Fundrise Starter vs. VNQ Vanguard REIT ETF Review: 4-Year Update (September 2021)

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Updated September 2021. Here is my (nearly) 4-year update on my experiment comparing a Fundrise eREIT portfolio and the Vanguard REIT ETF from October 2017 to September 2021. In Fundrise, we have a start-up with “crowdfunding” beginnings that offers users a share of a concentrated basket of properties actively chosen from the private market. In Vanguard, we have a one of the largest real estate ETFs in the world – users own a tiny, tiny passive slice of 172 public-traded REITs. I invested $1,000 into both in October 2017 and the plan is to let them run for at least 5 years.

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Fundrise Starter Portfolio background. When I bought in, the Fundrise Starter Portfolio was a simple 50/50 mix of two eREITs: the Fundrise Income eREIT and the Fundrise Growth eREIT*. Since these are finite baskets of entire properties, over time they will close one fund and start another similar basket. What new investors are buying today will be different than what I bought in 2017. Each 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 now just $10. You must buy shares directly from Fundrise, and there are only limited quarterly liquidity windows as this is meant to be a long-term investment. There are also additional options available with higher investments:

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 $100, but many brokers offer fractional dollar-based trades if you want. All shareholders are holding the same ratio of (tens of?) thousands of office buildings, hotels, storage centers, nursing homes, shopping centers, apartment complexes, timber REITs, mortgage REITs, 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% on top, but each public REIT also has their own internal costs to manage their properties. In each case, investors are paying for real estate management, office space for those employees, etc. REITs may also use debt to increase their real estate exposure (leverage). Is the technology offered by Fundrise a more efficient way to invest in real estate?

Fundrise Portfolio updates.

  • October 2017. $1,000 initial investment – 50 shares @ $10.00/share Income eREIT and 48.78 shares @ $10.25/share Growth eREIT.
  • 2018. Total of $83.63 in dividend and capital gains distributions received in 2018. Based on balance of $1,117 on 12/31/18, this was a trailing 12-month yield of 7.48%.
  • 2019. Total of $82.62 in dividend and capital gains distributions received in 2019. Based on balance of $1,276 on 12/31/19, this was a trailing 12-month yield of 6.47%.
  • 2020. Total of $66.16 in dividend and capital gains distributions received in 2020. Based on closing price on 12/31/2020, this was a trailing 12-month yield of 5.59%.
  • September 2021. Total of $40.82 in dividend and capital gains distributions received in 2021 YTD as of 7/31/2021.
  • Final balance on 8/31/2021 was $1,494. (includes 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.

  • October 2017. $1,000 initial investment – 11.9545 shares at $83.65/share.
  • 2018. Total of $3.53 in dividend and capital gains distributions per share received in 2018. Based on closing price of $74.57 on 12/31/18, this was a trailing 12-month yield of 4.73%.
  • 2019. Total of $3.14 in dividend and capital gains distributions per share received in 2019. Based on closing price of $92.79 on 12/31/19, this was a trailing 12-month yield of 3.38%.
  • 2020. Total of $3.33 in dividend and capital gains distributions per share received in 2020. Based on closing price of $84.94 on 12/31/20, this was a trailing 12-month yield of 3.92%.
  • September 2021. Total of $1.26 in dividend and capital gains distributions received in 2021 YTD as of 7/31/2021.
  • Final balance on 8/31/2021 was $1,532. (includes reinvested dividends).

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 since they hold entire apartment complexes, office buildings, and so on (similar to your house, but with even fewer comps). Your liquidity from Fundrise is limited to quarterly windows that are not guaranteed. These are meant to be long-term investments so that they can sell at the desired time and avoid forced sales. 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.

Commentary. After nearly 4 years, the final balances are basically tied at a 50% gain! Both turned $10,000 into $15,000 if you reinvested dividends and all other distributions. The Vanguard REIT has made a comeback after falling behind at the beginning of the pandemic. You could argue that really the Fundrise NAV simply didn’t account for what the actual pricing would be if they really had to liquidate in early or mid-2020. It could also be that VNQ will do better in good times, but worse in bad times.

This makes Fundrise similar to a rental property that looks more stable over time because you don’t get daily price quotes on your rental property. You’re really just guessing until something actually sells. Meanwhile, that physical piece of property is something you can visit and see people using (and paying rent). For example, I own part of the The Ridley Apartments in Jacksonville, Florida (picture below). Here is a recent Bloomberg article about a Fundrise property in Los Angeles. That feeling of stability and tangibility is a “pro” of private real estate. However, the “pro” of REITs is exposure to investment growth with zero ongoing management concerns. Fundrise tries to give you a bit of both – you get pictures and updates from the properties but zero management responsibility.

Bottom line. I’m nearly 4 years in my 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. At this point, both have created roughly a 50% gain, i.e. every $10,000 invested 4 years ago would be roughly $15,000 today. I will continue to make occasional updates, but won’t make any hard conclusions until after 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. The first time ended when I decided to test out a withdrawal in my Fundrise Liquidity and Redemption review.

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Comments

  1. Jonathan – a neat experiment that I look forward to reading updates about! By the way, you wrote “As of 12/13/17, the VWO holdings are worth $995.95.” I believe you meant VNQ, not VWO.

  2. Looking forward to your results as well! I just invested in the Fundrise eReits and I’m considering the Vanguard Reit ETF as well. Hmm.. what to do..

  3. Jonathan – Do you have an update on this?

  4. Bouthazar775 says

    I’m curious to see how this plays out.

  5. Posting for reminder of update, thanks for the leg work!

    Cheers

  6. Why would anyone want to own VNQ with the state of REITs in general and Commercial Property Real Estate specifically. VNQ has a nice yield no doubt about it but the share price has gone no where over the last 5 years and with the state of the Retail Industry and higher mortgage rates to come things can only get worse.

    • Shrug, my investment policy doesn’t time in and out of sectors. You could be right that the near-team outlook for REITs isn’t great. But as the saying goes, oftentimes you pay a high price for a rosy/cheery consensus.

  7. thanks for the comparison. as you said, too early to make conclusions, but i too am curious if Fundrise (and similar sites) live up to the hype. i too have invested in Fundrise since last year.

  8. “Despite the name, the Fundrise Starter Portfolio is actually a simple 50/50 mix of their first two eREITs: the Fundrise Income eREIT and the Fundrise Growth eREIT.”
    ___

    I just opened a Fundrise account, and in my account the Starter Portfolio is a 33.333/ 33.333/ 33.333 mix of 3 different REITs, one for the east coast, one for the west coast, and one for the “heartland”– i.e., 3 not 2, and differentiated by geography not by investment style.

    On another note: why the comparison with VNQ, which is not a REIT but a BASKET of REITs? A better comparison would be to compare Fundrise with a single company, e.g., one of the REITs that is actually held inside the VNQ ETF basket.

    • Thanks for the info. Perhaps my REITs were fully funded and now the new money is being shifted to those newer REITs.

      I could compare with a specific REIT, but which one? Why that one and not another one? I think a VNQ is a better comparison because many more people hold VNQ in their portfolios than any one REIT. It is a more common alternative, like comparing a single stock to the S&P 500 and not just Apple or ExxonMobil.

      • how about comparing fundrise with NLY ?

        • You could compare them, but NLY is a mortgage REIT that mostly owns a leveraged portfolio of mortgage bonds. I would think a better comparison would be with an REIT that holds a mix of commercial and residential properties.

      • I take your point about “which one” of the many REITs to compare to Fundrise, but I would respectively point out that you have been willing to pick one private REIT here (i.e., Fundrise) to compare to VNQ, and so I wouldn’t think it would be any more difficult to pick one public REIT to compare to Fundrise.

        If you compare VNQ to Fundrise, then obviously only one part of difference is the liquidity issue and consequent pricing issue; a major difference is that VNQ is not a REIT in the first place and, unlike Fundrise, doesn’t make any decisions about which properties to acquire. Rather, the management behind VNQ essentially just buys REITs in proportion to their market capitalization. It doesn’t take any specifically real estate expertise to manage VNQ, because the managers of VNQ don’t make any real estate-related decisions. That’s why I think comparing Fundrise to an actual REIT (one that is inside VNQ, no doubt) is the better comparison.

        I also would add that any investor who would be comfortable picking an individual company like Fundrise ought to be, in principle, comfortable choosing an individual public REIT over a *basket* of public REITs.

        As you say in your reply to Sam (on April 24), comparing Fundrise to a REIT with a mix of commercial and residential properties would be the way to go. I quite agree.

        On another note: have you ever looked at Emerging Trends RE Corp, which parters with the developer New Nordic? I have had a bit of money with them for a while. It’s far less diversified even than Fundrise but, like Fundrise, is all about illiquidity. It is most heavily focused on Thailand but also has branched out into other parts of Southeast Asia; it is not really about residential but more about hotel/ resort properties and is a play, especially, on growing Chinese tourism in the area.

        (Finally, let me add that I enjoy your blog very much).

        • I’m not against comparing against an individual REIT, but you’d just have to track dividends and reinvestment. With VNQ I can let Morningstar do the math for me. I notice Realty Income (O) a lot in individual portfolios. If I could find a good data provider we would compare that.

  9. thanks for the post. i also started investing in Fundrise in 2017 (partly due to feedback from blogs like yours, and i was curious).

    Generally, i give high marks to Fundrise for their communication and transparency. The only time I was disappointed was when the Heartland REIT that i own stopped giving dividends starting Nov 2018, without any notice. I emailed Fundrise customer support to ask what happened. They said dividends will restart in 60 days or so – let’s hope so.

  10. Wow, a ~10.4% return in the first 12 months. That’s impressive. I wish I found this when I was looking for a Commercial Real Estate fund back in June of this year. I was only able to find TIPRX, and the only reason I have access to it is through my wife’s retirement account through Schwab. The fees are very high (2.29%), but it was worth it to me for the diversification and the long run return is just over 8% per year.

    Still, it doesn’t seem to beat this, and like you said, our money is fairly locked up. I’m not sure how long it’s going to take to get it back out.

  11. With what happened to Realty shares during the boom time I’m skeptical of Fundrise surving the downturn (whenever it occurs)

    • A couple of factors that should help Fundrise weather a downturn:
      -portfolios are intended to focus on up and coming areas less likely to be devastated by an economic slowdown
      -Fundrise investors should be prepared to hold their investment for a long time, and Fundrise is up front about the fact that investors will not be able to pull their money out en masse should a downturn occur.
      -Fundrise sees a potential downturn as an opportunity to get a good deal on cheap properties to spur future growth
      -Fundrise usually holds preferred equity, so a property would have to lose 10-20% of its value before Fundrise equity is impacted
      -Fundrise’s holdings, especially in the cash flow eREITs, consist of debt as well as equity.

  12. How about taxes? Do I get to deduct my contribution to a vangard VQN>? I know I cannot deduct contributions to my Fundrise

  13. Can you update your numbers for April 2019? I’m very interested. Thanks!

  14. How much does Fundrise income complicate your taxes, as compared to owning an REIT mutual fund/ETF? Is it any different?

    • Taxes are pretty simple and similar to owning an ETF. You just get two 1099-DIV forms per year. One for Growth REIT and one for Income REIT.

      It’s actually easier than when I owned an oil futures ETN that distributed a K-1 form (that was also really late every year).

  15. I looked into Fundrise awhile back and didn’t like the risk/payout structure. Your investment only lasts a certain amount of years. (I think it was 18 years). At that point you get it all back regardless of whether you would prefer to let your investment keep going like an REIT or traditional real estate purchase.

    You’re taking a good deal of risk that any particular deal will fail along the way. 18 years is basically long enough that the risk is gone. If it hasn’t already crashed and burned you made a great investment… or rather the preferred equity holders made a good investment. They now own 100% of the investment despite passing a good deal of the start-up risk onto other people.

    In another comment Dan notes that these preferred equity holders share some of the risk early on, “Fundrise usually holds preferred equity, so a property would have to lose 10-20% of its value before Fundrise equity is impacted” which is true. But through that mechanism they receive 100% of the risk and gains later on, a time where the risk is basically 0. I’d sign up to for Fundrise’s preferred equity shares immediately except that they are not available to the public..

  16. Thanks for the experiment! It’d be great if you can split out the unrealized gains of each investment option. As you may know, the dividends are typically taxed at ordinary income rates and the “unrealized” gains at capital gains when realized. Depending on the income level of the reader, these could be seriously different (e.g. $200k earner in CA would have a marginal tax rate of >40% while capital gains is 25%).

  17. Jonathan, how do you think fundrise will perform in the current environment as both a buyer and a seller?

  18. Can you please review farmtogether and acretrader – crowdfunding for farmland?

  19. Jonathan,

    Would you please share your updates on Fundrise?

    Thank you

  20. Perfect, Thank you, Jonathan. 🙂

    By the way, did you invest only $1,000 or $10,000 initially because the examples show how $10,000 turned into $15,000 that was only for illustration purposes?

  21. Also, Jonathan, if you had to invest a larger amount, would you choose Fundrise or VNQ?

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