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With the ease and accessibility of investing, you’ve probably learned about Real Estate Investment Trusts, or REITs. One of the more popular REITs is Fundrise, and you may be asking, “is Fundrise a good investment?”
Investing in Fundrise may be a good call for you depending on your overall strategy.
The most common strategies involve diversification, which is another way of saying spreading out your risk. If you allocate all of your funds into a single account, like if you invest 100% in stocks or 100% in real estate, you risk a downturn in the markets that keep your investment growing.
Diversification helps mitigate your risk. If you invest in both stocks and real estate, stocks may drop while real estate keeps growing. Or vice versa. It’s widely recommended that you spread out your risk by having a diversified portfolio.
A diversified portfolio can include:
- retirement funds like a 401k or IRA
- index funds
- ETFs (exchange-traded funds)
- REITs, or other forms of real estate
When creating your portfolio, you may also try to balance short and long-term strategies.
Investing all of your cash into retirement funds will keep you from accessing your money for a long time — at least without early withdrawal penalties. But investing all of your money into more easily accessible funds may not provide the long-term growth (and tax advantages) that investment accounts provide.
Diversification gives you options. And when it comes to your finances, more options is a good thing.
What is a REIT?
REIT stands for Real Estate Investment Trust. It’s pronounced ‘reet’. A REIT is a company that focuses on buying and making money off of real estate assets. REITs make it possible for ordinary people to invest in real estate.
With less barrier to entry, REITs make it possible for anyone to potentially benefit from the income produced by real estate assets that might otherwise be too expensive.
REITs make it easy to invest in real estate. When you invest in a REIT, you become a shareholder, and your investment is used to buy or fix up properties that are likely to produce income. REITs hold a large number of properties that make up their portfolio.
The US Congress created certain rules that a company must follow in order to operate as a REIT. For example, a REIT must distribute at least 90% of their annual taxable income in dividends — money paid out to their shareholders. By law, a REIT can’t just keep the money it earns.
While you can just take the money when dividends are distributed, many REITs offer optional automatic dividend reinvestment. If you don’t need the dividend money, it might be a good idea to reinvest since investing more helps your money turn into more money faster. (Taking your dividends and investing them into other investments is also a good option.)
Another rule that REITs must abide by is that the company must purchase real estate with long-term investing in mind. Keep in mind that when you invest in a REIT, your investment may not be easily accessible. There are likely some rules and conditions for how quickly you’re able to withdraw your investment.
Depending on the REIT, you may be able to invest for as little as $500, like with Fundrise.
What is Fundrise?
Fundrise is a popular electronic REIT (or eREIT). Their goal is to make it easy and accessible for the public to invest in real estate.
Fundrise has had good returns. However, they only started in 2014, and the US economy has been doing well. So what can you expect in a recession?
According to a Seeking Alpha article REITs Vs. Stocks: The Best Investment In A Recession, REITs have historically performed better than stocks during recessions. The article highlights that there’s no guarantee that REITs will do better than stocks during a market downturn.
This means that investing in Fundrise, or other REITs, is likely to be a good way to offset risk from being overly invested in stocks should the market downturn.
Fundrise claims to be different from regular REITs in one key way: when you invest with Fundrise, you’re interacting directly with the company, not brokers. So your fees are much less than if there was a third-party handling the transaction.
Fundrise has ongoing asset management fees of 1%.
What’s the Minimum Initial Investment?
In January, 2020, the minimum initial investment in Fundrise is $500. That’s for the Starter account level. The Core account starts at $1,000 and the Advanced account at $10,000. There’s also a Premium level that requires a $100,000 minimum.
You can invest more in the future, but the minimum additional investment amount is $100.
What Are the Fundrise Account Levels?
Different account levels offer different options besides just the minimum initial investment.
The Starter level ($500 minimum) lets you invest but doesn’t allow you to pick individual investment funds.
If you want to pick a fund based on the objective (income versus growth) or the geographic focus (east coast, west coast, heartland, or national), you’ll need to be a Core investor ($1,000 minimum).
The Advanced account requires at least $10,000 invested. The Advanced level provides access to more specific, niche funds like the DC or LA growth funds which, as the names imply, focus on growth in Washington, DC and Los Angeles, CA respectively.
How Often Does Fundrise Pay Dividends?
According to Fundrise’s offerings, each of their funds pays dividends quarterly.
There are no fees associated with reinvesting dividends. If you change your mind and later want to reinvest your dividends — or stop reinvesting them and get paid — you can do that at any time.
Reinvesting dividends will give you a larger overall payout. If you don’t need the money, I recommend reinvesting or putting your dividends to work in other investments that you believe will perform better.
To track your finances, you can use a free tool like Personal Capital, which can import data directly from your Fundrise account.
For an automated financial tracking spreadsheet, check out Tiller Money. Tiller Money’s 30-day trial gives you plenty of time to see if you’ll benefit from their unique (and powerful) approach to tracking your finances.
When Can I Withdraw From Fundrise?
There are several withdrawal windows outlined by Fundrise in their regulation offering circular. If you want to read it, check out the question, “Will I have the opportunity to redeem my common shares?”
If you’re in the first 90 days (what they call the introductory period), you can withdraw 100% of your shares.
From 90 days to 3 years, withdrawal has 3% fees, so you’ll get 97% of your shares.
Withdrawing between years 3 and 4 has a 2% fee, and there’s a 1% fee between years 4 and 5.
After 5 years, there’s no redemption fee, so you can withdraw 100% of your shares.
To summarize the redemption windows:
- 0 – 90 days: 100% shares (0% fees)
- 90 days – 3 years: 97% shares (3% fees)
- 3 – 4 years: 98% shares (2% fees)
- 4 – 5 years: 99% shares (1% fees)
- 5+ years: 100% shares (0% fees)
Note that there is a 60-day waiting period after you submit your share redemption request.
Is Fundrise a Good Investment?
Every investment has pros and cons, and there are always trade-offs. The question “is Fundrise a good investment” doesn’t have an easy answer.
The Benefits of Fundrise
- Historically (though limited) returns have been good.
- One benefit of Fundrise (and other REITs) is that they have a lot of capital that they can use to negotiate good deals. Yes, the capital comes from investors like you and me, but our money allows them to have more buying power to make better deals that benefit us.
- Your investment is long-term, by design. Fundrise says that all real estate investments should be viewed as long-term, with at least a 5-year time horizon. While there are potential downsides to this (see the drawbacks below), this can be a good thing because it removes your ability to pull your money out if the market downturns. I think removing emotional investing from the equation is a benefit.
- Investing in real estate may offset the risk of being overly invested in the stock market. This a benefit of real estate and is not limited to Fundrise.
The Drawbacks to Fundrise
- Though returns have been good, and REITs have historically outperformed stocks in a recession, Fundrise itself has not been tested in a down market.
- The fees seem small at only 1%, but this is still higher than some of Vanguard’s index fund fees like the 0.04% expense ratio for Vanguard 500 Index Fund Admiral Class (VFIAX) and the 0.14% on Vanguard 500 Index Fund Investor Class (VFINX). If you want some diversification, Fundrise may be a good move despite the relatively higher fees.
- Your investment is highly illiquid, which is another way of saying you cannot easily get your cash out. Once you invest, your money is tied up for 5 years unless you’re willing to pay early redemption fees. So if you don’t like the direction the market is going, or if you find a place you’d rather put that money, you either have to wait it out or pay the fee.
As part of an overall diversification strategy, an investment in Fundrise — or other forms of real estate — may be a good addition to your portfolio. If you’re okay with the fee structure and the illiquid nature of real estate investing, but you don’t have the capital to invest in your own deals, Fundrise may be a good opportunity to get into real estate investing.
- Fundrise Regulation Offering
- Seeking Alpha: The Next Recession: Why REITs Are My Favorite Sector To Ride Out The Down Cycle