Fundrise deserves a lot of credit for continually and aggressively innovating within the investment crowdfunding ecosystem. Launched initially as a platform for investing directly in specific properties (and small funds), they’re quickly evolving into essentially a real-estate oriented robo-advisor. In addition to offering a range of real estate investment products (both commercial and residential), they’ve also raised more than $12M from individual investors using Reg A+.
To date, Fundrise has originated more than $350 million in equity and debt investments across more than $1.9 billion in real estate property
Fundrise is incredibly effective at marketing, branding, and promotion, and is clearly pursuing an aggressive growth strategy with an emphasis on reaching younger investors investing relatively small amounts. Their website is modern, approachable, and very consistent with offerings from companies like Betterment.'
Types of investments Fundrise offers
In early 2016 after a hiatus from any open investments, Fundrise launched their flagship “eREIT” product, the first REIT to use Reg A+ (the approach has since been copied by a number of other platforms, notably Rich Uncles and RealtyMogul). Their first two variants were “Income” and “Growth”, and they’ve since expanded into others, including those with a particular geographic focus. The eREITs invest in a range of commercial real estate.
More recently they’ve launched what they refer to as “eFunds”, which invest in residential properties, primarily single-family homes in urban areas (a product aimed squarely at Millennials).
And most recently, it appears that investors cannot directly invest in any of the individual eREITs or eFunds, and instead must go through Fundrise’s paid managed advisory service. A “Starter” portfolio is available for $500, split equally between their Income and Growth eREITs, with additional allocations available for particular goals.
While Fundrise is not the first real estate investment crowdfunding platform to use crowdfunding to raise capital for themselves (for example, now-defunct RealtyShares raised money via FundersClub), Fundrise may be the first to offer shares directly themselves using Reg A+, in what they referred to as an “internet public offering” (Groundfloor has since followed suit).
What do you get when investing with Fundrise?
The details can vary a bit based on the particular product, but investors typically receive common stock in a special purpose entity (usually an LLC), entitling them to a particular ownership interest (and dividends where applicable). The shares do not come with any voting rights (even for investors in the Fundrise “iPO”).
How does Fundrise make money?
As with much about Fundrise, there is quite a bit of complexity lurking beneath a very polished surface. Fundrise currently touts fees of 0.85% annually for the investments themselves, along with a 0.15% advisory fee. As with RichUncles, they also emphasize the lack of broker and commission fees that are typical with traditional REITs to help justify the claim fees that are 90% lower than traditional REITs.
However – and perhaps as a consequence of their ongoing evolution – Fundrise has become a complex web of inter-related entities, including investment, management, advisory, and lending companies of varying shapes and sizes, many of which pay others for services. For example, from one of the eFund offering circulars we learn that if the fund doesn’t have enough capital on hand to buy enough property, it may borrow money from (and pay interest or provide other compensation to) one of its related entities to do so:
If we have sufficient funds to acquire only a portion of a real estate investment then, in order to cover the shortfall, we will obtain a related party loan from, or issue a participation interest to, Fundrise Lending, LLC, a wholly-owned subsidiary of Rise Companies Corp. (“Fundrise Lending”)
And further detail on some of the fees include others paid to related parties, like this one:
A quarterly servicing / property management fee from 0 to 0.50% paid to Fundrise Servicing, LLC for the servicing, property management, and/or administration of certain investments and loans held by us.
And when it’s time for the properties to be sold, there’s additional fees paid to Fundrise affiliates:
Up to 1.50% of the gross proceeds (after repayment of any property-level debt) from the liquidation of any of our equity investments in real estate, unless such fee is reduced or waived by the Manager.
These fees may well be reasonable and appropriate (and if not paid to Fundrise, may well need to be paid elsewhere), but prospective investors should be sure to understand the full range of fees paid by the companies they’re purchasing shares in. Unfortunately, the move away from allowing investors to invest in individual products means having to wade through multiple prospectuses to try and parse out the various combinations of fees and terms – a tall order for a $500 investment.
Potential returns and cashflow
Fundrise publishes their historic performance, stating average annualized returns between 8.76-12.42%. Returns for the most recent full year in 2018 came in at 9.11%, with the company reporting returning $5.9 million in dividends to investors during the fourth quarter of 2018. Notably the years with the highest performance pre-date the current Reg A+ eREIT/eFund offerings, which for practical purposes have a minimal track record.
Details vary, but most of the investments have a mix of periodic dividend payments and a longer-term equity upside (Fundrise also offers a dividend reinvestment program). Investments in the Fundrise “iPO” have no dividends.
As with most equity real estate investments, the expected hold term is 5 years or more. Fundrise does offer limited redemption options if you want or need to sell your shares back early, but that is both subject to a few restrictions and to a fee (for example, if you sell your shares back after 6 months, you’ll only get 97% of their value – or put another way, there’s a 3% fee for early redemption).
Breadth of offerings on Fundrise
Fundrise has the widest selection of choices among platforms currently offering Reg A+ REIT products, and they deserve credit for an innovative product with their recent eFunds.
Regulatory framework and due diligence expectations
Fundrise’s investment products are offered under Reg A+, which involves a range of SEC requirements, disclosures, and filings.
The REITs and funds are “blind pool” investments, so investors are not able to opt-out of particular properties, and are relying entirely on Fundrise’s judgment and due diligence about which properties to acquire and all the terms of the purchase, any renovation, etc.
It’s also worth noting is that while their model of avoiding the use of broker-dealers does reduce the sales commission, there are potential side effects prospective investors should be aware of. REITs that use a licensed broker-dealer are subjected to a due diligence review by an underwriter or dealer manager to satisfy various laws and regulations, whereas Fundrise is arbitrarily determining the price of shares in their REITs/funds. As noted in one of their offering circulars:
Our Manager established the offering price of our shares on an arbitrary basis. The selling price of our shares bears no relationship to our book or asset values or to any other established criteria for valuing shares. Because the offering price is not based upon any independent valuation, the offering price may not be indicative of the proceeds that you would receive upon liquidation. Further, the offering price may be significantly more than the price at which the shares would trade if they were to be listed on an exchange or actively traded by broker-dealers.
There are plenty of other real estate investment crowdfunding choices that also aren’t reviewed by a broker-dealer, and to some extent language like that is just necessary disclosurespeak, but as a counter-balance to the case against the sales commission, is something prospective investors should at least understand.