some fixed dividends, but you still rely more on appreciating property values.
With most equity investments, you don’t see large gains until a property sells for a profit. In other projects, Fundrise may increase the monthly rent to boost returns as the property value increases too.
Potential Investment Risks
So far, Fundrise produces annual positive returns each year. But, there are potential investing risks.
Investment Property Goes Bankrupt
If a property goes bankrupt, Fundrise investor must take the outstanding balance as a loss. Thankfully, Fundrise invests your cash in a basket of properties. So, you should have more winners than losers.
Property Values Don’t Appreciate
Equity investments depend on rising property values to reach the higher projected returns.
Sometimes, property values remain flat or continue to depreciate. Fundrise tries to buy growth properties for below potential market value. Doing so limits downside risk, but the local real estate market must support higher prices.
If it doesn’t, Fundrise may sell for a loss when the investing period ends.
Fundrise Investment Options
To some extent, you can choose which Fundrise eREITs you invest in. But, you must select one of four investing plans. For full access, your account balance must be at least $1,000.
There’s one starter plan and three advanced investing plans. You can begin investing in the advanced investing plans when your balance reaches $1,000.
With each plan, you pay the same flat fee of 1%:
- 0.15% advisory fee
- 0.85% management fee
Tip: Besides reading these brief descriptions, read each plan offering circular. These circulars are similar to an ETF prospectus. It tells you all the fund fees, potential risks, and investing strategy.
Fundrise Starter Plan
- 50% Debt and 50% Equity Investing
Fundrise only requires $500 to open an account. Until your account balance reaches $1,000, the Starter Plan is your only plan option.
With the Starter Plan, Fundrise splits your account into the Growth eREIT and Income eREIT. The Growth eREIT relies on equity investing to make money from property appreciation. And, the Income eREIT focuses on collecting dividends from debt investing.
These two eREITs invest in projects located across the United States.
For example, this is where you can expect your Starter Portfolio properties to be. Of course, the cities can change as Fundrise adds and sells properties.
Fundrise Advanced Plans
Once your balance reaches $1,000, you can pursue one of three advanced investing plans. If your investing goals change, you can easily change which plan you want.
- 93% Debt and 7% Equity Investing
- Projected annual returns between 8.2% and 9.8%
This is the least risky of all investing plans. If you LOVE dividend income, this is your plan.
You won’t earn the most income, but you don’t have to rely on appreciating property values to earn larger returns.
As of this review, the Supplement Income plan holds the following eREITS:
- Income eREIT (20%)
- East Coast eREIT (10%)
- Heartland eREIT (10%)
- West Coast eREIT (10%)
- Income eREIT II (50%)
The East Coast, Heartland, and West Coast eREITs are held in each investing plan. These regional eREITs hold debt and equity investments.
- 60% Debt and 40% Equity Investing
- Projected annual returns between 8.7% and 10.1%
This is the most popular of the advanced investing plans. The balanced investing strategy favors dividends, but you still have plenty of upside potential with equity investing too.
Having the balanced plan also lets you invest in all of the Fundrise eREITs:
- Income eREIT (10%)
- Growth eREIT (10%)
- East Coast eREIT (10%)
- Heartland eREIT (10%)
- West Coast eREIT (10%)
- Income eREIT II (25%)
- Growth eREIT II (25%)
Because you invest in seven different eREITs, this plan also holds the most properties. At current count, this plan invests in 68 projects. The other two plans hold 48 and 55 properties.
- 27% Debt and 73% Equity Investing
- Projected annual returns between 9.1% and 10.5%
Young investors might prefer the long-term growth investing plan. And, since you have to hold any Fundrise investment for five years for penalty-free withdrawals, you may decide to go all-in.
- Growth eREIT (20%)
- East Coast eREIT (10%)
- Heartland eREIT (10%)
- West Coast eREIT (10%)
- Growth eREIT II (50%)
Most of your income from this strategy comes from rising property values. When Fundrise sells their investment stake, you receive a cut of the profit. You will also receive quarterly dividends from the debt investments.
To maximize growth potential, Fundrise looks for properties in growing areas. When possible, they invest in new or existing properties selling at a discount. So, they may “fix and flip” apartments. Or, finance new construction on vacant land.
Navigating the Fundrise Platform
Fundrise makes their platform easy to navigate. Although you must decide which investing plan to follow, Fundrise does the most of the work for you.
Recent updates make Fundrise more transparent. Now, you can instantly track your investing progress. And, you can see what project you’re investing in and why Fundrise holds them.
Before these updates, a common investor complaint was the lack of transparency. It no longer seems like your sending money to an online company and hoping it’s legit.
Join Fundrise for Free
Joining Fundrise is easy. You only need to enter your personal information to create an account.
And, you can browse the platform for free.
Then, you must fund at least $500 from your bank account to make your first investment. If you invest at least $1,000, you can pick an advanced plan right away.
Also, you have a 90-day satisfaction period. If you decide Fundrise isn’t for you, they refund your money penalty-free. After three months, you pay a redemption policy up to 3% during the first five years.
If your account balance is less than $1,000, Fundrise automatically enrolls you in the Starter Portfolio. Once your balance reaches $1,000, you can remain in the start portfolio or choose an advanced plan.
From personal experience, the Fundrise platform is easy to navigate.
What We Like About Fundrise
- $500 Minimum: One of the lowest minimums for real estate crowdfunding.
- Non-Accredited Investors Welcome: One of the few real estate platform for the non-rich.
- Different Investment Strategies: Can pursue income, growth, or both!
- Instant Diversification: Fundrise invests in many residential and commercial projects. This limits downside risk so you earn a profit each year.
- 90-Day Satisfaction Guarantee: You have three months to try Fundrise penalty-free.
What We Don’t Like About Fundrise
- Can’t handpick investments: Can only invest in eREITs. Accredited investors should use RealtyShares to invest in single projects.
- Earnings are ordinary taxable income: You don’t enjoy the capital gains tax benefits that public REITs have.
- Expensive IRA Option: You must pay a $75 annual fee per eREIT if you have an IRA.
- Illiquidity: Can’t easily sell assets. Must wait five years to avoid the early redemption fee.
- Crowdfunding hasn’t been “recession tested:” Fundrise and other crowdfunding sites have only been around in since 2012. It has gone through a complete credit cycle yet. So, we don’t know how investments will perform during the next recession.
After being a member with Fundrise and asking others about the platform, here are the most common questions you will hear asked.
Is Fundrise legit?
Fundrise is a real company that pays you real money. They are also regulated by the Securities and Exchange Commission. And, they send you a federal tax document each year.
Each month, you can also print off your monthly account statement to track your account balance too.
Is there an investment minimum?
The only investment minimum is the required $500 to open an account. After that, you can invest as much as you want.
Fundrise invests all your money according to the plan you choose. If you begin with the Starter Plan with $500, then $250 goes to the Income eREIT and $250 to the Growth eREIT.
You can also schedule auto-investing for free.
When does Fundrise pay dividends?
Fundrise pays dividends quarterly from Fundrise. You can track your dividend progress in real-time on the Fundrise dashboard.
And, you can either reinvest your dividends or deposit the earnings in your bank account.
What fees does Fundrise charge?
You pay 1% in annual fees on your Fundrise balance. If you invest $500, Fundrise keeps $5 each year plus 1% of the dividends you reinvest.
Also, each eREIT may have their own fund fees. For example, you might pay a 2% agent fee if Fundrise sells a property. These fees are relatively uncommon. But, it’s something to be aware of.
What are the Fundrise redemption fees?
Fundrise processes redemption requests at the end of each quarter. After the quarter ends, it can take 60 days to receive your cash.
There is also a tiered redemption fee depending on how long you hold your investments:
- First 90 days: 0% fee
- 91 days to three years: 3% fee
- Three years to four years: 2% fee
- Four years to five years: 1% fee
- After five years: 0% fee
How are Fundrise earnings taxed?
Each year, Fundrise sends you the proper tax documents. You receive a 1099-DIV for each eREIT. Long-time Fundrise investors who invest in eFUNDs receive a Form K-1.
Unless your eREITS are in an IRA, your dividends are taxable income each year. Unlike public REITs, they don’t receive the lower capital gains tax rate.
Does Fundrise have an IRA option?
Yes, but it’s not cheap. You must create a self-directed IRA with Millenium Trust Company.
Each year, you must pay a $75 annual fee for each eREIT in your IRA. The annual cap is $200. If you own at least four eREITs, the most you pay each year is $200.
This fee doesn’t apply to any non-IRA holdings. But, you will have to report your earnings as taxable income each year. So, you must decide if the fee is worth the tax savings.
Should You Invest in Fundrise?
After reading this Fundrise review, you now have a better idea if this is a good option for you. Fundrise is the perfect option to invest in private real estate as a non-accredited investor. You must still perform your due diligence when investing, but Fundrise has a history of earning positive returns.
Fundrise is more risky than keeping your money in the bank, but less risky than keeping it all in stocks. If you want a place to park your cash and still earn a decent return, try Fundrise.
Accredited investors should look at RealtyShares to invest. You get more direct access to private real estate and higher potential returns.