Fundrise Review: The “OGs” of Reg A Real Estate

Hi everyone,

In today’s Deep dive, we’re looking at Fundrise – a platform dedicated to providing both accredited and non-accredited investors with private real estate funds.

Their portfolio comprises more than 200 assets and $6b AUM. But how are they navigating today’s challenging real estate climate?

Let’s go

Quick Summary

  • Investment type: Private real estate and venture capital funds
  • Who’s it for: Both accredited and non-accredited investors
  • Min. investment: $10
  • Investment horizon: Long-term (5+ years)
  • Location: US residents only

Real estate & tech in 2023

Both Real estate and tech had a pretty rough 2022. Moving into 2023, property prices are dropping around the world:

  • Homes in Australian cities have fallen 10+%.
  • US house prices are predicted to drop 5.6% in 2023.
  • Houses in Sweden have fallen 15+% from their 2022 peak.

Interest rates will keep rising next year, and the outlook is pretty grim.

The same can be said for tech markets, which have lost $7.4 trillion in 2022.

So why are private markets any different?

Private real estate

Private real estate is any property or land not traded publicly. It is usually a large block of land used for developing single-family rentals. Usually, income generation is the name of the game.

Over the past decade, private real estate has yielded 5.2% per year. And when rates go up, so do rental prices. We think rental yields will only improve throughout the year.

Private real estate has consistently outperformed other forms of property investment (like REITs), and that’s to say nothing of stocks and bonds (given the recent downturn)

Private RE has yielded more than REITs, bonds, and stocks over the past 10 years.

Private tech

High-growth, private tech equity has historically been one of the strongest-performing asset classes.

Tech companies account for nearly a third of the buyout market.

And despite valuations (especially late-stage valuations) getting demolished in 2022, when you zoom out you realize VC firms have dominated global performance rankings over the past decade.

The problem with private markets

Private markets are plagued with issues for retail investors:

  • Extremely minimum investments (think tens of millions).
  • VC firms snap up most private opportunities before they make it to the public market.
  • Fewer companies are going public (Stripe really dropped the ball here)
  • High management fees

In most cases, accessing the best private equity funds is pretty much impossible unless you’re an institutional investor.

But that’s where Fundrise comes in.

What is Fundrise?

Fundrise is a long-running alternative investment platform that gives investors access to private market funds.

The Fundrise platform can be accessed via a browser or smartphone app.

The company was founded in 2010 and launched following the JOBS Act in 2012. Since then, Fundrise has accrued some pretty impressive figures.

They have:

  • 200+ assets distributed through 12+ funds, worth $6B+
  • 371,000 active investors on the platform
  • $7b+ in transactions
  • Distributed $226m+ in dividends to investors

Fundrise has been a leader in dismantling institutional disparity. Their mission is to use technology to build a better financial system for the individual — one that is simpler, more reliable, lower cost, and transparent.

The Fundrise story

Fundrise is headed by Ben Miller, co-founder and CEO who founded the company over a decade ago.

Fundrise is one of the Reg A pioneers. (Or as they put it, “the OG of Regulation A for real estate investments”

The Miller family has a long line of experience in the real estate industry. Ben’s dad, Herb Miller, developed 20 million sq ft of real estate throughout Washington DC in the 80s.

Ben’s brother, Dan Miller, worked alongside the duo as part of the Western Development Corp (WDC). The siblings founded Fundrise with a simple idea – let the residents of Washington, DC, invest in the developments WDC was building.

The idea sprung to life in 2012 when Fundrise publicized its first project, Maketto, to DC residents. The newly-minted company raised $325,000 in the United States’ first-ever crowdfunded real estate project.

Word traveled quickly. Less than a year later, Fundrise opened its doors to the American public and began scooping up properties all over the country.

How does Fundrise work?

On the customer’s side, Fundrise is super simple.

Once you’ve created an account, you get to pick an investment strategy depending on your risk appetite. Fundrise’s support team can work with you to choose the fund best suited to your investment goals.

That’s pretty much it. You can fund your account, buy into one of Fundrise’s real estate or tech portfolios, and start receiving dividends.

Fundrise invests in a diverse portfolio of assets that are usually scored from private real estate deals. The company rarely buys just one property – instead, they invest in developing (or already-developed) communities of multiple rentals, like single-family rental communities, last-mile industrial warehouses, and multifamily across the Sunbelt.

That way, they expose investors to as much yield as possible while snapping up properties they believe to be undervalued.

What sets Fundrise apart?

First cab off the rank

Fundrise was the first company to crowdsource a real estate development officially.

Many successful copycats have popped up now, but the Fundrise name continues to hold prestige among property investors and developers.

The sheer size of the company, combined with their strong historical performance through various environments, is largely responsible for that. They get access to great deals that independent investors could never touch.

And the platform also has great traction, with 300K+ active customers.

Low eligibility requirements

Getting into the stock market usually costs at least $500. Private real estate and tech IPOs are even harder to get into – we’re talking million-dollar entries.

If you’re an American with ten bucks to your name, you can start building your portfolio on Fundrise.

Know where you’re investing

You always know what your money is going towards with Fundrise’s eREITs. Your portfolio will show exactly which funds your strategy is investing in.

For example, you might choose an Opportunistic strategy, which would primarily invest in Fundrise’s Growth eREITs. You can then see info about the fund’s properties – such as their location, overall cost, and even some pictures.

Every property Fundrise invests in can be found on the  strategy page .

Excellent mobile app

Given how mobile-driven the new generation of investors is becoming, having a strong mobile app is now a must.

Fundrise boasts one of the industry’s best smartphone apps. It has a 4.6+ star rating from thousands of reviews on both the Apple and Google stores.

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The app’s clean user interface is easy to navigate, making it a great choice for beginner investors.

Risk management

Fundrise’s distinguishing feature is how it performs during periods of economic distress. The investment team has specifically built funds to withstand recessions and large-scale declines – as we’re currently seeing in many industries.

The team’s conservative investment philosophy focuses on income generation and extensive underwriting processes. This has led to strong performance in 2022, despite most other markets crumbling.

Fundrise’s portfolios might not see crazy capital gains during bull runs, but its performance through economic downturns is pretty impressive.

Case Study: Vanguard REIT vs Fundrise

Fundrise positions itself as an alternative to investing in the stock market. But how do they stack up against REITs from the world’s second-largest fund manager?

Vanguard’s Real Estate Index Fund (VNQ) is a publicly-traded REIT that comprises massive property developers and investment trusts like Equinix and American Tower Corporation.

The differences in VNQ’s performance to Fundrise’s portfolios are interesting.

Over the past half-decade, VNQ has gone up about 5.5%. The average Fundrise portfolio is up the same amount in just this past year. Go back five years, and Fundrise has returned about 86%.

Comparing year-to-year performance clues us in on the difference in investment philosophies.

When the property market is running hot, like in 2021, Vanguard’s REIT significantly beats Fundrise (+40% return vs. +23%). Go back a couple of years, and the trend is similar (2019 VNQ +28.9%, Fundrise 9.2%).

However (and this is important) when the going gets tough, Fundrise shines.

The team’s portfolios have never delivered a year of negative performance. (By contrast, VNQ is down 23% this past year.) That’s huge.

Distributions from Fundrise (~6%) are significantly higher than VNQ (~3%) – and pretty much all other REITs, too.

If you’re bullish on real estate and want high, shorter-term capital growth, a Vanguard REIT might be worth considering.

But for long-term, risk-adjusted returns and great income generation? I think Fundrise is the way to go.

Getting started on Fundrise

Creating an account is easy. I like how they handpick a portfolio for you based on your investing type.

Account levels and costs

There are five accounts to choose from, each level dictated by a minimum investment. The Starter account is pretty limited – but that’s to be expected for a $10 investment.

The fee structure remains the same for each account, even with the varying levels of features.

Fundrise annual fees are a reasonable 1% (an annual advisory fee of 0.15%, plus a 0.85% annual management fee.)

Compared to other similar fund managers, this is very competitive.

Investment portfolios

Fundrise offers four basic investment strategies:

  1. Fixed Income
  2. Core Plus
  3. Value Add
  4. Opportunistic

Fixed Income

Fixed Income strategies target a relatively smaller return of 4-8%. The funds in this portfolio are income-targeting and focus on dividends rather than capital growth. It is the lowest-risk offering in the Fundrise suite.

Apartments will never be sexy for capital growth, but they consistently produce income with low vacancy rates.

Core Plus

Core Plus is a stable investment strategy with a longer-term outlook.

The plan targets annual income and capital appreciation of 4-6% each. Fundrise utilizes moderate leverage and both industrial and residential properties to build investors a suitable portfolio.

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Core Plus properties are a mix of single-family homes, apartment complexes, and industrial offerings.

Value-Add

Value Add portfolios move away from Fundrise’s bread-and-butter development.

Instead, this investment strategy snaps up existing properties and aims to improve their value. This is accomplished through buying underpriced estates in lower rental vacancy areas. Income in this strategy is lower (2-4%), but capital gain targets are higher (6-8%).

Value Add properties are quite diverse – from commercial offices to renovated luxury apartment suites.

Opportunistic

The Opportunistic strategy is Fundrise’s least-represented – only 10% of their AUM fit the bill. However, it’s also their most ambitious real estate plan, targeting capital growth of 12+% per year. The portfolio mostly comprises large developments from the ground up, which have a long (5+ years) investment horizon.

Developments in the Opportunistic plan aren’t just family rentals – Fundrise also picks up big office spaces and other commercial properties.

The Innovation Fund

Fundrise’s latest offering moves away from private real estate into another, difficult-to-access sector – private tech companies.

The idea is to find high-growth opportunities in the tech sector before they hit IPOs. These will usually be late-stage tech startups, but Fundrise will balance their fund with public equity and early-stage companies too.

The current NAV per share is $10, which is quite low thanks to the Nasdaq’s dismal 2022. Fundrise is going to play it slowly over the next six months as they wait for private markets to reflect the public market’s decline.

Keeping with their real estate expertise, Fundrise will source some of the newest and most impressive PropTech as a core part of The Innovation Fund.

The Innovation Fund is a high-growth investment strategy. It’s targeting tech startups, so it’s by nature going to be pretty risky and illiquid. The time horizon for the fund is 5+ years.

But it’s a high-risk/high-reward play. When you hit a tech startup, you really hit. And unlike most similar venture funds, you don’t need to be accredited to get involved.

If you’re interested, join the waitlist.

What we like

  • Industry leaders with a large user base. The Fundrise executive team has been in the real estate industry for decades. They were the first, and have only improved their stature in the sector since. Fundrise boasts a clientele of 300K+ investors and has a clearly established customer base.
  • Low-risk options. Fundrise’s average real estate portfolio has never posted a negative year. Although some strategies will get beaten out during bull markets, very few perform as well as Fundrise’s during economic downturns. (Granted, the last decade has been absolutely terrific for real estate. But it’s still impressive.)
  • Attractive Industry Demographics. The real estate funds’ concentration on residential rental properties should benefit from near-term tailwinds: increasing interest rates and elevated housing prices are forcing many prospective homeowners to rent for longer periods, usually at higher monthly rental rates.
  • Low Investment Minimums and Reasonable Fees. Private real estate and equity are typically reserved for big-spending institutional investors. Fundrise lets you get involved for as little as $10. Their 1% annual management fee, while higher than those charged by some REIT ETFs, is reasonable when compared to fees charged for other private market investment opportunities.
  • Access to Private Funds. Fundrise’s real-estate and tech funds offer access to assets not available on the public markets at a fraction of a typical private investment minimum. As more tech companies stay private for longer, investment vehicles like Funrise’s Innovation Fund become one of the few ways investors can get in early on the next great tech growth story.
  • Allocation guidance. When investing at the lower account minimums ($10), Fundrise takes the guesswork out of which of their funds to invest in by allocating contributions into a pre-defined portfolio based on the investor’s risk appetite (the ability to select individual Fundrise funds gets unlocked at higher investment levels).
  • Excellent mobile application. Fundrise’s smartphone app for both Android and Apple has been universally praised.
  • Fractionalization of real estate. The fractionalization of real estate is making a big push of late, and we’re super bullish on its future in the industry.

Potential risks

  • Real estate and tech are suffering. Fundrise is built to withstand harsh economic climates, but they are still investing in two of the hardest-hit industries of late. Some may see this as an opportunity to get in early, whereas others may find the more aggressive strategies (Opportunistic/Innovation Fund) too risky.
  • Illiquid investments. Aside from Fixed Income strategies, most Fundrise investment plans don’t begin yielding dividends for 6-12 months. High-growth strategies may take even longer (5+ years) before consistent profits can be made. Unlike publicly-traded REITs, private market investments (funds and properties) can have values that are infrequently updated and determined solely by the managers, who may also limit redemption requests at their discretion.
  • Development and rehab risks. Fundrise’s higher risk/higher return funds have the potential for construction cost and time overruns or the inability to increase rental rates, which would impact the ability to achieve projected returns.
  • Rising interest rates. The reserve banks around the world are going to continue raising rates well into 2023. This might impact Fundrise’s ability to secure financing for both real estate and tech investments.
  • Real estate sector concentration. The Fundrise real estate funds have 83% of their holdings in single-family or multi-unit properties. This allows an investor to concentrate on a real–estate sub-sector with good near-term trends (see above). A downturn in these types of real estate holdings would have an outsized impact on the funds’ performance.
  • Tech startup volatility. Fundrise’s Innovation Fund invests in high-growth private tech companies which carry higher risk and volatility – Fundrise lacks a track record of tech investments, so an investment in this fund requires a belief that they can consistently pick winners.

Closing thoughts

For decades, private equity has followed the same old story – only the elite and richest investors were given these opportunities. These potentially lucrative, high-yield, and recession-resistant assets, have traditionally been hidden behind million-dollar barriers.

But Fundrise was one of the first to make private RE investment accessible.

There are very few funds that can say they’ve withstood the economic pressures of 2022 – but Fundrise is one of them.

If you’re bullish on the real estate and tech sectors going forward, this might be the opportunity for you.

Disclosures

  • None of the authors of this issue currently own any shares or assets of Fundrise.
  • We have no Fundrise shares or assets in the ALTS 1 Fund.

This issue is a sponsored deep-dive, meaning Alts has been paid to write an independent analysis of Fundrise. Fundrise has agreed to offer an unconstrained look at their business & operations. Fundrise is a sponsor of Alts, but our research is neutral and unbiased. This should not be considered financial, legal, tax, or investment advice, but rather an independent analysis to help readers make their own investment decisions. All opinions expressed here are ours, and ours alone. We hope you find it informative and fair.

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Author

Stefan Von Imhof

Stefan Von Imhof

Stefan lives and breathes asset analysis and valuations. Before co-founding Alts, he created a Due Diligence Service for evaluating website & micro PE deals. In his spare time he enjoys record collecting and managing his short-term vacation rentals. Originally from Boston and later Santa Barbara, CA, he now lives with his wife in Australia.

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