Fundrise Review - Jump on eREIT Bandwagon
Review of: Fundrise
Written by: Eric Bowlin
4.5 / 5 stars
Last Updated: 07/19/2016
Summary of Fundrise
Crowdfund commercial real estate investments or invest in the first eREIT. Available for both accredited and unaccredited investors. Invest as little as $1,000.
Since the JOBS act was passed, back in 2012 if my memory serves me, I've been interested in crowdfunding. I really thought it would massively change real estate and do it quickly. It was supposed to make private equity available to the unaccredited investors which is the vast majority of people.
Well, I was sorely disappointed. Years went by and some sites popped up, but almost all cater exclusively to accredited investors.
An accredited investor is a person who has more than a million dollars in assets (excluding personal residence) or who earns 200-300k per year or more. The government doesn't consider the rest of us to be sophisticated enough to be private investors.
So, I have decided to test out Fundrise to balance my real estate portfolio and earn some more passive income in the process.
Jump ahead to any section of this eREIT review
- What is Fundrise?
- Accredition Requirements
- How Does Fundrise Screen Deals?
- How to Set up an Account
- Debt vs Equity Investments
- eREIT Fees
- Redeeming your eREIT shares
Fundrise Review - Intro to the Company
So, I set up my account to honestly try it out - I only thought about doing a Fundrise review afterwards. If you are interested in setting up an account you can get it here on the Fundrise Wait-list. There is usually a wait-list so you should get your name on there now. The higher up the list, the sooner you get contacted about an investment opportunity. You can always decide against investing in any particular deal before there is an investment you want. Once something pops up, you can review the investment and decide against it.
Why Try Crowdfunding?
I've been enamored by the idea of crowdfunding since before 2012. Not only have I thought about ways to crowdfund my own investments (though I haven't got to that level yet), but I've also thought about investing in other's real estate deals as well.
I have noticed that real estate is so far behind other areas when it comes to crowdfunding. Real estate investing is still amazingly arcane with how developers find investors, syndicate deals, and then move forward on projects. Why can tech startups find hundreds of millions of dollars in funding practically overnight, even for terrible ideas, but real estate is reserved for a very small and elite group, even when the potential projects are amazing?
So, if you are an experienced investor currently and want to diversify or simplify your portfolio, online investing is a great place. On the other hand, new investors might find online investing a great place to start!
Let's dive in:
Fundrise an investment service that allows you to invest directly into commercial real estate. Fundrise created a marketplace that is fairly transparent and their goal is to "make the process of investing in the highest quality commercial real estate from around the country simple, efficient, and transparent." Essentially, they bridge the gap between the investor and the developer.
As I complained about above, real estate is traditionally very exclusive, and the only investors were those with direct access to the institutions that fund the deals. Fundrise (along with many others) is cutting out the middle-man and allowing us to directly invest. Also, by cutting out the institutions, it should hopefully reduce the overhead expenses and keep our fees low.
Fundrise currently has roughly 93,000 members and they have invested in nearly $3 billion worth of real estate. They let you invest as little as $1,000 at a time and you get to pick the projects or funds you want to invest in.
Are you ready to see how they do it?
Continue reading this Fundrise review to find out.
I found Fundrise a few years ago, and at the time it seemed that only accredited investors were able to partake. The SEC released Regulation A which made things available to unaccredited investors, but it was too complicated so most sites used Regulation D instead, which excludes unaccredited investors. The SEC surprised everyone in March and released Regulation A+ which further simplifies the process for the unaccredited investors to invest.
So I was browsing around the internet one day and I came across Fundrise...again. I was browsing around their site and found they are actually available to unaccredited investors as well (us unsophisticated masses that can't make good investment decisions). It was a welcome surprise to see the potential for normal people to get their hands on passive real estate investments.
Fundrise claims to receive over 250 submissions per week with less than 1 percent being approved. Here is their approval process
According to the Fundrise website, they have a very strict underwriting process that includes the following steps:
1) Sponser Screening
The first thing they look at is the company and the sponsors. They look only for companies that are well capitalized and have a history of success in top US markets. They claim that only 25% of sponsors move beyond this step.
2) Initial Project Due Diligence
Fundrise is focused on short-term projects that last 1-3 years. Their preferred structure is Senior Secured Debt, Mezzanine Debt, or Preferred Equity. Fundrise investors are senior to the sponsor and "Fundrise investors must get paid back their principal and any owed returns before the company is able to realize any profits."
3) Detailed Underwriting
If the sponsor and project meet the Fundrise requirements, it moves on to the detailed underwriting. The Fundrise underwriting team completes an extensive analysis and review of all these points. The total underwriting checklist contains more than 350 different data points.
I was originally going to include a list of some of the underwriting criteria, but instead I found a cool video and linked it above. Check it out!
4) Purchase by Fundrise
So Fundrise actually funds the deal before putting it on the platform. By pre-funding the deal, they take on a large amount of risk that this project will be good and investors will want it.
I popped my email in there and then forgot about it. A month or so later I got an email that an offering was available and I could participate in it. So, I went online to set up an account.
It literally took me about 60 seconds to set up an account. Setting up an account lets you see what offerings are available. You can actually put in bank info at a later time when you are ready to start crowdfunding some real estate.
Logging in the first time it gives you an option to take a tour. "X", skip that - I'm an explorer not follower.
So, continuing on... The website is pretty straight forward and easy to navigate. The landing page is nice - it shows you what your performance is and how much you have invested. For me that's $0. I did place an order for $1,000 but that takes a few days to process and go through.
One thing to remember about Fundrise - you are actually investing in physical real estate either through debt or through equity. Make sure you understand what you are doing and what you are getting into.
This is a great place to side-step from my review of Fundrise and take a moment to talk about the different TYPES of investments that are available. Essentially, you have two ways to allocate your money - Equity or Debt. You can also read another article on this site about different types of investments.
Real Estate Equity Investing
When you buy into an equity fund, you are actually buying ownership in that property. This is generally the more risky type of investment because If the investment fails, the equity holders can lose most or all of their investment since they are actual owners.
The potential for earning is far higher too. If the asset has some exceptional appreciation that was unexpected, that goes straight into the pockets of the real estate owners.
Invest in Real Estate Debt
You also can buy into Debt based fund. Since you are loaning money backed by an asset, the potential downside is generally lower. If the borrower defaults, the lender can go after the asset.
On the other hand, they don't have as high of a return as an equity investment does. Obviously, to the risk taker goes to spoils. So, we trade off some risk for some lower returns.
Choosing an Investment to Crowdfund with Fundrise
Continuing on with the Fundrise Review. As you can see, there aren't many choices. Accredited investors are given the option to invest in individual projects that are avilable. Here, I'm limited to an Income eREIT and a Growth eREIT. But, what is a REIT?
A Real Estate Investment Trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and even timberlands. - Wikipedia
a REIT has a lot of requirements in order to qualify and it needs to distribute 95% of its taxable income to the shareholders. There are also different types of REITs, such as a publicly listed REIT, non-listed REITs. These eREITs offered by fundrise are non-traded REITs as they are not listed or traded on the stock exchange.
According to FINRA there are a number of risks associated with non-traded REITs, the biggest of which is that it can be very difficult to get your principal back. Other issues are potentially high fees, especially on the front-end and a limited secondary market to sell your shares. In fact, you can read a very scathing review of non-traded REITs if you'd like.
So I decided to do a bit of digging on this eREIT. I was able to pull up the offering circular on the SEC website. Wow, what a hard document to read!
The first thing I wanted to investigate was the fees. Here is a quick breakdown of the fees I was able to find:
Form of Compensation and Receipient
Offering Costs of $1,000,000 or roughly 2% of money raised
3% of the amount funded. Paid by borrowers and not by the Fundrise Investors
Acquisition/Origination Fee - Manager
Only if not reimbursed by the borrower - Amount Unknown
Reimbursement of Acquisition - Manager
Asset Management Fee
0 - .5% * This is the fee that may be waived if underperforming
1% of non-performing assets
Special Servicing Fee
There appears to be no commissions
Here is another complicated one. There are a few variables at play here. First, Fundrise will only redeem a certain amount of shares per quarter. Once they have redeemed those shares, you will get in line for the following quarter, and so on. Additionally, when you redeem the shares, you will incur a penalty of between 3 and 5% of the share price. Thirdly, Fundrise gets to calculate the value of the shares and it's essentially impossible for us to determine that value on our own.
Effective Redemption Price (as a percentage of per share redemption price.
Holding Period from Start of Package
No Redemption Allowed
Less than 6 months
6 months to 2 years
2 to 3 years
The biggest unknown appears to be the unknown value that Fundrise will place on each share. Upon purchase, each share is worth $10, but that can easily go up or down based upon their valuation. On top of that, you can only get a portion of your money back when you redeem.
Checking the Fundrise Offerings
You can scroll through the offerings and see what is available and what the investment strategies are. Take a look at the pictures to get an idea of what you might see.
One thing that really caught me was that the management fee for the Income eREIT is waived through 2017 if it does not have a 15% return.
I read deeper into the offering circular and realized that the management fee is paid quarterly and this waiver appears to also be quarterly. So I guess it's theoretically possible to pay 3 quarters of fees then lose your entire year's worth of returns in the 4th quarter.
There are a lot of different fees built into the whole thing so I'm sure everybody gets paid either way, but at least they are willing to put some money at risk.
Additionally, the Equity eREIT will pay out a $500,000 penalty if a 20% return is not achieved. If they reach their 100 million mark, then 500k is the same as .5% so it's really just another way of saying the same thing.
Either way though, I can say I was really sold by this idea. It shows me that they really are prepared to lose a significant source of revenue if it doesn't perform at a high level. I think ALL the fees should be put up front, not just the ones they waive. But, 15% ain't too shabby for doing absolutely zero work, so let's hope for the best.
Well, I obviously cannot answer that for you. The purpose of reviewing Fundrise is not to tell you if you should invest (only you can decide that) but to give you an idea of what they have and if they are easy to work with. Like I said before, you can always sign up and check out what they have to offer, and never invest.
The fees appear very low compared to the horror stories I read about in other reviews. Also, Fundrise makes it's money solely by crowdfunding deals unlike traditional brokerages. So, if they start screwing people I feel like their funding would start to dry up. Who knows though, crowdfunding is a very new phenomena so anything is possible.
I decided to go ahead and buy into this fund. I can't show screenshots of it because it's not available to buy into anymore, but I can say the process was very quick and simple, taking only a couple minutes. They did say that it can take up to 30 days for the purchase to be approved and withdrawn from the account. Being a young guy and a product of our digital age, I kind of want things to be done NOW...but what can you do? I guess real estate is a slow game even when done online.
Fundrise Review - My Overall First Impression of Fundrise and Online Real Estate Crowdfunding in General
- Seemingly lower fees than traditional real estate investing
- I am impressed by the website, layout, and utter simplicity.
- I wish there were more offerings to choose from, or that they came along more often.
- Waived management fee if it doesn't perform makes you feel they are selling something they believe in.
I'll make sure to publish updates to this Fundrise Reviews throughout the year to keep everyone updated with my experience with them.
Don't forget to like this article and share it online! If you have experience with Fundrise, please comment.