Fundrise Review – Jump on eREIT Bandwagon

Fundrise Review – Jump on eREIT Bandwagon

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.

Even if you aren’t ready to start investing directly in real estate, you may be considering adding real estate into your portfolio by investing in other ways.

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

  1. What is Fundrise?
  2. Accreditation Requirements
  3. How Does Fundrise Screen Deals?
  4. How to Set up an Account
  5. Debt vs Equity Investments
  6. eREIT Fees
  7. Redeeming your eREIT shares
  8. Conclusion

Fundrise Review – Intro to the Company

Disclaimer: When I first wrote this article it was because I invested in Fundrise and enjoyed my experience with it. After some time I came to love it so much that I am now an affiliate. If you click on one of the links and sign-up for Fundrise, I may be compensated a small referral fee at absolutely no cost to you.

So, I set up my account to honestly try it out – I only thought about doing a Fundrise review afterward. 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:

What is Fundrise?

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.

Fundrise’s Accreditation Requirements

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.

How Does Fundrise Find and Screen 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) Sponsor 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.

Setting up my account with fundrise

Setting up an online real estate crowdfunding account was actually very easy. Setting up an online real estate crowdfunding account was actually very easy.

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.

Choosing Debt or Equity when Crowdfunding Real estate

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.

Not a lot to choose from at Fundrise - Real Estate Crowdfunding.

Not a lot to choose from at Fundrise – Real Estate Crowdfunding.

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:

Breakdown of the eREIT fees

Form of Compensation and Receipient

Estimated Amount

Offering Costs of $1,000,000 or roughly 2% of money raised

Manager

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

1%

Asset Management Fee

0 – .5% * This is the fee that may be waived if underperforming

Servicing Fee

1% of non-performing assets

Special Servicing Fee

Unknown

Other Fees

There appears to be no commissions

Commissions


Redemption of fundrise ereit shares

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

95%

6 months to 2 years

96%

2 to 3 years

97%

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.

Should you invest in the fundrise eREIT?

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.

What Next?

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.

By | 2016-11-28T14:18:18+00:00 April 4th, 2016|Categories: Crowdfunding, Investing, Reviews|Tags: , , |16 Comments

About the Author:

An investor that reached financial independence at the age of 30, Eric has been seen on Forbes, Trulia, WiseBread, TheStreet, and other financial publications.

16 Comments

  1. Pat July 19, 2016 at 11:14 pm - Reply

    Eric, what kind of returns have you been getting with eREITs if you don’t mind me asking. Did you investing in the growth eREIR or the income eREIT? I’m thinking about putting in $1k just for fun.

    • Eric Bowlin July 20, 2016 at 10:55 am - Reply

      Hey Pat, I got a 10% annualized return last quarter on the income eREIT. I’ve been impressed with Fundrise so far so I’m thinking about dropping in an additional 4 or 5k into the growth eREIT too.

    • MyFiIntheSky March 1, 2017 at 4:35 pm - Reply

      First of all, great write up to Eric! Pat, I’m also tracking the performance of my investment on my website if you’re interested. I detail a few additional concerns there, but overall I think it’s well worth a small investment to see how the company performs.

      My main concern is that the startup costs could be massive if the company does not raise as much capital as they think they will, so it also might make sense to hold off major investments until the current offerings raise closer to $50 million (the West Coast, East Coast, and Heartland offerings are each at about $10 million right now, which equates to 10% of the current investment going to startup costs – if they raise $50 million, the startup costs are 2%, which is much more reasonable).

      • Eric Bowlin March 1, 2017 at 6:14 pm - Reply

        Absolutely true, Fundrise had some very high startup costs on this offering and the more they go through it, the lower that cost is because it’s divided across all the funds.

        That being said, I commend them on being the first to actually try this offering in the murky regulatory environment surrounding some of the JOBS act.

  2. Joy August 11, 2016 at 5:57 pm - Reply

    Hello Eric and thanks for the review. I would like to make sure I got this right:
    1.The 3 to 5% fee you pay as an investor is only when you redeem your shares correct?
    2. As long as you own shares of the eREIT you pay management fees on theses shares correct?
    3. Does your annualized return take these fees (redemption and management) into account?

  3. Eric Angleton October 18, 2016 at 9:28 pm - Reply

    This is potentially a phenomenal company; but, they don’t offer any (to my knowledge) retirement accounts (IRA, Roth IRA, SEP IRA). I consider that to be their biggest flaw; and, enough of one for me to switch to someone who does have that kind of support. I emailed them about this, and apparently they used to offer this, but were driven out of that market, from the expense required to offer them. It’s disappointing, and honestly counter to the saving they promote; these tax-advantaged accounts are absolutely indispensable, for saving.

    • Eric Bowlin October 18, 2016 at 9:30 pm - Reply

      Thanks for pointing this out Eric.

      Do you know of any top tier companies that offer this?

      • Eric Angleton October 19, 2016 at 12:04 am - Reply

        Wealthfront, or Betterment; heck even Motif, which I honestly think is the future of the equity marketplace (I’m not even affiliated with, or own stock in them). But, in general, consumers should are better protected from downside potential, when buying baskets of diversified stocks (motifs) that align with their interests.

        • Eric Bowlin October 19, 2016 at 12:21 am - Reply

          Unfortunately, none of them are crowdfunding. None are real estate either.

          I actually have no idea how they are related to this topic at all. This article is for people looking to add real estate to their portfolio.

          Everyone already knows that real estate investing is not a replacement to your stocks. But a portfolio that has solid real estate investments outperforms a basket of stocks like the S&P 500.

          That’s just a fact.

          • Eric Angleton October 19, 2016 at 1:22 am

            Fair point yeah; I tend to honestly be a smidge biased towards publicly trade-able equities (stocks). Motif, actually offers REIT Motifs; which, because they have support, for retirement accounts, I would gravitate to them, over Fundrise. This is my only complaint about Fundrise; all they have to do is simply support IRAs, which I believe should be the cheapest to have support for.

  4. Abraham November 11, 2016 at 9:31 pm - Reply

    A quick look makes me think they are taking a 5% commission. The probably make more if the investment is successful.
    You, on the other hand are taking a 100% risk. 10% income is nice, this however only works as long as things go well, i.e. when times are good.

    Also, you have no control on the operation. If you buy/fix/rent/sell, whatever you do have that control. This on the other hand is a passive investment. You will be taxed, federal and state at your tax rate. No depreciation, no leverage.

    Been there, done that as an accredit investor prior to 2007. Did not loose too much money but was not the investment the brochure made you believe it would be.
    Warren Buffet says her reads the annual report in reverse order: first he reads the notes, that’s where the company puts all the nasty stuff they don’t want you to know but are required to report.

    Read the fine print, put yourself in the company’s shoes and understand why this would be a good deal for you.

    Not trying to be a wet towel, just encouraging you to look on the downside as well.

    Good luck to all.

    • Eric Bowlin November 12, 2016 at 8:12 pm - Reply

      Thanks for the great info. I think REITs of any type have many risks but still are amazingly popular investments.

      The eREITs are still young but appear to be some of the most transparent and low fee REITs out there. Of course, that only matters if you are the kind of investor that wants a REIT.

  5. Eric Angleton January 13, 2017 at 5:48 pm - Reply

    Looks like I can’t just append to my long(ish) thread above; but, there’s a HUGE red flag with Fundrise. Your redemption is seemingly reduced by the amount you receive as dividends. I just redeemed my initial investment; and, the amount redeemed was reduced by exactly the amount I received, as dividends. It’s possible this is associated with fees; but, I can’t tell, the documentation on it is sparse; plus, the difference matches the amount received in dividends, exactly. So, essentially, my investment appears to have been an interest-free loan; I redeemed within their 90-day trial period; so, I’m really confused. I emailed them, to try and get this resolved; I’ll post an update, when I get one.

    • Eric Bowlin January 15, 2017 at 8:22 am - Reply

      Thanks for bringing it to my attention, but I don’t see it as a red flag.

      You can find the offering curricula here: https://fundrise.com/oc

      A quick search for “redemption” and you’ll find the following in there:

      “For the first eightynine (89) days following the settlement of the common shares subject to the redemption request (the “Introductory Period”), the per share redemption price will be equal to the purchase price of the shares being redeemed reduced by (i) the aggregate sum of distributions paid with respect to such shares, rounded down to the nearest cent and (ii) the aggregate sum of distributions, if any, declared but unpaid on the shares subject to the redemption request. In other words, a shareholder would receive back their original investment amount, from the redemption price paid, prior distributions received and distributions that have been declared (and that will be received when paid), but would not receive any amounts in excess of their original investment amount.”

      Sounds like they followed the agreement.

  6. Eric Angleton January 15, 2017 at 12:46 pm - Reply

    Thanks for finding the relevant clause; it does indeed appear to be in-line with their agreement. Nevertheless, If redeemed within this introductory period though, it amounts to precisely what I alluded to; viz. “an interest-free, short-term loan.” I’ll stick with Wealthfront & Motif, until this market has more competition; you might not see this as a red flag; but, I see it as a borderline absurd way to essentially force investors to tie their funds up with Fundrise, for a lot longer than 90 days, in order to get their principal, and any dividends received, redeemed.

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