Commercial real estate investing can be an excellent way to grow your nest egg, although it’s not without risks. The big risk? Commercial real estate requires large amounts of upfront capital to purchase a property. In order to properly diversify your portfolio, you should own multiple properties, various types of properties (e.g., apartment complexes, strip malls, office space, etc.) and properties in multiple locations.
One avenue for the small investor who wishes to invest in commercial real estate is through a REIT (real estate investment trust). As you may know, a REIT owns and manages income-producing real estate.
By pooling the funds of many individual investors, the REIT can purchase a diversified mix of commercial properties — such as office buildings, shopping centers, hotels and apartments — that the typical investor might not otherwise be able to purchase individually.
One type of REIT, an exchange-traded REIT, is available through any broker; as the name implies, its shares trade on the securities markets. Exchange-traded REITs have a few downsides, however. For one thing, their performance is heavily correlated with the broader stock market.
Fundrise Fees & Features
|Offering Types||Debt, Equity, Preferred Equity|
|Property Types||Commercial, Residential, Single Family|
|Regions Served||50 States|
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- Self-Directed IRA (New) – Now you can invest in Fundrise with pre-tax dollars and use for retirement planning. (Note that, currently, self-directed IRAs can used only for eREIT oferrings.)
- Goal Based Investing (New) – Via the Fundrise 2.0 platform, invest in real estate based upon your goals rather than types of investment or location.
- eREIT – A non-traded REIT that invests in multiple commercial real estate. Compared to traditional REITs cuts out the middleman saving you on commissions.
- eFund – A private fund that invests in multiple commercial real estate properites, that unlike Fundrise’s eREITs focus on growth than income.
What Are eREITs?
An eREIT (short for electronic Real Estate Investment Trust) is an invention by Fundrise to make investing in commercial real estate accessible to the masses. eREITs are similar to investing in an ETF or mutual fund. Fundrise’s eREITs are most similar to non-traded REITs. The primary difference is in the fees. When you invest in an eREIT, you don’t go through a broker — you buy directly from Fundrise. That allows Fundrise to dramatically reduce the fees. There’s no middleman, so there are no upfront fees or commissions. And rather than paying a front-end load of 7%–15%, Fundrise charges just a 1.0% annual asset management fee.
Non-traded REITs and eREITs are registered investments, and while they’re subject to the same SEC requirements that an exchange-traded REIT must meet, they’re not directly correlated with stock market fluctuations. Two downsides: There isn’t the same liquidity since they’re not traded on the markets, and front-end fees are higher than exchange-traded REITs.
eREIT vs. Non-Traded REIT vs. Publicly Traded REIT
|Type||eREITs||Non-Traded REITs||Exchange-Traded REITs|
|Secondary Market||No||Typically No||Yes|
|Front-End Fees||None||0-15%||0-7% + broker commission|
The minimum investment is just $500 for Fundrise eREITs, and you don’t have to be an accredited investor to participate. Shares of the eREITs are purchased exclusively online, and Fundrise members receive notifications when new assets are added to the eREITs.
What is an eFund?
An eFund (short for Electronic Fund) invests in commercial real estate and is exclusive to Fundrise. It’s similar in design to a professionally managed mutual fund, but like the eREITs not publicly traded. eFunds are set up as partnerships and not corporations so they are taxed differently — saving on double taxation. Also, like eREITs Fundrise offers these eFunds to investors without any brokers or commissions. Unlike an eREIT which is typically used for income, Fundrise’s eFunds are set up for growth.
Goal Based Investing (New)
Fundrise currently offers three investment styles:
|Balanced Investing||Income & Growth|
|Long Term Growth||Growth|
Your investments with Fundrise will consist of their eREITs and eFunds. The allocation will depend upon if you are looking for growth, income or a combination of both.
If you are unsure which one is right for you, Fundrise offers a three-step questionnaire that can help determine how you should invest.
For the launch of their eREITs, Fundrise offers an “accountability policy” that’s far from industry standard:
- As an investor in their Income eREIT, you pay $0 in asset management fees unless you earn at least 15% annualized return during the first two years of operation, until Dec. 31, 2017.
- For their Growth eREIT, Fundrise will pay a penalty of up to $500,000 to investors if it earns less than a 20% non-compounded annual return.
Fundrise is not a newcomer to real estate investing, and their team has experience in many areas of the real estate marketplace. In 2015, they had $525 million in real estate assets under management and provided an average annual return of 13% net to their investors.
How Has Fundrise Performed?
Fundrise recently revealed stats on how its REITs have performed. In fiscal 2014, 2015 and 2016, they returned 12.25%, 12.42%, and 8.76%, respectively, on an average annualized basis. And in the first quarter of 2017, the average annualized return was 10.59%. Obviously, previous performance does not indicate future results.
There’s a slight complication when you want to cash out those gains — because the money you invest is put into particular properties, you wouldn’t be able to receive money from a deal until the physical property is sold. To rectify this matter, Fundrise now allows investors to cash out of deals during specified quarterly periods. So you can get exit a trade during four windows per year without having to wait for a sale.
Pros and Cons
- Low Minimum — The minimum investment to start with Fundrise is $500.
- Low Fees — Fundrise charges only a 0.85% asset management fee per year.
- No Accreditation — Unlike competing firms, Fundrise is open to any investor in the United States, regardless of income or net worth.
- Diversification — Unlike other private REITs, Fundrise eREITs have a pool of many properties that could smooth out returns.
- 90-Day Guarantee — Unheard of in the investment industry, if at any time during your first 90 days as an investor you’re not satisfied, Fundrise will buy your investment back at the original investment amount. This offer is subject to certain limitations.
- Commercial Real Estate Access — Commercial real estate is typically a high-dollar investment, whereas Fundrise allows you to invest with little money.
- Passive Investment — Unlike owning your own commercial real estate outright, Fundrise investments are truly passive.
- Quarterly Redemptions and Distributions — The Fundrise eREIT has adopted a quarterly redemption plan to provide periodic liquidity; however, distributions are not guaranteed.
- Investment Liquidity — Fundrise eREITs are not publicly traded. Once you make an investment, you are pretty much committed to the investment for the term. There is currently no secondary market to sell your investment to others; however, there is a quarterly redemption program whereby investors may be able to redeem their shares, subject to some limitations.
- Tax Consequences — Distributions are taxed as ordinary income, as opposed to the 15% tax rate on qualified dividends.
Real estate as an asset class is a long-term investment. This includes REITs, whether they’re publicly traded, non-traded or eREITs. The opportunities for capital appreciation, portfolio diversification, and regular distributions are alluring; however, distributions are never guaranteed.
While not exactly the same as investing in real estate directly, REITs are much more passive and allow you to invest in properties outside your geographic location. Fundrise can be a way to diversify into real estate without the large amounts of capital or management headaches involved when doing it yourself.
While I am a real estate investor, REITs have never appealed to me for several reasons — primarily because of the front-end load and ongoing fees. Fundrise takes the sting out of those investing fees with their 0.85% asset management fee.
And their unique accountability guarantee is a breath of fresh air in the investment marketplace. Every investor I know would fully agree with this statement on their website: “Today’s model of investors paying large fees to investment managers regardless of their performance makes no sense.”
Disclaimer: The information contained herein neither constitutes an offer for nor a solicitation of interest in any securities offering; however, if an indication of interest is provided, it may be withdrawn or revoked, without obligation or commitment of any kind prior to being accepted following the qualification or effectiveness of the applicable offering document, and any offer, solicitation or sale of any securities will be made only by means of an offering circular, private placement memorandum, or prospectus. No money or other consideration is hereby being solicited and will not be accepted without such potential investor having been provided the applicable offering document. Joining the Fundrise Platform neither constitutes an indication of interest in any offering nor involves any obligation or commitment of any kind.– http://www.investorjunkie.com