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Fundrise eREIT vs. VNQ Vanguard REIT ETF Review: 2-Year Update (November 2019)

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Updated November 2019. This is the 2-year update on my experiment comparing a Fundrise eREIT portfolio and the Vanguard REIT ETF. In Fundrise, we have a start-up that bought a concentrated basket of roughly 20 properties chosen from the private market. In Vanguard, we have a one of the largest real estate ETFs in the world that owns a passive slice of 184 public-traded REITs. I invested $1,000 into both in October 2017 and plan to let them run for at least 5 years.

Fundrise Starter Portfolio background. Despite the name, the Fundrise Starter Portfolio (you can see the options below after entering e-mail) is actually a simple 50/50 mix of two eREITs: the Fundrise Income eREIT and the Fundrise Growth eREIT*. This private eREIT works within recent crowdfunding legislation that allows all investors to own a basket of individual real estate properties (not just accredited investors with high net worth). The minimum deposit is $500. You must buy shares directly from Fundrise, and there are liquidity restrictions as this is meant to be a long-term investment. There are also additional options available with higher investments:

* Due to increasing popularity and the limited nature of this product, Fundrise has created the Income REIT II/III/2019 funds and Growth REIT II/III/2019 funds. My portfolio is primarily invested in the REIT I and REIT II series of funds, but new investors (and my dividend reinvestments) will buy shares of the 2019 series. Here is a screenshot of my most recent statement:

Vanguard REIT ETF background. The Vanguard REIT ETF (VNQ) is one of the largest index funds to invest in publicly-traded real estate investment trusts (REITs). You can purchase it via any brokerage account. You have the liquidity of being to sell on any day the stock market is open. A single share currently costs about $93, not including any trade commission. You are holding a tiny slice of (tens of?) thousands of office buildings, hotels, nursing homes, shopping centers, apartment complexes, and so on. Here are the recent top 10 holdings:

Expenses. The Fundrise Starter Portfolio has an 0.85% annual asset management fee and a 0.15% annual investment advisory fee (1% “all-in” total). The Vanguard REIT ETF has an expense ratio of 0.12%, but each public REIT also has their own internal costs to manage their properties. We will see if Fundrise can provide higher net returns for this concentrated holding. REITs may also use debt to increase their real estate exposure (leverage).

Five-year time horizon. Both Fundrise and VNQ usually announce dividend distributions on a quarterly basis. Vanguard updates the NAV daily, but Fundrise only updates their NAV quarterly. Fundrise NAVs are only estimates as there is no daily market value available (similar to your house). Therefore, I plan on holding onto this investment for 5 years at the minimum. This will allow the investments to “play out” and also avoid any early redemption fees. I will withhold any judgements until both investments are cashed out, but will provide quarterly updates.

Fundrise Portfolio performance updates.

  • 10/20/17: $1,000 initial investment – 50 shares @ $10.00/share Income eREIT and 48.78 shares @ $10.25/share Growth eREIT.
  • 1/9/18: 2017 Q4 dividends of $17.98 received and reinvested.
  • 4/11/18: 2018 Q1 dividends of $16.13 received and reinvested.
  • 7/11/18: 2018 Q2 dividends of $17.60 received and reinvested.
  • 10/10/18: 2018 Q3 dividends of $19.10 received and reinvested.
  • 1/10/19: 2018 Q4 dividends of $20.08 received and reinvested.
  • 4/10/19: 2019 Q1 dividends of $18.34 received and reinvested.
  • 7/11/19: 2019 Q2 dividends of $17.62 received and reinvested.
  • 7/11/19: 2019 Q3 dividends of $17.28 received and reinvested.
  • 11/18/19: Total Fundrise value $1,227 (includes adjusted NAV and reinvested dividends).

Vanguard REIT ETF performance updates. I own VNQ and the mutual fund equivalent VGSLX (same underlying holdings) in my retirement portfolio, but will be using Morningstar tools to track the performance of a $1,000 investment bought on the same date of 10/20/17.

  • 10/20/17: $1,000 initial investment – 11.9545 shares at $83.65/share.
  • 12/27/17, VNQ distributed a gain of $0.012 per share, return of capital of $0.37 per share, and a dividend of $0.88 per share.
  • 3/26/18: VNQ dividend of $0.71 per share.
  • 6/18/18: VNQ dividend of $0.73 per share.
  • 9/24/18: VNQ dividend of $1.14 per share.
  • 12/14/18, VNQ distributed return of capital of $0.23 per share, and a dividend of $0.72 per share.
  • 3/29/19: VNQ dividend of $0.62 per share.
  • 7/2/19: VNQ dividend of $0.83 per share.
  • 9/27/19: VNQ dividend of $0.74 per share.
  • 11/18/19: Total VNQ value $1,200 (includes reinvested dividends).

Every month or so, Fundrise sends me an e-mail with an update on a new property that they have acquired, or a property where they have exited. They recently exited some projects where the profits exceeded expectations, and thus they adjusted the NAV. Both Fundrise and the ETF are completely passive holdings, meaning I have no control over what they buy or sell.

Bottom line. I’m doing a buy-and-hold-and-watch experiment where I compare investing in real estate via Fundrise direct investment and the largest REIT index ETF from Vanguard. I’ll provide quarterly updates, but more important is what happens over 5+ years.

You can learn more about all Fundrise eREIT options here. Anyone can invest with Fundrise; you don’t need to be an accredited investor. This is the second time I have invested with Fundrise. Last time I decided to test out a withdrawal in my Fundrise Liquidity and Redemption review.

Peerstreet Foreclosure Case Study #2 (Real Estate Crowdfunding)

I’ve invested in multiple real estate crowdfunding sites, and the one that I’ve put the most money into ($50,000+) is the PeerStreet real estate loan marketplace. If I had to give one tip about this type of real estate investing, it is that you need patience. Yes, the notes are secured by the property, and thus even if the lender defaults you should recover most if not all of the money owed to you. However, what is this process like? How long does it take? What are the possible outcomes? This is the kind of information that I would have liked to see before investing myself, so I wanted to share my experiences.

See also: Peerstreet Foreclosure Case Study #1

Initial investment details.

  • Property: Commercial property in New Jersey.
  • Target Net Investor Rate/Term: 9.25% APR for 17 months.
  • Amount invested: $1,133 out of $1,700,000 loan.
  • Appraised at $4M = 43% LTV.
  • Loan secured by the property in first position.
  • Bridge loan to redevelop into a 179-unit apartment building.

Timeline.

  • May 2018. Loaned out $1,133, my share of $1,700,000 total.
  • June 2018. One single interest payment was made.
  • August 2018. No more payments.
  • September 2018. Legal notices sent.
  • November 2018. PeerStreet and the borrower agree to a forbearance agreement. The terms of the forbearance include, the borrower paying $8,500 and in return, PeerStreet will not file the foreclosure complaint until the end of November. The borrower states that they are in the process of refinancing the loan.
  • December 2018. The forbearance agreement has expired and the borrower has not cured or paid off their loan. The loan file has been sent to a local law firm to initiate legal proceedings against the borrower. Foreclosure counsel filed the foreclosure complaint on December 13, 2018. The complaint has been sent out for service.
  • February 2019. All parties have been Served. Once the time to answer expires, we will move for defaults.
  • June 2019. Foreclosure counsel filed the final judgment package and are waiting on the court to enter the same. Judgment should be entered in the next 3 to 6 weeks
  • July 2019. The foreclosure process continues and PeerStreet is in negotiations to sell the note back to the lender. On 7/31/2019, PeerStreet provided the originating lender with an updated payoff statement as repurchase discussions continue. PeerStreet continues to wait for the Court’s ruling on its Motion for Final Judgment in the foreclosure.
  • September 2019. The Escrow Agent advised that it has received the bulk of the funds for the repurchase of the loan at $1,850,000.00.
  • October 2019. PeerStreet has completed its sale of the note, and final proceeds have been distributed to investors. Proceeds from the sale were $1,815,227, net of costs and fees associated with the foreclosure. The cash-on-cash return on this investment, after taking into account interest and fees paid to investors, was positive at 107.7%.

Final numbers. I invested $1,113 in May 2018 and got paid $87.52 of interest and $1,113 of principal for a total of $1,265.27 as of October 2019. (This was an automated reinvestment which included whatever cash was in my account, thus the odd numbers.) This works out to a 7.86% total return over 17 months, which is roughly a 5.5% annualized return. My overall annualized return across my entire portfolio is 7.3%. These numbers are net of all PeerStreet fees.

My commentary. This loan is an example of Peerstreet negotiating a settlement, in this case getting my principal back and even a a small positive return. This loan was initially concerning because the lender made a single payment and then stopped. While you have collateral, if the loan goes into default, it takes a very, very long time to seize and sell that collateral. This is why you need to diversify your notes and never invest money you need anytime soon.

I can only assume that Peerstreet negotiated with the lender here because they just didn’t want it to drag out any further. They might have gotten more money if they foreclosed, but they would also have had to finish the foreclosure, prep it for sale, market it, and then wait for a sale of the property. The lender still took advantage of the situation, as they basically didn’t have to pay any interest for 17 months and then they ended up paying less interest than they initially promised. The borrower also likely had a bad mark on their credit report, which should hurt their ability to get future loans.

I’ve read many reviews of real estate crowdfunding sites done by new investors who haven’t had the chance to experience how it all works out. Some are overly positive because they haven’t had any late payments yet, while others are too negative because they have some really late loans and assume the worst. With Peerstreet, both of my loans that went “bad” took over a year to sort out, but in the end they had positive returns. Of course, that is not always the case and I have lost some principal on a single note from another now-defunct real estate site.

Bottom line. Out of the $50,000+ I’ve now invested into 51 loans at PeerStreet over 3+ years, 48 were paid back in full in a timely manner, while three have reached various stages of the foreclosure process. This is one example where we went pretty deep into the foreclosure process, but PeerStreet negotiated directly with the borrower to settle the debt and thus avoided another several months of waiting and selling the property. The annualized return for this loan was 5.5%, while my overall annualized return across my entire portfolio is 7.3%.

If you are interested and are an accredited investor, you can sign up and browse investments at PeerStreet for free before depositing any funds or making any investments. If you already invest with them, they now sync with Mint.com.

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