Fundrise Review (2021): My Experience Investing $5,000 with Fundrise
As everyone and their mother who’s ever been within earshot of me knows, I’m a renter. I don’t own any real estate.
Well, kind of. I don’t own any real estate the conventional way.
Enter: Fundrise.
Fundrise is a real estate crowdfunding platform that allows average individual investors (with as little as $10) to invest in commercial private real estate projects. In case you’re like me and blissfully unaware, that’s a big deal: Private real estate deals used to only be available to accredited investors with a lot of capital.
And in August 2021, I met a high-level Fundrise employee on Instagram (thank you, personal finance bubble). We chatted about real estate, naturally, but we also had a conversation about how there might be a more diversified way to invest in it outside of the primary residence (i.e., owning your home).
In fact, this employee – of a real estate investment firm! – owned real estate in a rental capacity, but rented their own home.
I’ll dig into why I opted for Fundrise as a method for getting exposure to real estate in my portfolio (as opposed to public REITs or buying property outright), but I also want to address why I decided to diversify outside of equities at all.
After all, it’s hella popular in the personal finance space to push an all-stock portfolio, and since most creators that are big on Instagram and Twitter started in the last few years, they’re mostly pushing the S&P 500 and Total Stock Market index funds.
Large Cap Growth has been having a #moment in the last few years, so it seems obvious that you could easily just throw all your eggs in that basket and ride the wave. Observe:
The S&P 500 has grown rapidly in the last 18 months. See what I mean? It’s been an easy sell (erm, buy?).
JL Collins is perhaps the most well-known proponent of the “Total Stock Market and nothing else” philosophy, and while I think his approach is absolutely valid, I’m personally not comfortable with the one-basket approach.
Why? Because I know – from the data – that more baskets = higher returns, and higher returns = more money, earlier FI, and – ultimately – more stable annualized returns.
But stocks aren’t always having a banner year and – contrary to what FinanceBro500 may have you believe, stocks don’t only go up.
After I had $350,000 in stocks, I started to feel like, Hm, maybe I should diversify into something else just to hedge a little against major downturns.
As you can see by the title, I initially invested $5,000 – and it’s not like my portfolio would be saved by one $5,000 investment – but it was a toe-dip into something new that I don’t hear many people discuss on the all-stocks-all-the-time forums I hang around in.
But diversification can pay when it matters most: Consider that in 2018, the S&P 500 was down 6.4%. It was not a pretty year for the stock market. There wasn’t a crash, but stocks were meh. No 20% YoY returns. That year, Fundrise returned 9.11% (net fees) – beating VTI by 14%.
While I’m still quite far from financial independence, that hedge (at scale) could come in quite handy – imagine needing to draw down 4% of your wealth to live on and doing so in a year where your equities are negative. Being able to draw from an asset class that’s up would feel (and be!) better.
I’m getting ahead of myself: Let’s circle back to why I chose Fundrise > publicly traded REITs.
Why I decided to invest with Fundrise instead of public REITs
One of the questions that I hear most whenever Fundrise comes up (and, honestly, a question I had, too!) was: What’s the difference?
What’s the difference between investing in something like Fundrise and investing in a public REIT (Real Estate Investment Trust), like the Vanguard Real Estate ETF?
I’ll cut to the chase: While there are semantic differences that I read (and heard; I listened to podcasts about the topic, too, to try to wrap my head around it), the most tangible difference between REITs and Fundrise comes down to the returns.
While REITs are usually promoted as a way to diversify your portfolio outside of your friendly neighborhood Total Stock Market fund, their performance is actually pretty damn correlated: REITs have an overall correlation with the Total Stock Market of 0.86 in recent history, which means that when the stock market goes up, so do REITs, and when the stock market goes down… well, you get the picture.
Fundrise, on the other hand, has behaved a little differently:
Notice how the pink and red lines are doing more or less the same thing with mirrored peaks and troughs. Fundrise, the orange line, demonstrates the relatively stable returns (since 2014).
And while that chart does a good job of visualizing the difference between a REIT’s performance and Fundrise’s, you’re probably wondering: Yeah, but what’s the total annualized return for that period? I don’t mind a little volatility!
Good on you, sis – you’re asking the right questions.
The annualized returns are as follows (since 2014):
Fundrise: 10.11%
Total Stock Market (VTI): 12.74%
Real Estate ETF (VNQ): 8.37%
Fundrise’s annualized returns were more stable and higher overall than the public REIT that I compared it to (and I’m a Vanguard fan girl, so that’s the one I chose – you can do your own comparison if you have another).
But if you’re spending much time with personal finance content, you’ve probably got another follow-up question:
What about Fundrise’s fees?
I wondered the same. The funky thing about REITs in general is that their fees tend to be higher, and while the expense ratio itself might look low in some cases, it’s common for REITs’ fees to be “internal” in the sense that you don’t necessarily see them from the outside, but they’re baked into the fund internally because of many layers of management.
That’s neither here nor there today, though. For the sake of this comparison, all you need to know is that Fundrise’s total fee is 1% (steep) and VNQ’s is 0.12% (not steep). For a comparison standard, I believe VTI’s fee is 0.03%. A lot of fee-adverse investors choose to avoid things with high fees (and I tend to as well) but I knew that I had to look at the whole picture here, not just the fee in isolation.
Even with the fees accounted for, the Fundrise annualized return was higher – and that was compelling to me.
Net annual returns after fees:
Fundrise: 9.11%
Real Estate ETF (VNQ): 8.25%
One downside, though, is that Fundrise’s returns are all rental dividends (in other words, they’re distributing the cash flow from tenants to you) so they’re taxed like regular income instead of like a capital gain. That’s a bit of a bummer for a tax hacker like myself, but you’ll see shortly why I ultimately still decided Fundrise made sense for me.
Private real estate vs. public real estate
The other thing that interested me about Fundrise was the fact that the real estate projects within the portfolio were (a) easy to see, so I could see which properties my money was buying and (b) that the deals were private, as opposed to public.
That signaled to me that – for better or worse! – it was exposure and diversification into an alternative asset class that was going to operate a lot differently than any public real estate exposure I already had in my portfolio through public REIT exposure baked into the mid cap and small cap funds I owned.
I don’t know if it’s just slick marketing, but the idea that I could now access deals that were previously only available to accredited investors ready to deploy $100,000+ in capital was compelling.
Choosing investments in Fundrise
When I went through the account setup process, they asked me what type of investing goal I was interested in. There were a number of choices, and I (somewhat blindly) chose Supplemental Income. It felt like the most accurate choice: I was looking for another investment to supplement my stocks and bonds portfolio that I could use as income later in life.
The initial $5,000 I invested was split into two sections: Income eREIT and Interval Fund. The Interval Fund still says it’s “ramping up” 3 months later, so my assumption is that that’s a longer-term play.
I invested $5,000 in August and – by November – have made about 10% on my money and paid $1.42 in fees.
Interestingly (and this is definitely not a scientific explanation; take me as I am), the difference between the rest of my portfolio and my Fundrise money is that the Fundrise money just slowly goes up. Remember how the chart earlier in this post just shows relatively stable returns?
It’s like that. It’s not excitingly volatile and all over the place, it’s just a slow climb upward. I have no idea if that’s normal (though I suppose the annualized returns since 2014 would suggest it is), but that’s been my experience so far.
I invested $5,000 and have seen $502 in total returns in three months.
Fundrise breaks your investments down by “project,” which allows you to see the actual properties as well as the different “sectors” of their investment strategy that you’re partaking in. For example, you can see that 52.9% of mine was put into “Core Plus.”
Stocks, bonds… and private real estate?
When I was trying to decide whether or not I wanted to throw $5,000 into Fundrise (about 1.2% of my investable assets), I wanted to see some historical backtests. I wasn’t about to get suckered by some fancy UI and an interesting marketing angle without seeing some #facts, you know? (Though I am a sucker for marketing and UI.)
It turns out that between 2000 and 2021, portfolios that have approx. 20% real estate outperform portfolios that are entirely stocks and bonds.
Mini history interlude: Bonds used to get pretty damn good returns when interest rates were higher. An investor didn’t have to take on much risk to get a 7% return because a bond yield was 7%. Not bad for fixed income, huh?
Investors would choose bonds for stable, predictable returns that carried lower risk than stocks.
I’ve been growing increasingly skeptical of bonds as interest rates continue their eternal climb downward and have considered treating Fundrise (the real estate portion of my portfolio) as an alternative to bonds. Obviously, I’m pretty far away – Fundrise is only 1.2% of my total invested assets – but depending on how the next year goes, I may start shifting more of my bond exposure into Fundrise.
The other reason this strategy makes sense to me is because my bond yield is taxed like earned income, too. In other words, Fundrise returns and bond yields are taxed the same way. By shifting money out of bonds and into Fundrise, I’m not changing my tax liability, but I’m improving my chances of higher overall returns that are uncorrelated to the stock market and may provide some cushion in down years later on.
How liquid is Fundrise?
Well, not very.
That’s a big reason why I caution brand new investors: The folks who are in my DMs asking me why it takes three business days to get their money out of their brokerage account are likely not prime candidates for Fundrise, where you can’t touch your investment for five years. It’s locked up, because it’s actually being used to buy properties.
Think about it this way. If you bought the house down the street and you gave the bank $50,000 for it upfront and then mortgaged the rest, would you expect to be able to go to the bank and be like, “Yo, I’d like to withdraw my $50,000. And also, can I cash out some of that appreciation?” No. You have a house, not money. Until you sell the house, you don’t get the money. Tough luck.
(Please resist the urge to fire off an email about HELOCs or cash-out refinances; I’m just using an #analogy.)
Fundrise isn’t THAT illiquid (you can start using the money after year 5 penalty-free, and before year 5 with a penalty) but they’ve determined that that’s the amount of time they need all funds to remain invested in order for the best results.
The idea of not being able to withdraw for 5 years might feel a little foreign in the age of Robinhood and instant gratification, but I’ve heard it described as a way to protect you, the investor.
If you and five friends put money into a pot to buy a house over a five-year period, you wouldn’t want one of your friends pulling out their funds after two years. That would hurt your overall investment. It’s kinda like that, except… way more complex.
Final review: Is Fundrise worth it?
I’ll put it this way: I’m pretty thrilled about my 10% return in three months, and I’m excited to see how Fundrise performs compared to the rest of my equities portfolio over the long term. If things keep going this way, I’ll be investing more.
Do I think it’s foolproof or an absolutely necessary component of every portfolio? No, probably not. You’d probably be fine with an all index fund portfolio. I’m just in the business of trying to optimize, learn, and experiment, and I’m trying to build some more stability and diversification into my portfolio.
After all, if I plan to live on this wealth beginning in my thirties, I don’t want to be forced to draw down from only one asset class indefinitely without having any other options.
Real estate – private crowdfunded real estate with Fundrise, specifically – seemed like a good way to meet my goals with essentially no effort.
The fine print, since we’re talking about investing
All events, persons and results described herein are entirely fictitious and amounts will vary depending on your unique circumstances and factors not necessarily accounted for here, such as market volatility, inflation, advisory fees, reinvestment of dividends or earnings, etc.
Investing involves risk of loss and performance not guaranteed. Just my opinions, not advice. Sponsored by Fundrise.
