We’ve covered Yieldstreet, so today we’ll be taking a left turn and covering Fundrise.
Fundrise is a huge company with many great reviews. On the other hand, Yieldstreet is a similar company with lots of negative talk about it. What gives?
They’re both quite similar on paper, and they’re both supposedly able to take any money you invest with them and return a healthy markup on it. In this post, we’re planning to get deep into this topic and why the discrepancy in sentiments between the two.
The focus in this article is Fundrise, so we’ll be delving mostly into that. But it is worth it to touch upon what makes it so different from Yieldstreet, as it helps us learn why Fundrise is the much better choice. We’ll touch upon the direct comparison towards the end, so without further ado, let’s get into it.
- What is Fundrise?
- How does Fundrise work?
- What do each of the Fundrise tiered accounts invest in?
- What eREITs does Fundrise offer?
- How much does Fundrise cost?
- What is the difference between Fundrise eREITs vs. traditional REITs?
- Is Fundrise legit?
- Is Fundrise good for short-term investing?
- How did Fundrise perform compared to the S&P 500?
- Should I get involved in the Fundrise IPO?
- What are some alternatives to Fundrise?
- What is Yieldstreet?
- What makes Fundrise so different from Yieldstreet?
- In conclusion
What is Fundrise?
Fundrise is a platform that allows the average Joe like you and me to invest in real estate. As many of us know, real estate is often a playground for the wealthy. It’s just too out of reach for the majority of us to be buying real estate en masse since it often requires millions of dollars in down payment at the very least.
Founder and CEO of Fundrise Benjamin Miller started the company back in 2012 and has raised money through both venture capital funds as well as on the platform itself.
Tech companies like Fundrise are looking to disrupt the discrepancy in access to investing in real estate, and their answer to it is through eFunds and eREITs. In short, you’re putting money into a pool of even more money sourced through crowdfunding. Essentially, you and other investors are banding together to harness the power of big money in order to be able to take part in real estate gains, whether it be through active, professionally managed funds or through a portfolio of diversified, passive funds. In terms of REIT composition, they seem to get involved mostly with REITs that do multi-family units, but this can and likely does change as the market evolves over time.
How does Fundrise work?
Traditionally, the barrier for real estate investing is that non-accredited investors can’t get into the game due to too low of a net worth or yearly income. Accredited investors are those worth over $1 million or make at least $200K per year (or $300K combined if married). Fundrise takes away that barrier by allowing you to pool your money in with other non-accredited (or accredited) investors.
Fundrise still has some of their own rules based on how much you’re investing at a minimum. Their tiers are set at:
- Starter ($10 minimum)
- Basic ($1,000 minimum)
- Core ($5,000 minimum and the most popular option)
- Advanced ($10,000 minimum)
- Premium ($100,000 minimum and the least popular option)
All of these tiers include automatic investing and dividend reinvestment. Notable differences include the ability to invest via an IRA (Basic tier and up), the ability to customize your portfolio strategy (Core tier and up), the ability to directly allocate to funds (Core tier and up), and access to Fundrise IPO (Basic tier and up), which we’ll get into a bit later. Here’s a bit more detail if you’re interested in all the features and options they offer:
Other than that, you do get to choose your overarching strategy regardless of which tier you’re qualified for. The different strategies are:
- Long-term growth – this is akin to investing in the stock market and hoping to capture capital gains. The analogous counterpart to it in real estate is the appreciation of the property over time, generally at least over 5 years. Your portfolio will tend towards a larger percentage of growth (capital gains or equity-focused) and a smaller percentage of income (dividend or debt-focused) in terms of dollar allocation.
- Supplemental income – this is akin to receiving dividends in the stock market. Some companies make a very healthy income, sometimes too much, and when they don’t know what to do with it or want to entice more investors to buy up shares, they increase dividends and pay them out on a regular basis, often quarterly. The analogous counterpart to this in real estate is rental income, which pays out on a monthly basis. However, Fundrise will pay these to you on a quarterly basis. You can then decide to withdraw the money or reinvest it. If you reinvest it, you have the option to do it manually or automatically using the Auto-invest feature. eFunds make up 25% of your portfolio in this strategy.
- Balanced investing – a mixture of the above two. Your portfolio will tend towards a roughly 50% income and 50% growth allocation.
What do each of the Fundrise tiered accounts invest in?
Starter tier investments
With the Starter tier, you simply need to have $10 to invest. If you had a million dollars and still wanted to stay in the Starter tier, you technically still could. This tier is the simplest but has the least options available. For some, that can be a downside, but for many who don’t know what they’re doing and want a helping hand from the experts, the limitation can be a godsend.
The Starter account will take your investment dollars and allocate them towards a 50% income (dividend-focused) and 50% growth (capital gains-focused) investment portfolio. Sometimes, simple is better. The portfolio will contain around 20 real estate assets in total.
Basic tier investments
You can opt for the Basic tier once you’ve reached $1,000 in investing power. For example, if you’ve put in $950 in the Starter account and it grew to $1,000, you automatically qualify for a tier upgrade. It doesn’t have to consist solely of original investment dollars.
As stated above, the Basic tier allows you to participate in auto-investing as well as dividend reinvestment. If you’d rather take out your returns as they come, that’s up to you. You don’t necessarily have to take advantage of these features. But if you’ve been doing them manually in the Starter tier, this can be a huge deal as you no longer have to keep such a close eye on your account. You can let it breathe a bit of life on its own.
It also allows you to start investing via an IRA and take part in the Fundrise IPO (internet public offering). Keep in mind that if you are interested in investing via an IRA with Fundrise, you’ll be paying an annual fee of $75 to do so. You can choose to invest via a traditional, Roth, or SEP IRA, but you’ll only be able to invest in eREITs in them. Fundrise doesn’t allow you to invest in eFunds via in IRA account.
Core tier investments
Purportedly Fundrise’s most popular account tier, this one requires you have a minimum of $5,000 to unlock. The biggest deal here is that you can choose to invest directly in certain eREITs if you desire. This is where you start getting a bit more control over your portfolio, allowing you to take on a bit more risk if you’d like.
Advanced tier investments
The Advanced tier requires a minimum of $10K to invest. Advanced accounts are allowed to start investing in eFunds. These include:
- Los Angeles eFund
- National eFund
- Washington D.C. eFund
These eFunds hold 100% equities, so that is something to keep in mind.
Premium tier investments
This one requires you to have $100K or more to invest. The main benefit to this account is that you will be able to access limited time offerings. However, I’d probably say that the benefits to this account aren’t that great taking into account the step up from $10K to $100K minimum investment. These are very risky offerings, but I suppose they take that into account, since those with $100K are in the better position to take such risks over the little guys with $10K or less in their pockets.
What eREITs does Fundrise offer?
Fundrise has several eREITs, including:
- East Coast
How much does Fundrise cost?
The great thing about Fundrise is that you don’t get penalized for having less money like a lot of other investment platforms do. Generally, you’ll find that when you invest less with a company, you’ll get a higher management fee that those with more money won’t get. These kinds of platforms often claim that they exist to make the world a fairer place for average Joes, but then proceed to charge the average Joe more for putting up less money. Not so with Fundrise. No matter what tier you’re in, whether it be Starter, Basic, Core, Advanced, Premium, you’ll be charged an annual advisory fee of 0.15% ($1.50 per year for every $1,000 invested) plus an annual asset management fee of up to 0.85% ($8.50 per year for every $1,000 invested), depending on what assets you decide to invest in.
There is, however, something you should be aware of. Fundrise encourages a long-term investing mindset of at least 5 years, and I agree with it especially in the world of real estate. As a way to further encourage it, they do charge a 1% fee if you decide to exchange your shares for cash before five years. Furthermore, if you do let go of your shares, you’ll have to wait at least two months before you get your cash.
What is the difference between Fundrise eREITs vs. traditional REITs?
The main difference is that Fundrise eREITs aren’t available to the public. They are only available to Fundrise customers. This means that there is much less liquidity in terms of buying and selling shares.
However, because Fundrise eREITs are much smaller than a publicly-traded REIT, they are able to get involved in much more midsized projects that a huge publicly-traded REIT might not, simply because such projects wouldn’t make much of a dent in the overall performance of the REIT. These midsized projects are also known as sub-institutional assets because they are too small for institutions to even consider, but also too large for most individuals to take on. The upsides to investing in midsized projects are that there is much less competition, and the market is quite inefficient compared to large institutional assets. This present lots of opportunities for better risk-adjusted returns.
Note that both eREITs and REITs have some sort of mixture of debt and equity. The allocation depends on the specific REIT/eREIT in question.
Is Fundrise legit?
In other words, is Fundrise a scam? Fundrise indeed isn’t a scam and is completely legit in the sense that they abide by rules and regulations much like every other legitimate investing platform. They are registered with the SEC and have been completely compliant thus far. In terms of performance, there is never a guarantee and if they underperform the overall market, that isn’t necessarily a sign that they are a scam.
As far as I know, they don’t partake in any shady business practices. The shadiest thing that they’ve done in my opinion is that when you want to withdraw your money, they sometimes don’t allow you to do so immediately, which in many cases is understandable, especially if you’re investing in illiquid assets such as real estate. However, there have been cases where they don’t allow the investor to take out their money even by more than three months, and they don’t give a reason or a timeline of when the money might become accessible. This is a problem because they state that when you redeem your shares, they take 60 days to process plus another 3-5 business days to get the money to your bank account. Three months or more is quite worrisome. These cases usually happen when investing in an eFund rather than in an eREIT, as eFunds are actually investing in pure real estate. eREITs are a bit more liquid and don’t usually give investors a problem in being able to liquidate and access their holdings.
Don’t get me wrong, this has happened to very few investors; the majority of investors are able to take their money out as desired on a quarterly basis and are completely satisfied with doing business with Fundrise.
Is Fundrise good for short-term investing?
Fundrise isn’t really ideal for short-term investing. Usually when investing in real estate, investors are looking at a longer timeframe, usually over 10 years or more. However, that’s not such a bad thing. When investors let their money grow without intervention, that’s when the majority of winners occur.
How did Fundrise perform compared to the S&P 500?
As with any stock market comparisons, the results vary wildly depending on which timeframe you decide to cherry pick. However, just to give a basic idea of how Fundrise has been performing, let’s take an arbitrary time period of 2018 to 2021. During this time, the S&P 500 has grown roughly 75%. During the same time period, Fundrise (for all clients) has grown roughly 50%. It isn’t the worst growth, but if definitely lagged the S&P 500 during that time. However, more recent numbers should likely show that Fundrise comes out much ahead during 2022, and perhaps even 2023. Time will tell.
Should I get involved in the Fundrise IPO?
Let’s clarify that in this case, IPO doesn’t stand for Initial Public Offering but rather Internet Public Offering. It’s not buying up shares of a company going public. It’s buying shares in a private company, and it is only available for purchase by current Fundrise clients who are in the Basic tier or higher.
One thing I personally admire about Fundrise is that they only allow you to invest up to a certain amount into their IPO based on how much you are currently investing with them at the moment. They won’t allow you to put all your eggs into that basket even if you wanted to. It’s a risky move no matter how much you believe in their company.
What are some alternatives to Fundrise?
Over the past decade, several companies have popped up that are similar in one way or another to Fundrise. These include:
What is Yieldstreet?
Remember how I promised I would touch a bit upon Yieldstreet towards the end? Well here we are.
Yieldstreet is quite similar to Fundrise in that it is a private market investing platform, which includes the ability to invest in real estate. In fact, real estate makes up more than half of the opportunities found on Yieldstreet.
Founder and CEO Milind Mehere founded the company back in 2014 because he believes that with all the passive investing going on in index funds and robo-investing, the stock market has become all too efficient, essentially wiping any potential alpha opportunities with it. He believes the private market is the way to go from here on, and real estate as a private investment is part of that.
However, they’ve got much more than real estate investing on their platform. They’ve also got crypto, venture capital, art investing, private credit, and other niche (and sometimes seemingly vague) opportunities to get into.
Check out our full review of Yieldstreet here.
What makes Fundrise so different from Yieldstreet?
For one, Fundrise focuses solely on real estate, whether through direct projects or via REITs. Yieldstreet does the same and more, and that’s where I think they start to fall short.
When a company has to do too many things at once, they tend to have to hire more minds, yet quality still suffers. In Yieldstreet’s case, since they need to vet each project, they need a team with a bunch of fields of expertise in addition to real estate. You may get a few good guys in crypto, a few in venture capital, a few in private credit, but you’re spreading yourself thin. Overall, you’ve got less minds able to work together and advise each other, and your standard of vetting can go down the drain especially when it comes down to some niche project that no one has any idea about.
Fundrise doesn’t suffer from this ADHD type of approach, and thus can grow their company in a more focused manner. That of course, is all just one man’s opinion.
Plus, Fundrise excels in transparency, especially regarding fees and where your profits or losses come from. Yieldstreet on the other hand excels at not being transparent. They’ve been known to keep projects up on their website that have complete failed and have gone bankrupt, just to smooth out their success/failure rate. It’s also next to impossible to get in on a project with thorough research, as the projects often quickly fill up before you get a chance to get in on it.
Fundrise does a lot of things right. They allow non-accredited investors to take advantage of investing in real estate through a crowdfunding model, which has a lot of potential due to deregulation. I like them as a company and believe they’ve got their focus in the right direction. They aren’t trying to rush you into anything; in fact, they really want you to keep a long-term mindset, which when it comes to real estate, I wholeheartedly agree.
But what really sells Fundrise to me is their transparency regarding all things including fees, profits vs. losses, and where the profits or losses come from. At any given second, you get a full picture of what exactly you’re investing in; you don’t have to speculate what’s going on behind closed doors. And naturally, with that philosophy, their client support is quite excellent. To me, that’s worth a lot, especially for peace of mind.