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Now that Mrs. Superhero and I are free from student loan debt, we are naturally positioning ourselves to pursue further alternative investment opportunities. At present, we both participate in pension plans with our current employers and contribute to our IRAs. Recently, I have begun pursuing my real estate licensure as an additional side hustle. At the intersection of new investing opportunities and my new-found real estate knowledge? You guessed it: real estate investment.
As most readers have probably gathered by now, I tend to err on the conservative side when it comes to all financial matters. This is the reason why we opted to pay off over $17,000 of student loan debt in just 54 days rather than invest that money. At any rate, my conservative nature dislikes the idea of borrowing money on an investment property, even with today’s favorable interest rates. Currently, there are several quality, profitable investment properties available in our area in the ballpark of $100,000. While these properties would command handsome returns in rent given the local market conditions, Mrs. Superhero and I lack the liquidity to pursue to this kind of investment and likely will for some time, given our other goals. That stumbling block aside, I’m not so sure that I have the time or desire to be a landlord at this stage in life.
Are we destined to be “stuck” investing in our IRAs and funnel any remaining funds earmarked for investments into taxable brokerage accounts? Fortunately, I don’t think so.
What is an REIT?
A Real Estate Investment Trust, or REIT, is a type of security which allows everyday investors to invest in real estate, such as apartments, hotels, shopping centers, and office buildings, through property or mortgages. An REIT is modeled after mutual funds in the sense that it provides diversification, regular income streams, and long-term capital appreciation. Essentially, a shareholder invests in an REIT and pools his money with other investors toward the purchase of portfolios of typically large-scale or mid-size properties.
Chief among the benefits of an REIT is diversification, as an investor’s money is not technically tied up in a single asset. Additionally, REITs provide taxable dividend income to investors and allow individuals to invest in real estate while maintaining significant liquidity.
Believe it or not, the earliest REIT, Continental Mortgage Investors, was launched in 1965, according to Investopedia. While they were not necessarily the hottest investment available in the 1960s, many of today’s investors are flocking to them. Why? Many REITs are outperforming stocks and bonds at present.
The eREIT: Improving Accessibility to REITs
When Congress approved the creation of REITs in the 1960s, their intention was to make commercial real estate investing more accessible to the average investor. Whether or not this was successful is debatable and dependent upon your definition of “successful.”
In my opinion, today’s eREIT, or electronic real estate investment trust, is a perfect marriage between the power of the world wide web and the many advantages of the REIT.
While an investor in today’s market has multiple options when seeking an eREIT, Fundrise is an excellent option for all types of investors.
What is Fundrise?
Simply put, Fundrise is an online investment platform for commercial real estate. Fundrise allows investors the ability to:
- Browse investment offerings based on investment preferences including location, asset type, risk and return profile;
- Transact entirely online, including digital legal documentation, funds transfer, and ownership recordation;
- And manage and track investments easily through an online portfolio; receive automated distributions and/or interest payments, and regular financial reporting.
My favorite feature of Fundrise lies in its accessibility; while many REITs are only available to accredited investors or require a $3,000 minimum investment (like the Vanguard REIT Index Fund Investor Shares), Fundrise only requires a $1,000 minimum investment for several of its eREITs. In doing so, Fundrise has essentially put their money where their mouth is, so to speak, and ensured alignment with their initial goals:
So, we started Fundrise with a simple idea: give everyone the opportunity to invest directly in high quality real estate, without the middlemen. Our idea definitely had its skeptics. Industry professionals told us that it was impossible. Well, they were wrong.
The Fundrise Advantage: Superior Performance
According to Fundrise,
Historically, investors with roughly 20% allocated to real estate have outperformed those who only own stocks and bonds. However, the best opportunities require minimums of $100,000 or more, making them inaccessible unless you’re very wealthy. The only other option is to go through unnecessary middlemen who charge high fees, negatively impacting returns.
Outperforming stocks and bonds sounds great to me, but as a would-be investor who currently lacks $100,000 in liquidity, I would naturally have to bow out.
Fortunately, Fundrise makes it possible. But how can an average investor invest in real estate with such limited funds? After all, we are talking about investing in substantially-valuable (multi-million dollar) properties, particularly when it comes to commercial real estate. While many REITs focus upon investing in a small number of large assets on an annual basis, Fundrise utilizes state-of-the-art technology and a selective review process which leads to the approval of fewer than 1% of all reviewed projects in order to invest in a larger number of midsize assets. Following detailed examination of projects, approved investments are funded up front and in full by Fundrise before being offered to investors.
I can understand that many investors, especially those who are inclined to invest strictly in index funds, may be skeptical. When I first learned about the growing eREIT movement, I was skeptical. However, numbers don’t lie (unless they are manipulated, of course): diversification in eREITs can certainly pay off, as it did in 2015, with an annualized return of 13.00%.
Options for Non-Accredited Investors
One of my favorite features of Fundrise is the option to buy into two different eREITs, the income eREIT and Growth eREIT. Currently, the Income eREIT features 10 assets (properties in Long Island, suburban Seattle, Phoenix, Pittsburgh, Atlanta, and Los Angeles, to name a few) and pays quarterly dividends. It is intentionally structured to provide investors with a low-volatility income stream. The Growth eREIT features 2 assets (properties in Denver and Jacksonville), also pays quarterly dividends, and is structured to provide higher potential returns than the Income eREIT based on equity ownership of commercial real estate assets.
Note: The Income eREIT currently has a waiting list, while the Growth eREIT is accepting applications as of June 21, 2016. You can still sign-up for either option here.
Evidently, these options, in addition to other options for accredited investors, are appealing, as over 98,000 members have invested with Fundrise at the time of publication of this review. As an added benefit, Fundrise has pledged to charge $0 in management fees until December 31, 2017 unless an investor earns at least a 15% annualized return. Furthermore, I was surprised to learn that Fundrise has pledged to pay a penalty of up to $500,000 to investors if the Growth eREIT earns less than a 20% average non-compounded annual return!
While most investments, particularly those in real estate, are intended to be long-term in nature, Fundrise recognizes that some investors value financial flexibility more than anything. As a result, they have created a redemption option to allow investors the opportunity to sell back some or all of their eREIT shares on a quarterly basis, subject to certain limitations.
What’s Not to Love?
While it may seem like I am touting Fundrise as the latest and greatest thing since sliced bread, I have learned to approach all investments with a high degree of hesitation. And while Fundrise is a fine option for many investors, like all opportunities, there is a great deal of associated risk.
First and foremost, at the most basic level, Fundrise is real estate crowdsourcing. It is one of many different options available for would-be investors. There is a chance that real estate crowdsourcing is just one of the latest trends. Maybe its popularity will fizzle out. Personally, I don’t believe that is the case, but I have been wrong before.
Second, as a relatively new company, Fundrise does not have a long operating history, which they willfully disclose in their Offering Circular. This alone can contribute to uneasiness for the investor who prefers investments with long track records.
Third, many investors may prefer the option of investing in REITs through other portals, such as Vanguard, eTrade or Schwab. While this approach may be more “comfortable,” it should be known that comfort always comes with a cost; in this case, Fundrise offers approximately 90% lower fees than its the aforementioned REITs.
While investing in real estate can be a scary proposition, especially for those of us who keenly remember the monumental collapse nearly a decade ago, all investments carry risk. It is a well-known investment fundamental that diversification is one of the best protections against risk. For investors who are seeking new opportunities with potential for strong returns, Fundrise represents a fine opportunity with a very low barrier for entry.
Disclosure: Fundrise, LLC did not compensate FinanceSuperhero for writing this review; in fact, the comprehensive nature of this review is primarily for my personal benefit, as I will be investing personal funds with Fundrise in the future.
However, FinanceSuperhero does maintain an affiliate relationship with Fundrise; if you sign-up with Fundrise via any of the links contained in this article, FinanceSuperhero will be paid a referral fee.
As always, FinanceSuperhero pledges to NEVER recommend products which we have not deemed responsible and valuable to readers.
All investments carry risk. Before investing, it is advisable to speak with a qualified financial professional. FinanceSuperhero assumes no liability for losses incurred by following this or any other investment advice contained within this website (www.financesuperhero.com). Information contained herein should be considered to be strictly informational and entertainment in nature.
Readers, tell us about your experience with real estate crowdsourcing. What level of returns have you experienced thus far? For those who have not yet participated in real estate crowdsourcing, what reservations are holding you back?