Fundrise Review: Real Estate Crowdfunding & Investing Sites

Everyone who wants to invest their money with the expectation to get good returns on their investments deserves a simpler, smarter, more reliable way to invest their money. This is where technology comes into the rescue. FundRise walked into the market with their resolution of making investments simpler, smarter and more reliable using technology. They are in the process of rebuilding the entire investment system from the scratch so that the interested individuals can benefit from it.

The team members of FundRise have been real estate investors themselves, they have spent their early days of careers building and owning unique properties in Washington, D.C. This added experience of an investor gave them highly efficient insights about the industry and they were able to make FundRise one of the best-performing real estate investment platform. Very often, most of the profit generated by the investments in real estate ends up in the pockets of institutional investment partners. In reality, the institutes were nothing more than the middle man between the actual people whose money was being invested.

So, the idea to allow everyone with the opportunity to invest in real estate without giving away their profits to middle man became the foundation of FundRise.

Fundrise Investment Options and Special Features

Fundrise has built its system from the scratch and during their journey to what they are today, they added a lot of features and benefits into their array of offerings.

Fundrise believes that their platform is based on the biggest change in the investment industry since the introduction of mutual funds. Most of the successful institutions allocate their capital in private market investments, whereas individual didn’t have the access to the private market investing. Fundrise allocates 30% of their capital in private market real estate, 20% bonds and remaining 50% in stocks compared to the old way of 30% capital in bonds and 70% in stocks.

This enables you to invest the way most successful institutions do. Almost all of the successful institutions invest in an analytically planned portfolio which consists on private market investing. The tech driven platform of FundRise gives you access to these analytically planned portfolios to invest in.

Why should you pay for something that you don’t use? When you buy stocks in the public market, you or your representative buys stock in an open auction, where prices are heavily bid up. Causing you to pay more than you should. Whereas, FundRise purchases assets from the private market at a negotiated price causing you to pay less for what you buy. The investment horizon in public market is daily liquidity whereas in private market the investment horizon in 3-7 years. Trailing 20 years annual return in public market is around 8.2% whereas in private market the trailing 20-year annual return is 12.3%.

Most of the famous investors accredit their success to a strategy called “Value Investing”. In this strategy assets/stocks/equity is bought at a price less than their intrinsic value. FundRise buys investments using this virtually impossible strategy. This strategy tends to produce stable returns over a long period. This strategy coupled with instant diversification provides greater stability for return on investment. Fundrise automatically diversifies your investment across their proprietary eREITs and eFunds, investment products which are specifically designed to be low-cost and tax efficient.

Fundrise has the potential to save 20-40% on your investments when compared to traditional investments using their end-to-end approach. Using full-stack financial integration, Fundrise provides same services as the traditional financial systems but with one single holistic structure saving capital on your ongoing annual costs. Saving between 0.37-5.45% annually on ongoing annual costs. Using full stack system Fundrise provides investors with the access to private market and removing goalkeepers and structural flaws save up to 40% cost on up front payments.

Fundrise Portfolio Strategy

Fundrise provides you with 3 investment portfolio strategies to choose from depending upon your aspiration from the investment.

1) Supplemental Income: This investment portfolio is designed for moderate-term investment horizon, to create attractive, consistent passive income stream. This portfolio has low expected variability.

2) Balanced Investing: This investment portfolio is designed for moderate to long term investment horizon, to create wealth confidently with the maximum level of diversification. This portfolio has low expected variability.

3) Long-Term Growth: This investment portfolio is designed for long-term investment horizon, to pursue maximum overall returns over the long term. This portfolio has moderate expected variability.

FundRise Performance

Performance of Fundrise investments, net of fees Including Rise Companies Corp. sponsored deals

Current Fundrise income vs. public investments

By investing directly in the private market, the Fundrise portfolios are able to perform better than public market focused portfolios.

 

The figure shown here represents the Q3 2017 currently declared dividends for the Fundrise Supplemental Income portfolio as compared to public market REIT ETFs and public market bond funds.

Fundrise Past Investment Opportunities

Requirements to Sign up For Fundrise

In order to signup with Fundrise, you first need to select the portfolio you want to invest in. You will be given two options of starter and advanced portfolio. The major difference between the two is in the level of diversification where the advanced portfolio has greater diversification. You would have to invest a minimum amount of $500 in order to start investing with FundRise.

Steps to Sign Up

  1. Choose Portfolio between starter and advanced
  2. Fill Basic Information like name address etc.
  3. Fill Tax Reporting Information- Social Security Number & Date of Birth
  4. Add Bank account via online linking or manually adding bank details. You can pay via wire transfer as well.
  5. Filling and Accepting their agreement
  6. Review and Finish

Latest Fundrise News: Investors pile into Fundrise’s new eREIT”

Recently, the investors in Fundrise received a breathlessly vague email saying Fundrise was about to release something “big”. A second email sent several days later, promised it would be the “biggest financial innovation” since the start of real estate crowdfunding.

These big claims generated quite a buzz among curious investors. A third email lifted the curtain and revealed what it was. It was an investment vehicle that Fundrise called an eREIT. The eREIT is a public, non-traded REIT that would invest in the small-cap commercial real estate.

The list of feature bullet points on the promotional page of the eREIT looks impressive at surface level.

It has a revolutionary low $1000 minimum. The average crowdfunding minimum is $5000.

Unlike most crowdfunding investments that are only open to accredited, it is open to Non-accredited investors as well.

Certain fees are 1/10th as expensive as non-traded REITs. (Although organizational fees are significantly larger as discussed below).

Money can be withdrawn by the investors any quarter subject to availability and a small penalty. This is a huge improvement over the majority of crowdfunding equity investments which lock investors in until the property is sold.

1% is the asset management fee, which is quite reasonable. It is waived by Fundrise, if the fund fails to make an impressive looking 15%.

The new offering was reacted by the market with a bang. Yield-starved investors excitedly flooded the eREIT with money. The first $1 million was fully filled in a jaw-dropping 4 hours irrespective of little knowledge by investors about what a single property would be in the portfolio or what the specific acquisition parameters would be. After that, Fundrise acted like a bouncer at the city’s hottest nightclub and stopped accepting new money, despite the fact that tens of thousands of investors were on the waiting list.

An announcement was made by the fund a few days later that it had purchased its first property and reopened briefly in order to raise another $1 million from enamored investors, before closing again. Following this, it added 3 more properties with all four properties ranging from a Fundrise grade of B to D. Each time it raised another $1 to 4 million from clamoring investors, before closing.

“I’m so lucky! Now, tell me again what I bought?”

I did a deep dive of the circulation offering to write this article. Taken as a whole, I feel this is a very innovative product that unfortunately is marred with flaws. I was bothered by what appears to be questionable marketing spin lacquering over substantial investor dilution and mammoth $1 million organizational expenses. And similar to a previous Fundrise diversified offering, there is a lack of financial transparency, which includes a lack of limits, targets and detailed financial information, which most competitors freely disclose.

If I were a non-accredited investor who was positive about the economy for the next several years and didn’t expect to need my money back anytime soon, I still might consider it. But there are many other better options for accredited investors.

Before understanding those, let’s first look at the positive side of this offering.

REIT of a different feather

The readers of this site know that there are three types of REITs: publicly traded, publicly non-traded and private REITs. Publicly non-traded REITs (like the eREIT) traditionally have fees that are so extortionary, that a warning was issued by the FINRA about the entire asset class.

But Fundrise has essentially rebooted the public non-traded REIT format. And to their credit, they’ve drastically improved it by building it with features of traditional private REITs: granting quarterly redemption and lower asset management fee. Moreover, Fundrise has made the eREIT available to non-accredited investors, different from a private REIT.

In addition, the minimum investment is a strikingly modest $1000, instead of the pricier $25,000-$5 million typical with private REITs (in case they are not offered through crowdfunding). Fundrise surely deserves credit for addressing this issue and making the fund accessible to more number of investors.

Simultaneously, the eREIT still retains some unwanted vestiges of traditional non-public REITs (like investor dilution to handle a mammoth fee) which have caused trouble in the past, and cause an unnecessary burden on performance.

In my opinion, it’s unfortunate that Fundrise lacquers over these important issues with what appears to be a deceptive marketing gimmick. Let’s look at this first, and what really lies behind this idea that Fundrise calls so “radical”.

“Do you mean ‘radical’ like a ‘ninja turtle’ or an ‘extremist’”?

Fundrise openly brags about its asset management fee structure and calls it a “radical idea that will set a new standard in accountability”. They continue saying (very confidently and impressively) that “during the first two years (until Dec 31, 2017), you pay $0 in quarterly asset management fees unless you earn a 15% annualized return. Period.”

This gives the impression that Fundrise is setting a very high bar for itself. In addition, will only be paid if they perform a high-performance leap.

Though, after reading the offering document, I was very disappointed. The fine print allows them to pull a ladder up to the bar, walk up and fall over, and still proclaim victory. If Fundrise continues with what the document allows, they will be less like a high-performance athlete competing for an Olympic gold, and more like an out of shape weekend warrior competing against himself/herself (and who has already bought themselves a trophy).

Here’s how will it be done.

“Support for me, or support for you?”

The ladder is built with something that Fundrise has given the name of “distribution support commitment”.

During those first two years, Fundrise LP has the right to inject cash into the fund by purchasing shares. In general, cash would be used for investment in real estate, thus creating profit for investors. Instead, the fund reserves the right to divert that money from investment use to pay investors a “return”.

In simple words, in the case where the fund is losing money, the rules are set up to allow Fundrise to “achieve” the 15% hurdle and get paid.

You might utter the words, “So what?”. As long I get my 15% for free in the first two years, who cares where it comes from? Well, unfortunately, it’s coming from you.

The shares bought by Fundrise LP still entitle them to a portion of the fund return, even though the money wasn’t used to purchase in real estate. So this causes the value of your shares to fall (dilution). Also, it reduces your ultimate return after the two-year period, to make up for the injected funds. To illustrate, it only looks like you’re getting a free lunch until you get handed a check at the end of the meal.

The more Fundrise has to bring in to support the 15%, the lower your net asset value is going to be. And there may be some serious injecting. On top of the general issues that are faced by all the real estate investments, there is a $1 million deficit/fee to worry about, which we’ll talk about in a moment.

Further, I also want to convey that this strategy (of using the fresh money to pay investors, rather than real estate earnings) isn’t just expensive, but it can sometimes be fatal. It’s one of the factors that are the cause of so many of the traditional non-traded REITs to become “zombie REITs” that may never be able to pay their investors back. They were of the thought that they would make up ground in the future but never did.

So why would this structure be chosen by the Fundrise, with its hindrance to performance and frightening history? Ultimately, only they know. The reason is an unfortunate side effect of Regulation A+ and not malice as suspected. Unfortunately, this causes the fund to have a gargantuan fee of $1 million that creates an enormous hole for the fund to dig itself out of on day 1.

“Congratulations on the purchase of your new $1 million paperweights!”

The regulation A+ was supposed to revolutionize the real estate crowdfunding industry because it would open the door for non-accredited investors in participation. However, most platforms established that the implementation was so expensive and limiting that it wasn’t worth doing.

Fundrise deserves kudos for finding a way to create an offering under it at all. However, a side effect is that they have an expectation of organizational expenses to be a gigantic $1 million.

Now the question is how big is this? If the fund has raised an amount of about $10 million right now, those properties all have to make a whopping 10%, before the fund can just break even. That is a significant hole to have to dig out from.

Making lemonade from lemons

Fundrise can make the cost more manageable if they raise more money. The reason being the percent of the overall cost will go down. Taking an example, many of the core real estate private REITs raise billions of dollars, which causes the organizational expenses to be a minuscule percent.

However, regulation A+ ties Fundrise’s hands, because the law limits them to just $50 million. So the best that can be done by them is to raise the full $50 million and then lower it to 2%.

Where a nonaccredited investor might be willing to pay the extra 2% as they have few options, but as an accredited investor, I see little reason to pay this fee for no benefit. I can invest in numerous private REITs (especially through crowdfunding) that give me all the benefits of the eREIT with better transparency and that too without this payment of an extra fee.

Also, there is an extra risk factor too. Many economists predict a recession in next one to three years. If their theory goes right, then Fundrise could have problems raising the entire $50 million. If that takes place, then the expense percentage could climb to higher and more painful numbers.

Apart from the fee issues, the fund also has some transparency problems regarding its targeting and limits, topping the list of issues.

“No, I didn’t miss the target. I chose not to aim.”

Almost every private REIT attracts investors by way of setting targets of the most important parameters. This lets investor know if the strategy matches their portfolio. Moreover, they also set explicit limits so that a sense of reassuring is given to an investor that they won’t take speculative risks that are beyond what the investor expects.

However, the eREIT is disturbingly silent and will not disclose explicit limits, targets and financial details in several important areas. To be specific, it has:

No specific diversification targets

No specific target IRR

No specific leverage maximum

No open book policy which discloses low-level financial details of the investments to investors.

No specific target for investment risk based on the Fundrise rating of A-E.

Investors can only rely on the Fundrise rating, since not being able to see the details of investments. This itself is not very encouraging, as it appears to be currently averaging about a low C-. This insufficient information is difficult to locate on the Fundrise site.

The previous Fundrise diversification offering seemed to offset the protection of diversification by including higher risk properties (averaging an even lower D Fundrise rating). I hope that is not the case with the eREIT. Only time will tell, as more properties are added to it.

As investments available on the Fundrise site seem to be drying up, the quality of the portfolio is especially pertinent. Where before October 2015 it had one of the largest selections, I haven’t seen any new individual investments on the site since then.

Benjamin Miller, CEO of Fundrise has written that the dry spell is an intentional action to prevent poor quality deals from appearing on the site. If this is true, then it deserves admiration. However, it raises an additional question. If there aren’t enough deals that are safe enough to put out to individual investors, then what does this convey about the quality of the deals being put into this eREIT? Yet again, time will only tell.

Silence of the Fundrise

I asked Fundrise for confirmation and/or correction on some of the basic facts in this article but after initial cooperation, I was ultimately told that Fundrise could not provide this and that I should just read the contract by myself.

I’ve again requested Fundrise to respond to this article by addressing the numerous questions raised by it and correct any mistakes or give their official position. If they choose to respond, I will post it here.

Conclusion

The cooperation from the economy can help Fundrise in raising the entire amount of $50 million. And, where they put in higher quality assets, then this eREIT investment still might be worth it for nonaccredited investors. It allows them in accessing small-cap commercial real estate, which is difficult or impossible to do with the public REIT while it is too expensive to do with the nontraded REIT.

However, if the economy goes south, or the investments themselves don’t do well, then those investors may find themselves substantially disappointed. This dynamic is not helped by the $1 million hole that this small fund has to climb out of, on day 1. Also, such investors need to be long-term. They should not expect to be able to pull their money out anytime soon, without taking a substantial loss due to dilution.

As an accredited investor, I can see little reason for me to invest in this. The lack of targets and maximums, investor dilution, questionable marketing spin and huge organization expenses make the eREIT less attractive. In my opinion, there are many other