Until a few years ago, real estate investing required a lot of money and time. Today, online real estate platforms like Fundrise let you directly invest in private real estate with as little as $500. It’s possible to earn steady passive income without managing the property or screening tenants.
Effortless investing and not having to deal with tenants. You must be asking yourself, “Is Fundrise legit?”
This Fundrise review covers the ins and outs of how crowdfunding lets you invest small amounts of money in real estate and earn regular dividends. You will also be able to decide if this passive income idea fits your investment goals.
Review of Fundrise
Fundrise offers real estate crowdfunding for non-accredited investors who live in the United States. Previously, only accredited investors with a high income or net worth could invest in commercial real estate and multi-family apartments through crowdfunding.
You get instant exposure to a diversified portfolio of property types:
- Shopping centers
- Mixed-use properties (commercial and residential tenants in one property)
- Multi-family apartments
Like a robo-advisor, Fundrise decides which properties to invest in and uses a local manager to handle the day-to-day affairs. You earn quarterly dividends from tenant rent and loan payments or when Fundrise sells a property for a profit.
It’s free to join Fundrise and can start investing with $500. You pay approximately one percent in annual fees. There is an early withdrawal fee up to three percent on funds you withdraw within five years.
What is Fundrise?
Directly investing in real estate, especially commercial and multi-family, is too expensive and time-consuming for most people. Most of us don’t have the time, cash, or skill to be a real estate mogul.
Yet, we still want to earn the potential long-term wealth that real estate investing with Fundrise offers.
Most people feel their only option is publicly-traded real estate stocks, REITs, and index funds. While real estate stocks are easy to trade, you only invest in the company.
As a result, you earn less income because you have less “skin in the game.”
Fundrise can be less volatile and earn more passive income than public real estate stocks. Higher potential income is one benefit of crowdfund investing. But your investment commitment is at least five years to avoid early withdrawal fees.
No investor can invest in individual properties like some other crowdfunding platforms.
All Fundrise investments are in a non-traded eREIT (electronic real estate investment trust). These eREITs hold multiple commercial and multi-family properties throughout the United States.
They don’t trade on the stock market and require a multi-year investment commitment from you. But, the annual performance of these funds rivals the S&P 500 annual return.
For example, the S&P 500 has an 8% average historical return since 1958. All Fundrise investments had an average annual return of 9.11 percent in 2018 net of fees.
Most Fundrise investors pay around one percent in annual fees.
How Does Fundrise Work?
Each Fundrise portfolio holds properties with either debt or equity financing. Equity investments are like investing in stocks for long-term growth. Debt investments are like bonds and earn fixed monthly dividends.
Here is a brief example of how Fundrise debt and equity investments work:
- Debt investments lend money to the property owner. These investments are less risky but earn less potential income. You earn quarterly dividends from the monthly interest payments and rental income.
- Equity investments own a direct stake in the property. These investments can be riskier but have more earning potential. You most likely won’t earn regular dividend income. Most of the revenue comes when the property sells for a profit.
There are four different Fundrise portfolio options. Each portfolio owns differing proportions of debt and equity investments.
The Fundrise minimum investment is $500 for their Starter portfolio. Your balance splits evenly between debt and equity investments. Once your balance reaches $1,000, you can pick a Core plan for a specialized investment strategy.
All subsequent investments must be at least $100 for Starter or Core portfolios. You can reinvest all dividends or deposit into your bank account for free.
Fundrise Starter Portfolio
The Fundrise Starter portfolio is your only option when you invest between $500 and $999. This portfolio invests in half of your funds into an income (debt) eREIT and the other half into an equity eREIT.
One reason to consider the Starter portfolio is to try out Fundrise. You get a 90-day trial period where you can withdraw your investment penalty-free.
This portfolio is also a great option if you can only invest $500 as you work toward a Core plan. Other online real estate platforms may require as much as $5,000 to start investing.
Fundrise Core Portfolio
With a minimum $1,000 balance, you can choose a Core plan. Each plan favors different percentages of debt and equity investments.
Best for: Earning dividend income and risk-averse investors
The Supplemental Income portfolio focuses on debt investments to earn dividends. As of December 1, 2019, the current annualized dividend is 7.75 percent after fees.
Fundrise currently invests your cash into two different eREITs:
- Income eREIT: 60 percent
- Heartland eREIT: 40 percent
The Heartland eREIT holds debt and equity investment across the Midwest.
This trust can be a better option than a high-yield online bank account for cash you don’t need to touch within the next five years.
The Supplemental Income portfolio is the least-risky Core plan but has the lowest projected annual returns. The projected annual Fundrise returns for this plan are between 8.8 percent and 10.8 percent.
Most of this return comes from the 7.75 percent annual dividend. But you also hold some equity investments.
Best for: Earning dividends and equity income
The Balanced Investing plan is most like the Starter portfolio. Its projected annual return is between 9.0 percent and 10.4 percent.
This plan relies more on equity appreciation than dividends. The projected annual dividend yield is only between 3.8 percent and 4.2 percent.
This plan is riskier than the Supplemental Income. Yet, it’s still an excellent option to earn passive income from predictable quarterly dividends.
Fundrise divides your balance between these eREITs:
- Heartland eREIT: 40 percent
- Growth eREIT: 40 percent
- Income eREIT: 20 percent
Best for: Investors with a high risk tolerance
Young investors with a higher risk tolerance might choose the Long-Term Growth portfolio. Although you earn minimal short-term dividends, you can earn higher long-term returns.
It can take several years for Fundrise to sell the properties they acquire for a profit.
If you need immediate income, choose another Core plan with higher dividend yields.
The projected annual return is between 9.4 percent and 10.1 percent. Appreciation accounts for an annual 8.1 percent to 8.6 percent annual return, with the remaining 1.4 percent from dividends.
This plan can be less risky than only investing in the stock market. Still, make sure you invest in stocks and index funds to diversify your portfolio. Plus, stocks still give you instant access to your money if needed.
What Are Fundrise’s Fees?
Fundrise is free to join, and you don’t pay upfront transaction fees or reinvestment. You will pay an annual fee of at least one percent on your account balance.
For every $1,000 you invest, anticipate paying $10 in fees:
- 0.85 percent annual asset management fee
- 0.15 percent annual investment advisor fee
There are extra fees to cover costs related to buying or selling properties. In most cases, your annual fees will be slightly higher than one percent.
These fees are higher than a robo-advisor like Betterment or investing in index funds. However, Fundrise is still one of the most affordable ways to invest in real estate.
To see the potential fees, you need to read the eREITs offering circular. These circulars are similar to an ETF prospectus. Read the circular to find these eREIT details:
- How the eREIT invests in your cash
- Potential risks
- Potential fees
Each year, each eREIT provides a Form 1099-DIV in January. The IRS taxes your earnings as ordinary income like your day job or side hustle.
You can invest with an IRA but will pay an annual $125 custodial fee.
Is Fundrise Legit?
Fundrise is a legit way to invest in commercial real estate across the United States. Their website lists the various projects they invest in.
Previously, crowdfunding was only open to accredited investors. Now, Fundrise lets people with an average income invest in commercial real estate.
Fundrise can also be an effortless way to make money from home.
Is Fundrise a Good Investment?
Fundrise can be a good investment for these reasons:
- Want to invest in a stock market alternative with less daily volatility
- Earn potentially more income than a regular bank CD or bond investment
- Don’t have the time, money, or skill to be a landlord
Don’t invest any cash with Fundrise that you won’t need for at least five years. For example, this isn’t an appropriate place to store your emergency fund.
Like any investment, Fundrise isn’t risk-free. If an investment property fails, you can lose money. In a recent letter, Fundrise states they may temporarily prevent withdrawals during an economic downturn.
Below is the average Fundrise historical performance for all of their assets (after fees):
- 2014: 12.25 percent
- 2015: 12.42 percent
- 2016: 8.76 percent
- 2017: 11.44 percent
- 2018: 9.11 percent
Some of these historical returns are greater than the projected Core plan returns because some of the higher-performing investments were accessible to earlier investors.
Fundrise has since changed to investment strategy to reduce downside risk.
Since 2016, the historical returns are more in-line with the projected Core plan returns. When deciding which Fundrise plan to choose, consider the projected returns to pick the best plan.
How to Redeem Your Fundrise Shares
You can only sell your Fundrise shares by submitting an online request at least 15 days before the calendar quarter ends. When the redemption window opens, Fundrise will begin selling your shares.
It can take several weeks for Fundrise to transfer the cash into your bank account.
Fundrise also charges an early redemption fee for most shares you own less than five years. Below is the early redemption fee depending on how long you hold them:
- Own less than 90 days: zero percent
- Between 90 days and three years: three percent
- Between three years and four years: two percent
- Between four year and and five years: one percent
- Own longer than five years: zero percent
Pros and Cons of Fundrise
Still unsure if Fundrise is a good investment? Here is a quick overview of the highlights and lowlights.
- Low-cost way to invest in commercial real estate. In most cases, real estate investing costs thousands of dollars per property. Fundrise only requires $500 to start.
- Open to non-accredited investors. Fundrise is open to all U.S. residents older than 18.
- Easy for inexperienced investors. Fundrise decides which properties to invest in, to make it easy for anyone to invest in real estate and potentially earn a profit.
- Highly illiquid. You don’t have instant access to your cash like a bank account or stock investments. However, your potential annual return can be higher and less volatile.
- Can’t invest in individual properties. Accredited investors with real estate investing experience will want to use another platform to hand-pick properties.
- Ordinary income taxes. All Fundrise investment income is subject to federal and state income taxes instead of capital gains like stocks.
Who Should Invest in Commercial Real Estate?
Commercial and multi-family properties are a fantastic way to earn passive income. It can be more stable than a rental house or duplex. But you should only invest cash you won’t need for several years.
Your average annual returns can be similar to the S&P 500. Fundrise isn’t risk-free. However, you can diversify your portfolio with a nationwide real estate presence.
Fundrise Review: Bottom Line
Fundrise is one of the easiest ways to start investing in real estate. However, you should only invest cash you don’t need for at least five years as commercial real estate is a long-term investment.
If you want to invest in real estate and have limited funds, visit the Fundrise site and open an account for as little as $500.
What are your thoughts on investing in real estate? How are you currently working to grow your wealth? What questions do you have about real estate investing?
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