Real Estate Crowdfunding Experiment #2: Fundrise Income eREIT Review

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Updated with Q2 2016 performance results. My second real estate crowdfunding investment is $2,000 into the Fundrise Income eREIT. (REIT = Real Estate Investment Trust.) Their investment claim is being the “first ever low-fee, diversified commercial real estate investment available directly online to anyone in the United States, no matter their net worth.”

Fundrise is one of the first real estate companies taking advantage of the recent JOBS Act that allow certain crowdfunding investments to be offered to everyone, as previously it was limited only to accredited investors. You must be a US resident and your investment cannot exceed the greater of 10% of your gross annual income or net worth.

Here’s a quick overview of the features:

  • Low investment minimum ($1,000)
  • Quarterly cash distributions
  • Quarterly liquidity (you can request to sell shares quarterly, but liquidity is not always guaranteed)
  • Low Fees (claimed to be roughly 1/10th the fees of similar non-traded REITs). Until Dec 31, 2017, you pay $0 in asset management fees unless you earn a 15% annualized return.
  • Transparency (you get to see exactly what properties are held)

Essentially, instead of investing in a single condo building, I am now putting my money into a pot of money that will invest in a basket of different commercial real estate properties.

Why not just invest in the Vanguard REIT index fund? Well, I happen to think most everyone should invest in VNQ if they want commercial real estate exposure. I own a lot more of VNQ than this Fundrise investment. VNQ invests in publicly-traded REITs, huge companies worth up to tens of billions of dollars. VNQ offers wide diversification and you have daily liquidity. But as publicly-traded REITs have grown in popularity (and price), their income yields have gone down.

As with other crowdfunding sites, Fundrise deals with specific, smaller deals with (hopefully) higher risk-adjusted returns. This eREIT diversifies your money across multiple properties, but we’re still talking examples like a $2 million townhouse complex, or a $2 million boutique hotel. An analogy might be made with “micro-cap” investing. From their FAQ:

Specifically, we believe the market for smaller real estate transactions (“small balance commercial market or SBC”) is underserved by conventional capital sources and that lending in the market is fragmented, reducing the availability and overall efficiency for real estate owners raising funds. This inefficiency and fragmentation of the SBC market has resulted in a relatively favorable pricing dynamic which the eREIT intends to capitalize on using efficiencies created through our technology platform.

A positive feature is the ability to request liquidity on a quarterly basis, but it is not guaranteed that you can withdraw all that you request (similar to some hedge funds). Here’s a comparison chart taken from the Fundrise site:

fundrise_ereit1

Why Fundrise? It can be hard to differentiate between the various crowdfunding websites. One way that I feel that Fundrise differs is they are more picky about the deals they choose to fund. Talk about higher standards is one thing, but I’ve been tracking them for a while and Fundrise really does offer far fewer deals than the other competitor sites I have signed up with. For about a year now, every deal that I’d been interested in filled up within 24 hours. Even this eREIT had a waitlist. Will this selectivity last? I don’t know, I hope so. Will their selectivity produce higher, safer returns? I don’t know, I hope so.

Dividend income updates.

  • 1st Quarter 2016. 4.5% annualized dividend was announced. This is the first complete quarter of activity, so the dividend size is expected to increase once funds are fully invested. The portfolio included 13 commercial real estate assets from 8 different metropolitan areas, with approximately $31.5 million committed as of March 31, 2016.
  • 2nd Quarter 2016. 10% annualized dividend announced, to be paid mid-July. Portfolio now includes 15 assets totaling roughly $47.25M in committed capital.

Screenshot from my account:

fundrise2016q1

I think the Fundrise Income eREIT is an interesting concept. There may be a waitlist to join, but they do work through it. I am simply sharing my own results, not making an investment recommendation as I don’t know your situation. This is a higher-risk, speculative investment.

Comments

  1. Very interesting concept but not for me at this point. I will be interested in your updates.

  2. Beyond liquidity, the HUGE difference between Vanguard and Fundrise is the quality and experience of the management team. As far as I can tell, it doesn’t appear any of the management team at Fundrise have ANY experience operating REITs or public companies. This is extremely dangerous as just one misstep can have disastrous consequences to investors. Any investment in the Fundrise eREITs should be viewed as charity towards their management team’s on the job education rather than a bona fide investment opportunity.

  3. Hmm, cool experiment. In canada, we are super new to this and one company just started, I’m anxious to see how it goes too because I’m looking into it. I look forward to your updates on this experiment. Thanks for sharing,

  4. LOL @ their comparison table. Shouldn’t they be comparing it to VNQ?
    Up front costs: 0%
    Ongoing Fees: 0.12%
    Liquidity: Daily
    Historical Returns: ~10% (20 year period using VGSIX, underlying investor fund, that dates back to 1996)

  5. Fundrise has fraud written all over it. Don’t be one of the ones who loses all your money chasing a “12-14% return” con job.

    • What is the evidence behind your statement? 12-14% may be optimistic for a long-term average return, but holding debt backed by the collateral of real, physical property (and promises) sounds better than holding debt backed by nothing but promises (Prosper and LendingClub). I don’t see anyone calling LendingClub fraud.

      • Fundrise is touting 12-14% consistent returns with little to no market correlation and little/no volatility…precisely the same thing Bernie Madoff peddled in his heyday. Investments with those characteristics can’t and don’t exist. Higher potential returns correspond with more volatility, not the other way around. LendingClub (or any other legitimate investment opportunity) demonstrates returns consistent with this hypothesis (https://www.lendingclub.com/info/demand-and-credit-profile.action). Conversely, Fundrise touts double LendingClub’s 5.24 – 9.31% returns with no volatility!!! A large volume of consumer income loans are expected to be more stable than a small volume of real estate construction projects, so the returns Fundrise advertises don’t add up. This is especially true when you consider some of the loans made by Fundrise are in excess of 90% LTV! That is why I say this has fraud written all over it.

        I have suspected something for a while, but there’s been plenty of alarm bells going off recently with the departure of one of the Miller brothers and the strange departure of their CFO.

  6. Via email today: “We are proud to report that the Income eREIT earned an approximate 9.7% annualized return during Q1 2016. As of April 6, the Income eREIT has acquired 14 commercial real estate assets with total commitments of roughly $38.5M.”

    True ?

  7. my patch of land borrower has defaulted. did not receive last months interest payment.
    the property is now in escrow for way below asking price. I’m just hoping I get my money back.
    not too happy with POL. no transparency. would not recommend them.

    • Sorry to hear that. What was your initial LTV? Please update me on what the final recovery amount ends up being.

      I am not trying to rub it in, but my Patch of Land property in currently in escrow for satisfactory amount (enough to fully repay loan) and expected to close this month. I agree that it is really hard to vet the RE borrowers on this site. Maybe after a few years they will be able to show a longer track records and actual deals done instead of just claims like “I’ve flipped $10M of property in my lifetime.”

      • looks like the Sacramento real estate market is not that hot compared to the bay area. your property seems to be in similar situation to mine. my ARV is 79%. the loan was for $460K , don’t know what the final price is for the sale, but the last price was listed as $599K , so I should get my money and interest back if everything goes well, but POL is not very good at telling you what is going on. escrow closes end of month.

  8. Is there opportunity for capital appreciation on your $2,000 investment or does the fund just pay out dividends?

    • Yes, just as with a publicly-traded REIT, you have the potential for both capital gains and dividends. This REIT simply chooses to focus on income; they are also coming out with a Growth-focused eREIT.

  9. I did not see the exact invested property address (street number and street name) in eREIT, but address info is available in Patch of the Land. Will this affect your investment decision later?

    • Well, investing in a single property is definitely different than investing in a fund of properties. After the eREIT got past 10 properties, I pretty much stopped paying close attention when they tell me about new acquisitions. I like that the eREIT has a lot more commercial properties, which can be expensive and tend to have higher minimum investments when done individually (often $25k minimum for a single deal). I give up control in exchange for diversification. For residential properties, I think individual properties offer you at least the illusion of control in picking a good situation.

  10. Interesting but i’d rather stick to my own research on dividend stocks.

  11. I haven’t invested in Fundrise. I’m thinking about it. I think the concept is cool and it seems pretty simple. I like simple. It’s interesting to me that all the people that I ever see bashing Fundrise have never invested in them. I have yet to see someone that has actually invested in Fundrise say anything bad about them. That’s just funny to me.

  12. How is the annual tax return process with this? Is it similar to other REIT funds, where majority of the 1099-DIV earnings are non-qualified?
    Can you use Roth IRA to invest in Fundrise?

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