Fundrise Starter Portfolio eREIT vs. Vanguard REIT ETF Review – Updated July 2019

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Updated July 2019. This post tracks 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:

Here’s a recent map of locations for the holdings. Most are apartment complexes, condominiums, and hotels.

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* Due to increasing popularity and the limited nature of this product, Fundrise has created the Income REIT II/III funds and Growth REIT II/III funds. My portfolio is invested in the REIT I and REIT II series of funds, but new investors will get the REIT II and REIT III series. Thus, your returns may look somewhat different than mine.

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 $89, 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. Due to scale, I would expect the net effect of fees to be significantly higher for the Fundrise assets than for the Vanguard ETF. 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. Screenshot of my most recent statement:

  • 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: 2018 Q4 dividends of $18.34 received and reinvested.
  • 7/11/19: 2018 Q4 dividends of $17.62 received and reinvested.
  • 7/11/19: Total Fundrise value $1,192 (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.

  • 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.
  • 6/27/19: VNQ dividend of $0.83 per share.
  • 7/11/19: Total VNQ value $1,157 (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. 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. 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.

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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..

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