Fundrise Review – Crowdfunding for Real Estate

by Scott Sery on June 1, 2015

Fundrise Review

Most of us have heard about crowdfunding. It is a way that many people have utilized the power of the masses in order to get their idea off the ground. There are multiple different resources depending on if you have a business idea, a product idea, or a charity idea, but the concept is still the same. Use resources from dozens, hundreds, or even thousands of people in order to raise the capital you need for your idea. The company Fundrise uses this approach for real estate investing.

What is Fundrise?

Fundrise takes a new approach on real estate investment. The goal of the company is to allow everyone access to real estate investments, and not just those that are rich enough. Since not too many people can afford to buy a multi-million dollar commercial real estate building, the only option for the small investor is to buy in through a real estate investment trust (REIT). Unfortunately, these often come with heavy fees and high management costs; the investor is left with a diminished return.

Essentially what this company does is gather investments from hundreds of people to fund the purchase of the building. That building is then rented out, and the returns are passed on to the investors. It works sort of like this:

100 people invest $10,000 each into a building that costs $1 million. Each person now owns 1% of the building. That building generates $100,000 per year in rental income (or 10% of its value per year), and after management fees and expenses are taken out (let’s assume 1%) there is $90,000 of profit. This is divided amongst the 100 investors, so each takes home $900; or a 9% return on their investment.

But the program works the other way as well. Let’s suppose you want to build a commercial building, but you only have $500,000. You need to raise the other 50% of the costs, and you are having trouble obtaining a conventional loan, and there are no investors out there willing to risk that much money. You can fund your own project through Fundrise and hasten your closing date.

Benefits of Fundrise

The idea is simple: everyday investors can invest directly into real estate and reap a higher return. Instead of having to invest through a REIT, and subsequently pay all sorts of management fees, investors can cut out the middleman. In the end, they take home a higher percentage of the rental income profits.

On the other side, those funding their projects, have a number of benefits as well. Instead of relying on one or two large investors, they can now rely on multiple smaller investors. They don’t need to convince a few investors to take a lot of risk; instead they convince a lot of investors to take a little risk.

In the end, the smaller investor can reap the bigger rewards, and the owner gets funding faster.

Fundrise

Pitfalls of Fundrise

As with all investments there are some downsides. Those investing will notice that the advertised rate of return is often 15% or sometimes higher. However, those are just projected returns. The building may end up sitting vacant for months, and the return rate could be negative. There is always the risk of the project failing. But the biggest downside is probably the need to be an accredited investor.

In order to invest in the majority of the Fundrise projects, you have to be an accredited investor. This means you have to have an income of over $200,000 per year (or $300,000 for a married couple), or a net worth of over $1 million. There are a few other specifications for companies that want to invest as well.

While the reasons are clear: Fundrise only wants those with money to be able to invest. This helps weed out thousands of tiny investments and only stick with hundreds of small to medium investments. But it also weeds out a lot of people who could otherwise benefit from these types of investments. There are also SEC guidelines and regulations that require investors be accredited investors.

Would You Use Fundrise?

For those who do meet the accredited investor requirement (the site does say that there are some projects available to non-accredited investors), would you use Fundrise to invest? They don’t appear to be riskier than investing through a REIT, have all the advantages of owning the physical property, minimize the downsides of owning the property, and claim to offer double digit rates of return. Sounds pretty attractive to me.

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Note: I was compensated for this article, however all opinions are my own and these are my try beliefs.
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Scott Sery

Scott Sery is a native to Billings, Montana. Within an hour in nearly any direction he can be found fishing, hunting, backpacking, caving, and rock or ice climbing. With an extensive knowledge of the finance and insurance world, Scott loves to write personal finance articles. When not talking money, he enjoys passing on his knowledge of the back country, or how to live sustainably. You can learn more about Scott on his website Sery Content Development

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