Fundrise: The Easy Way to Start Real Estate Investing
With sky high real estate prices, it seems hopeless trying to purchase your first home. While buying a home might be unattainable for some, there are new ways to own a slice of private real estate. Fundrise, a real estate investing platform founded in 2010, offers you the opportunity to invest in private real estate without the typical barriers.
What is Fundrise?
Fundrise is an investing platform that allows anyone to invest in private real estate starting with as little as 10 dollars. Their funds invest in commercial and residential real estate properties across the U.S. Some examples of active projects in the Flagship Real Estate Fund include an apartment development in Vero Beach, Florida and a new home construction in Charlotte, NC. You are outsourcing the development, ownership, and maintenance of the property to a 3rd party. In return you receive returns via dividends (e.g. loan interest payments) and price appreciation of the assets.
Overall, Fundrise has performed well since 2017 with average annual returns greater than 10 percent. Fundrise’s funds are essentially a more illiquid version of the traditional REIT that you trade via a brokerage firm (e.g. Robinhood, Fidelity, etc.). Less liquidity can be seen as a feature or a bug, depending on the investor’s objectives.
Why invest in Fundrise?
Private Real Estate has higher risk-adjusted returns
Since 2017, Fundrise’s returns have been significantly less volatile than public REITs and the S&P500. In the below graph, you can see Fundrise (blue line) has a much lower risk profile and never experienced negative returns during this time period. Looking at public REITs (orange line) and the S&P500 (grey line), you will see that they have much higher peaks and valleys in terms of performance. The difference between the performance of Fundrise’s funds and the other two assets suggests that it might be relatively uncorrelated.
Something omitted from the graph above is the shareholder yield for these different assets. The average income returned to shareholders from Fundrise was 5.42 percent, while public REITs and the S&P500 were 4.34 and 0.35 percent, respectively. While these results seem promising, we need to zoom out to a longer time period to learn more about historical private real estate performance.
Looking back over the past 20 years, private real estate continued to have higher average income yields returned to the shareholder. Private real estate averaged an annual income return of 6.1 percent, while public REITs, bonds, and the S&P 500 averaged 5.4 percent, 4.2 percent, and 1.9 percent, respectively.
As seen in the table below, private real estate also yielded a higher risk-adjusted return (i.e. Sharpe ratio) than the S&P 500, bonds, and publicly traded REITs.
| Asset Class | Total Return | Volatility | Sharpe Ratio |
|---|---|---|---|
| Stocks | 6.56% | 18.07% | 0.22 |
| Bonds | 5.03% | 3.43% | 0.74 |
| Publicly traded REITs | 11.28% | 18.68% | 0.47 |
| Private real estate | 8.73% | 8.20% | 0.76 |
Diversification yields higher returns for your portfolio
Because private real estate is less correlated with the market, it would suggest that a portfolio including private real estate might perform better than one comprised of just stocks and bonds. Fundrise ran this simulation and compared a fund comprised of 80 percent stocks and 20 percent bonds to a portfolio comprised of 60 percent stocks, 20 percent bonds, and 20 percent private real estate. As seen in the table below, the results support that private real estate improves overall returns and risk-adjusted returns.
| Portfolio | Total Return | Income | Risk (Std Dev) |
|---|---|---|---|
| 60% Stocks, 20% Bonds, 20% Private Real Estate | 6.3% | 3.1% | 11.22% |
| 70% Stocks, 30% Bonds | 5.4% | 2.6% | 13.87% |
“Illiquidity is a feature”
“the time to buy is when there’s blood in the streets.”
This old financial saying is much easier said than done. Seeing my investment portfolio drop over 30 percent during the past six months has been brutal, to say the least. Some of the best advice is to not look at your portfolio often; otherwise, you might foolishly tamper with your holdings thinking you know how to time the market. In order to combat human emotions, you might design an investment product that is tamper proof. What would one of these products look like?
Private real estate.
Owning private real estate makes it difficult to trade often. There are structural impediments and high physical or monetary costs that prevent investors from trading private real estate. When it comes to your physical real estate (e.g. your home), prices don’t wildly fluctuate on a daily basis and it is incredibly expensive to buy and sell physical real estate.
When it comes to Fundrise, they put restrictions on your ability to withdraw funds from the platform. You are strongly encouraged to hold their investments for a minimum of 5 years. This is similar to buying physical real estate where the typical advice is to stay in your home (or not sell it) for at least 5 to 7 years.
Illiquidity alone does not make something a good investment. The added element of being relatively uncorrelated with the stock market makes private real estate a good addition to your portfolio. In fact, we are living in a period where private real estate prices have increased substantially, while the stock market has entered into a bear market.
Private Real Estate might be a good hedge against inflation
If you entered a grocery store anytime over the past 6 months, you will understand that inflation has been on the rise. In fact, the not seasonally-adjusted consumer price index (CPI) is 8.3 percent since April, 2021. When it comes to investing, inflation can also be a risk. During periods of high inflation, like today, many financial advisors and firms will recommend investing in real assets. In the below charts, Blackrock analyzed historical returns between 2001 and 2020 that show U.S. real estate outperforming stocks and bonds during high inflation environments.
If we go back to the high inflation 1970’s, real estate prices soared while the S&P500 stagnated. History suggests that if we enter a high inflationary environment for an extended period, then real estate might outperform many other assets.
What are the risks of investing in Fundrise?
“Illiquidity is a bug”
Because Fundrise invests in private real estate, the funds they offer are more illiquid than the normal public REIT, ETF, or stock. There are restrictions put in place that only process redemption requests, at best, 2 months after the request was filed. Additionally, any Fundrise eREIT or eFund shares that you have held for less than 5 years may be subject to a penalty upon redemption.
The most alarming risk is that you might not be able to withdraw your investments during the next financial crisis. Below is a statement from Fundrise setting expectations for this situation:
“while under normal market conditions we seek to provide our investors with liquidity through the redemption program, during a financial crisis, investors should expect us to pause the program to allow enough time for whatever events may unfold.“
They go on to explain that these temporary restrictions during a financial crises are put in place in order to protect the financial health of the entire investor community and their funds. While these restrictions protect you from making poor choices during times of extreme uncertainty in the market, they also prevent you from tapping into this additional pool of liquidity when you might need it the most.
Supply Risks (e.g. government regulations, lack of labor)
Because you are contributing to a real estate investment much earlier in the value chain, you need to factor in barriers to developing and selling new real estate. This includes government imposed restrictions or requirements in certain zip codes that make it extremely costly to build. In a recent podcast episode, Ben Miller, co-founder of Fundrise, discussed several supply-side issues such as the difficulty in finding labor or certain parts of a house (e.g. refrigerators).
Demand Risks (e.g. higher interest rates)
As seen in today’s environment, a rise in interest rates increases the cost of borrowing (i.e. mortgage rate). With an increased cost of borrowing, it is more difficult for consumers to afford a home. Often, this leads to lower demand and/or lower prices for real estate. Lower demand is not what you want as a real estate developer. Lower prices will lower the price appreciation of real estate; thus, some of the returns from investing. Supply and demand are a delicate balance that pose risks on both sides to investing in real estate.
Conclusion
After reading through the benefits and risks of private real estate, you might wonder what type of investor should consider investing in Fundrise. Personally, I think this asset class should appeal to an investor with some (or all) of the following characteristics:
- Has an emergency fund built up (e.g. 2-6 months of savings as a safety net)
- Long term investor –> does not need to touch private real estate investments for 5+ years
- Has at least 10 dollars of surplus funds to get started
- Desires an asset class with less volatility and daily price fluctuations
- Wants higher risk-adjusted returns for their portfolio, but potentially less upside than stocks in total return
- Seeks additional diversification in their portfolio
- Does not have the time or money to own multiple physical, illiquid real estate properties
- Desires a passive income stream
- Wants real estate exposure in their portfolio with less volatility than REITs
- Accepts the risks that come with this asset class
If this sounds appealing to you, I would recommend doing some further research into private real estate investing and/or talking to a financial advisor.
~ The Data Generalist
Data Science Career Advisor
Referral Code: Earn \$50 in bonus shares when you sign up with this Fundrise referral link.
Disclaimer: I have some investments in Fundrise’s eREITs.
Financial Disclosure: Please note the website disclosure — none of this is financial advice