Oliver S. Berryhill Blogs: Real Estate Crowdfunding with Fundrise

Friday, October 13, 2017

Real Estate Crowdfunding with Fundrise

Imagine you have $20,000 to invest and rather than stocks and bonds, you want to put your money to work in real estate. In the past, your options were likely limited to projects and buildings in your zip code. And for $20,000, there aren’t very many options!

fundrise review

But then along came the idea of real estate crowdfunding. Through crowdfunding, you can invest your $20,000 in thousands of projects across the country–along with thousands of other investors. Fundrise is a leader in the real estate crowdfunding enterprise. And they’ve developed a few unique tools to make investing in real estate easy and profitable.

How Do I Invest With Fundrise?

eREIT–After signing up for an account with Fundrise and adding funds to your account, you’re ready to get started. The most common form of investment through Fundrise is their eREIT’s (electronic Real Estate Investment Trust). Just as a mutual fund is a group of stocks, an REIT is a group of commercial real estate assets. Think things like apartments, shopping centers, and office buildings.

The beauty about the Fundrise eREIT is that the company offers it to you directly. Because you buy straight from Fundrise, you don’t have to pay commissions or other fees. This allows the company to keep the costs and volatility low. On the flip-side, the liquidity is also low, so pay close attention to the terms of your eREIT. Fundrise charges penalties for withdrawing your investments early, and you’ll receive a 1099-DIV every tax year.

eFund–If you’re looking for a slightly different investment, Fundrise offers e-funds. These are investments in residential-only real estate assets. These investments are not publicly-traded and consist of single family homes, condos, and townhouses. eFunds are structured as partnerships, not with dividend income like the eREIT’s above. This means come tax time, you’ll receive a 1065 K-1 form, which is different than the tax for you receive if investing in eREIT’s.

Fundrise is available to any United States citizen that is over the age of 18. You must have a Social Security Number to invest with Fundrise, and the minimum amount to invest is currently $500.

Fundrise Fee Structure

When investing with Fundrise, you are charged two standard fees plus a third that may or may not impact your investment:

Asset Management Fee–0.85%
Investment Advisor Fee–0.15%
Asset Origination / Acquisition Fee–0% – 2% (Depending on your investment)

Add ’em up and you’ll see the fees charged equate to 1 – 3% of your portfolio with Fundrise. For example, if you were to invest $100,000 for a full calendar year, you would be charged a total fee of $1,000 – $3,000. Fundrise charges these fees to your account monthly.

Special Promotion Through 12/31/2017 – If you sign up for a Fundrise account, they will waive the 0.15% advisory fee for the remainder of the year.

Should You Invest with Fundrise?

When you look at the annual dividend rate Fundrise boasts–10% – 12%–why wouldn’t you invest with them? Consider these two very important cons:

Liquidity is limited. When you select an eREIT from the Fundrise portfolio, you are locked into that term. These are not publicly traded funds, which means there is no secondary market to sell off your investments. When you make an investment, it’s yours for the full term, for better or worse. Consider that the money you invest will not be available to you until the term expires, and plan accordingly.
Distributions from your portfolio are taxed as ordinary income. This from the public offering document provided by Fundrise:

Unless your investment is held in a qualified tax-exempt account or we designate certain distributions as capital gain dividends, distributions that you receive generally will be taxed as ordinary income to the extent they are from current or accumulated earnings and profits. The portion of your distribution in excess of current and accumulated earnings and profits is considered a return of capital for U.S. federal income tax purposes and will reduce the tax basis of your investment, rather than result in current tax, until your basis is reduced to zero.

When looking at a new investment opportunity, the best advice I can give is to first dip a toe into the water. Sign up for a Fundrise account, take advantage of their low minimum to invest, and try it out. If you’re satisfied with the terms, the return, and their customer service,look to invest more in the future. You may also want to consider some of their stiff competition. RealtyMogul and RealtyShares are two excellent alternatives that also provide real estate crowdfunding investment opportunities.