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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, profitableinvestment 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 dependentupon 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, Fundriseis 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 REITsare 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 werewrong.
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 impactingreturns.
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 strictlyin 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, Fundriseisa 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 notcompensate 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.
