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As most readers have probably gathered by now, I tend to err on the conservative side when it comes to all financial matters, including investing. This is why we opted to pay off over $17,000 of student loan debt in just 54 days rather than invest that money. I’m very interested in buying a rental property, but 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. These homes could command great returns on rent, but again, we don’t have the cash to buy them. 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, we have other options thanks to the REIT.
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 the moment.
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, it's a smart idea to sign-up now - it's FREE - and be among the first in line when a new eREIT opens. 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 is that is available to almost anyone. 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 to invest in real estate with very little money. 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 different eREITs. Offerings are changing month-by-month, and though there is often a waiting lis , it's a smart idea to sign-up now - it's FREE - and be among the first in line when a new eREIT opens.
These options must be 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.
Final Thoughts
Investing in real estate can be a scary proposition, especially for those of us who remember the monumental collapse nearly a decade ago, but it’s important to remember that 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 is a great opportunity with a very low barrier for entry.
Though there may be a waiting list as you’re reading this, there is no risk to signing-up with Fundrise now to examine your options. If you’re in position to invest without putting your family at risk, signing-up with Fundrise is a smart move.
Disclosure: Fundrise, LLC did not compensate FinanceSuperhero for writing this review; 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?
Vicki@Make Smarter Decisions says
June 21, 2016 at 6:54 PMThanks so much for sharing this information. We currently have 10 rental units (in 4 houses) but we are really interested in the real estate “crowd sourcing” business now too. We just had an investor look at an 8 unit complex we own and if that would sell, we may look at this option very soon. A lot of homework still to do – but this is a good start for sure!
Hero says
June 21, 2016 at 7:03 PMSounds like a great opportunity to implement your decision matrix, Vicki! One on hand, continuing to run with your current units may be inside your comfort zone, but at the same time, crowdsourcing through Fundrise or another similar REIT might be much easier. I will be curious to see what route you decide to pursue!
The Millennial Budget says
June 21, 2016 at 7:57 PMI have seen many ads for this on my Facebook page as I am researching real estate options and crowd sourcing options. My goal is to own a rental property within 5 years of graduation… scary! Fundrise definitely seems like they make investing in property relatively easy with their low requirements but as any investor I need to see longer returns before I dive into this. I think if I had some play money I would toss it in here and see what happens as real estate, in my opinion, is always a great investment (especially if they build/own healthcare properties!). I need to do far more research into this company and the market in general before I take this leap. Currently I just invest in dividend paying REITs which may be boring but I feel safer as they are heavily diversified.
Mr. PIE says
June 21, 2016 at 8:04 PMAnother good read on a new type of REIT.
What are the redemption penalties like? They can be quite severe with non traded REITs especially if you want to bail out early.
Like the fact that the minimum investment is low and allows a broader audience to participate.
Hero says
July 20, 2016 at 9:19 AMThat’s a great question, Mr. PIE. I’m not a CPA or otherwise an expert in redemption penalties, so I had to do a bit of research. This may answer your question:
A redemption of shares will be treated under Section 302 of the Code as a taxable distribution unless the redemption satisfies one of the tests set forth in Section 302(b) of the Code enabling the redemption to be treated as a sale or exchange of the redeemed shares. A redemption that is not treated as a sale or exchange will be taxed in the same manner as regular distributions (e.g., ordinary dividend income to the extent paid out of earnings and profits unless properly designated as a capital gain dividend), and a redemption treated as a sale or exchange will be taxed in the same manner as other taxable sales discussed above.
The redemption will be treated as a sale or exchange if it (i) is “substantially disproportionate” with respect to the shareholder, (ii) results in a “complete termination” of the shareholder’s interest in us, or (iii) is “not essentially equivalent to a dividend” with respect to the shareholder, all within the meaning of Section 302(b) of the Code. In determining whether any of these tests have been met, shares considered to be owned by the shareholder by reason of certain constructive ownership rules set forth in the Code, as well as shares actually owned, must generally be taken into account. Because the determination as to whether any of the alternative tests of Section 302(b) of the Code is satisfied with respect to any particular redemption will depend upon the facts and circumstances as of the time the determination is made and the constructive ownership rules are complicated, prospective shareholders are advised to consult their own tax advisers to determine such tax treatment.
If a redemption of shares is treated as a distribution that is taxable as a dividend, the amount of the distribution would be measured by the amount of cash and the fair market value of the property received by the redeeming shareholder. In addition, although guidance is sparse, the IRS could take the position that shareholders who do not participate in any redemption treated as a dividend should be treated as receiving a constructive stock distribution taxable as a dividend in the amount of the increased percentage ownership in us as a result of the redemption, even though such shareholder did not actually receive cash or other property as a result of such redemption. The amount of any such constructive dividend would be added to the nonredeeming shareholder’s basis in his shares. It also is possible that under certain technical rules relating to the deduction for dividends paid, the IRS could take the position that redemptions taxed as dividends impair our ability to satisfy our distribution requirements under the Code. To avoid certain issues related to our ability to comply with the REIT distribution requirements (see “— Qualification as a REIT — Annual Distribution Requirements”), we have implemented procedures designed to track our shareholders’ percentage interests in our common shares and identify any such dividend equivalent redemptions, and we will decline to effect a redemption to the extent that we believe that it would constitute a dividend equivalent redemption. However, we cannot assure you that we will be successful in preventing all dividend equivalent redemptions.
Liquidating Distributions
Once we have adopted (or are deemed to have adopted) a plan of liquidation for U.S. federal income tax purposes, liquidating distributions received by a U.S. shareholder with respect to our common shares will be treated first as a recovery of the shareholder’s basis in the shares (computed separately for each block of shares) and thereafter as gain from the disposition of our common shares.
Good Nelly says
June 22, 2016 at 1:24 AMI have a very short & simple question, you have said that REIT provides taxable dividend, I am little confused over it, does it mean that during the financial year ending I will be getting IRS Tax Relaxation? Please guide as I am having very less knowledge on this subject. Thank you.
Hero says
July 20, 2016 at 9:14 AMNelly, here is some information for you:
Unless your investment is held in a qualified tax-exempt account or we designate certain distributions as capital gain dividends, distributions that you receive generally will be taxed as ordinary income to the extent they are from current or accumulated earnings and profits. The portion of your distribution in excess of current and accumulated earnings and profits is considered a return of capital for U.S. federal income tax purposes and will reduce the tax basis of your investment, rather than result in current tax, until your basis is reduced to zero. Return of capital distributions made to you in excess of your tax basis in our common shares will be treated as sales proceeds from the sale of our common shares for U.S. federal income tax purposes. Distributions we designate as capital gain dividends will generally be taxable at long-term capital gains rates for U.S. federal income tax purposes. However, because each investor’s tax considerations are different, we recommend that you consult with your tax advisor. You also should review the section of this offering circular entitled “U.S. Federal Income Tax Considerations,” including for a discussion of the special rules applicable to distributions in redemption of shares and liquidating distributions. -from https://www.sec.gov/Archives/edgar/data/1645583/000114420415068128/v425704_253g2.htm
Also, investors with Fundrise receive a 1099-DIV, in case that wasn’t clear above. Thanks for the question. For more info, check out the U.S. Federal Tax Income Considerations section within the circular linked above.
Good Nelly says
July 29, 2016 at 5:59 AMOkay, I am going through it now, thanks for your kind effort.
Good Nelly’s recently written article – https://wiki.debtcc.com/debt/how-to-deal-with-banned-debt-collection-agencies.html
Millennial Moola says
June 22, 2016 at 7:57 AMThe fact that they are touting past performance makes sense from a marketing standpoint but scares me from an investor standpoint. REITS are extremely high valued right now and ultra low interest rates pushed their values even higher as cheaper debt for buys is making property more accessible. I’m curious what happens in a period of higher inflation , I bet REITs get smoked
Hero says
June 22, 2016 at 3:42 PMI understand where you are coming from, MM. Past performance is almost never a good indicator of future results.
I am in the camp that thinks interest rates will remain low for a long time. If that holds true, perhaps REITs will continue to be wildly successful for many years to come.
Financial Slacker says
June 22, 2016 at 11:59 AMI have stayed away from direct real estate ownership due to the lack of liquidity and property management issues.
But I’ve been weighing a Fundrise investment along with a real estate-backed venture debt investment. Because I would be making the investment using IRA dollars, direct real estate ownership is diffcult, but either of these options would work in a self-directed IRA.
I’m slow to analyze and slow to make these types of decisions, but I am getting close to pulling the trigger.
I’ll let you know which route I pursue.
Hero says
June 22, 2016 at 3:43 PMIt sounds like you’re thinking through the options carefully and doing your research. Definitely let us know which route you choose to pursue!
Beth says
June 22, 2016 at 3:30 PMThis is the first I have heard of this and I will definitely look into it.
Currently, I have been testing out Acorns. I am in the most aggressive model it offers which includes Vanguard REIT ETF. The majority of the model is invested in this REIT ETF.
Hero says
June 22, 2016 at 3:40 PMThanks for stopping by, Beth. I just started using Acorns a few weeks ago and am enjoying it so far, though I’m not currently in the aggressive model.
Kalie @ Pretend to Be Poor says
June 22, 2016 at 3:36 PMWow, congrats on paying off those student loans in record time! That is the stuff of superheroes.
We have invested in the Vanguard REIT fund. The minimum is a lot more accessible than some others out there that require $10,000 or more. Fundrise sounds like another great option; thanks for the review!
Hero says
June 22, 2016 at 3:45 PMMy pleasure, Kalie, and thanks for stopping by. To be honest, I like the Vanguard REIT option, even though its fees are higher than Fundrise, because it is more established. Psychology and financial decisions do not always mix well for me. 🙂
ZJ Thorne says
June 22, 2016 at 10:59 PMI am perhaps too skeptical. For me the value of real estate is the tangible asset itself. I am not sure I could get comfortable as a paper-owner.
Josh says
June 23, 2016 at 6:39 AMI haven’t read much about REITs before. Fundrise sounds like an affordable option for those of us without much free capital!
Hero says
June 28, 2016 at 3:09 PMThat’s a great way to describe it, Josh. I’m excited to see what kind of returns I get when I take the plunge and invest in a couple weeks.
Apathy Ends says
June 23, 2016 at 7:02 AMThanks for the write up Mr Superhero!
Sounds like a decent way to get into real estate investing without a ton of cash. I own one REIT that I bought a few years ago, it can be a roller coaster in the markets!
Derek says
July 10, 2016 at 9:32 AMDo you truly believe in Fundrise? Or are you just loving the affiliate program? I’m not sold on it myself.
Hero says
July 10, 2016 at 1:28 PMI think it is a viable alternative investment. I will be investing with Fundrise as soon as I’ve maximized other outlets this year.
John L'Ecuyer says
July 20, 2016 at 8:00 AMHate to put it to you, but:
1. You published this article on Fundrise 6/21/16, then commented on 6/28/16 you’d be buying in a couple weeks, then on 7/10/16 backed off with “as soon as I’ve maximized other outlets for this year.” Today I write on 7/20/16, a month after you published this article. Your actions don’t sound as convinced as your original words.
2. You haven’t given answers to two questions from a month ago just after you published your article (question re redemption fees and one re taxes). Are you a researcher or a paid cheerleader?
Hero says
July 20, 2016 at 9:32 AMJohn, thanks for your comment and feeling comfortable enough to “put it to me.” I’m a firm believer that iron sharpens iron, so it’s good to be called out from time to time. I’ll address your points individually.
1. It appears your timeline as listed above is accurate. A few comments: I wrote my review of Fundrise primarily to learn more about the program and evaluate its merits for my own personal purposes. On 6/28, I meant what I said when I shared that I planned to invest with them in a couple weeks. At that time, I did not anticipate that a handful of unexpected personal/family/medical expenses would arise within that time frame. As a result, I opted to utilize the funds I had earmarked for my Fundrise investment to extinguish those expenses; in doing so, I did not have to raid my emergency fund or float the expenses on a credit card for one month.
After further reflection during this time, I decided it would be more advantageous to max out my tax-advantaged accounts for the year prior to diving into Fundrise. Do you disagree with this assessment? It seems to me that you are trying to question my integrity and label me as a “paid cheerleader” who doesn’t actually intend to invest with Fundrise. We’re all entitled to form our own opinions, but in this case, your opinion is wrong, with all due respect.
2.) Thanks for pointing out that I missed two questions. Unfortunately, I approved the two comments you referenced and failed to respond. I have gone back and responded to them today. Thanks for calling attention to my oversight.
We need more bold commenters like you here on FinanceSuperhero and elsewhere within the personal finance blogging community, John, so I hope you’ll stick around and challenge me more in the future. Are you a blogger yourself? What is your professional background? I look forward to learning more about you.
John L'Ecuyer says
July 20, 2016 at 9:38 AMThank you–excellent job responding to my questions. This should raise any readers (including myself) confidence in your posts.
ps–I’m just a middle-aged couch potato with an iPad. Keep up the good work.
Hero says
July 20, 2016 at 9:58 AMGlad to hear it, John. I aim to be transparent with this blog without boring readers with unimportant life details, so this was a good lesson to learn.
Matthew Melange says
September 29, 2017 at 10:54 AMI’m actually extremely skeptical of Fundrise. There seems to be a bit of conflict of interest in their actions.
In your article you write “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:” How does charging $1,000 mean they’re putting their money where their mouth is?
What’s the difference between an eREIT and a REIT? I know the e stands for electronic but if I download a Robinhood trading app on my phone and buy a regular REIT stock is that not electronic? Fundrise claims they’re getting rid of the middlemen but they’re charging an asset management fee which essentially makes them the middlemen! Also on Fundrise’s own web platform there’s no way to withdraw your money as of September 2017. I sent an email to support asking about this and they replied that I need to fill out a form. I don’t know if it’s still true but I believe they charge a fee for withdrawing your money before 5 years of your first investment. The website also offers a handy reinvestment tool so I’m unsure if the reinvested assets are stuck in the 5 year jail too. This seems like Fundrise is just creating their own restrictive trading platform where they can decide when you sell and what you buy. You only have 3 purchasing options. Income, Balanced and Growth. They decide which specific real estate markets you are invested in. The most worrisome thing about the eREITs they offer is you can’t choose. I was looking through and several of their properties are in Florida and Texas. Both states have recently been hit by dangerous hurricanes recently and there has been no email about how Fundrise intends to respond. Infact there was an update about how they finished remodeling at a property in Orlando. Even investing platforms like Lending Club have sent out emails about how they’re going to respond to the two hurricanes.
“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!” This is a little scary to me. Is that $500,000 per person or split among the investors. Because this same article mentions that 98,000 people have invested in Fundrise. That comes out to about $5.10 per person if the money is split among them. Even if only 1/3rd and 1/10th of their investors purchased the growth option, it would come to $16.66 and 51.02 per investor. Hardly a good insurance policy when the buy in fee is $1,000 unless they do it proportionally which again would be adding between 1-5%.
Even I have put in $1,000 in the Balanced fund, at the moment I’m getting a return of $0.16 per day. If it continues at that rate it would be about a return of 5.84%. I’m really interested in what other people’s returns are. I’ve read some articles about people putting in $3,000 and getting a 10% return but I haven’t seen any actual hard proof of that. It just makes me believe that they have these random spike days where the payout is larger than $0.16.
In closing I have a lot of suspicion of Fundrise. I’ve read a few negative articles and few positive articles. Obviously the negative articles are amplified because an investor should always be conscious of their risks. The biggest problem as mentioned in this article is the lack of historical returns which makes it hard to gauge whether or not this really will be a successful venture for most investors.
Hero says
September 29, 2017 at 1:21 PMOne of Fundrise’s initial goals, especially at the time this article was written, was to make real estate investing easier for the average person. Compared to, say a 20% downpayment on a rental property, $1,000 is pretty accessible.
In response to your other comments, I can understand the overall trepidation about Fundrise. All investments have possible downside and risk, and I think you encapsulated a few of them quite well, Matthew. Thanks for your comments!