Fundrise vs individual property

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Fundrise vs individual property

Jim Truman
Member since 2018 · 52 posts · 12 votes

Greetings,

I am exploring the possibility of getting started in real estate investing. My wife and I really don't have an interest in real estate but looking at the numbers, it seems like something we should pursue. 

During my research I've come across companies such as Fundrise. I'm wondering if this is a good way to receive some of the benefits of real estate investing, without the hassle of owning an actual property? I researched a bit on the forums but I'm not finding a really great comparison. What are the downsides of investing in real estate through a company like fundrise vs buying my own SFH?

From what I can tell so far, some possibilities are below, but I might not be correct....

-I don't get the tax advantages of owning a property.

-I don't have the advantage of leverage. 

Other than these what am I missing? It seems like I get shared ownership in a diverse portfolio of multiple properties. The rent/cash flow is returned to us as dividends. When the property is sold, any profits are returned to us as increased share values.

For someone who doesn't really want to deal with the full scope of owning properties, but sees real estate as a good investment, is something like fundrise somewhat comparable to actually owning property?

Thanks.

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John Bradley
Developer · Mountain View · Member since 2018 · 2 posts · 5 votes
7y

I think we can view the fundamental difference between a fund/trust and an investment in terms of risk/return and time. Fundrise is an eREIT with 8-12% return. It's primary differentiating characteristic is its low minimum, and slick online presence. REITs are a segment of commercial real estate investments which are the 2nd highest dividend-yielding asset class after small cap growth stocks. A REIT/eREIT/fund is a passive investment, requiring minimal time investment. The choice between investing in individual real estate purchases versus funds/REITs is fundamentally the decision between active and passive investment. The key questions are: How much money do you want to put into real estate investments? How much time? What're your financial goals? If you have time and resources, you certainly have other options than an eREIT. I'll give two real world examples to show what's out there: 1) I'm friends with the founder of the Palo Alto Real Estate Investor Group which has yielded 86% return on investments over the past several years (and which is not currently taking investors). I know two real estate developers with returns several times what most people consider exceptional, both with Stanford computer science backgrounds. We can call these exclusive passive investing - Generally high buy-in, long holding periods, high returns. 2) I recently had some friends who did a flip - They bought at 1.2M, 80K of construction, sold at 1.7M, ROI of 20.8%. This is a standard example of active investing. Many of the smartest people I know are very into 'mobile home syndication.' The bottom line is there's a whole world out there.

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  • Jim Truman
    OP
    Member since 2018 · 52 posts · 12 votes
    7y
    Originally posted by @Account Closed:

    All these platforms will go down hard in a downturn.

     Can you explain this? If property values or rents go down won't this hurt individually owned property too?

    0Reply
  • Jim Truman
    OP
    Member since 2018 · 52 posts · 12 votes
    7y
    Originally posted by @Account Closed:

    All these platforms will go down hard in a little downturn.

     Deleted...duplicate. 

    0Reply
  • John Bradley
    Developer · Mountain View · Member since 2018 · 2 posts · 5 votes
    7y

    I think we can view the fundamental difference between a fund/trust and an investment in terms of risk/return and time. Fundrise is an eREIT with 8-12% return. It's primary differentiating characteristic is its low minimum, and slick online presence. REITs are a segment of commercial real estate investments which are the 2nd highest dividend-yielding asset class after small cap growth stocks. A REIT/eREIT/fund is a passive investment, requiring minimal time investment. The choice between investing in individual real estate purchases versus funds/REITs is fundamentally the decision between active and passive investment. The key questions are: How much money do you want to put into real estate investments? How much time? What're your financial goals? If you have time and resources, you certainly have other options than an eREIT. I'll give two real world examples to show what's out there: 1) I'm friends with the founder of the Palo Alto Real Estate Investor Group which has yielded 86% return on investments over the past several years (and which is not currently taking investors). I know two real estate developers with returns several times what most people consider exceptional, both with Stanford computer science backgrounds. We can call these exclusive passive investing - Generally high buy-in, long holding periods, high returns. 2) I recently had some friends who did a flip - They bought at 1.2M, 80K of construction, sold at 1.7M, ROI of 20.8%. This is a standard example of active investing. Many of the smartest people I know are very into 'mobile home syndication.' The bottom line is there's a whole world out there.

    5Reply
  • Account Closed
    Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
    7y

    There's no law that restricts you to doing either/or. You can also do both, putting some money in a fund (which generally has a lower minimum) and the rest in individual investments (which generally have higher minimums). I've found the quickest way to learn something is to have skin in the game. The trick is to do this intelligently so that a failure doesn't take you out of the game.

    0Reply
  • Jim Truman
    OP
    Member since 2018 · 52 posts · 12 votes
    7y

    @John Bradley I can imagine dedicating around 100k to real estate. Ultimately, my goal with real estate as opposed to my other investments, is to create another income stream in retirement by paying of the property and receiving the monthly income.

    I guess my fundamental question is, are investments through something like fundrise basically the equivalent of purchasing real estate in a group? I think you call this syndicates. Meaning, with fundrise, aren't I basically joining a partnership with other investors to invest in specific properties? We share the cash flow, profits, and losses? Our expenses are basically paying fundrise to find, purchase, refurbish, and manage the property (and pay the executives).  

    If I understand this correctly, it is different from a REIT where I just buy stock in a company that invests in real estate.

    I live in the DC area so any property I purchase will be out of state and require management. So what's the difference between buying a house and paying a management company vs investing in a portfolio of properties with a group of other investors through fundrise?

    -I give up some control

    -I might not have tax benefits

    -I don't have the possibility of leverage. But I imagine Fundrise does purchase on leverage?

    1Reply
  • John Bradley
    Developer · Mountain View · Member since 2018 · 2 posts · 5 votes
    7y

    Jim, 

    Fundrise operates precisely how a REIT does (because it is one). "You're investing in a diversified portfolio of real estate projects located throughout the United States" - Fundrise.com. "You're buying dividend yielding shares" - Fundrise.com. It's not fundamentally different from buying Walmart stock.

    Fundrise/REITs/Funds are fundamentally different from a syndication in terms of risk (+ returns/time), and risk is everything. A syndication is a much more active investment simply because it's (generally) not an institution doing the investing. There's no track record because it's some guy/guys with an idea getting together money to buy something. A syndication is fundamentally the same thing Fundrise is doing at a different scale. With a syndication it's someone setting up an LLC and selling off shares to people - same thing Fundrise is doing. Fundrise isn't much different from a real estate developer, and real estate developers generally set up an SPV for each project they embark on. It's best to think about it in terms of how much is required of you: With a syndication you have to evaluate the deal and the manager (the person running the deal). If you do your homework, you can outperform Fundrise, potentially by a great deal.

    What you're looking for with your profile (~100K, seeking dividend yield, nearing retirement) is something like ownership in a stabilized multi-family home (apartment building). With Fundrise that would be their Supplemental Income Core Plan, but you should shop around. 50K is usually the minimum buy-in for what you're looking for, and you have that. The core advantage of Fundrise is that it has a low-minimum because buying in is all automated online, but you aren't girded by a low-minimum, so the world is your oyster. 

    With a potential downturn in the housing market coming, be cautious in what you choose. University student housing is the kind of thing that will weather a downturn. You can beat Fundrise by analyzing and investing in a Private REIT focused on income replacement, or you can provide debt or equity financing on a flip and potentially get 8-12 (debt) 10-20% (equity) APR, but you'll have to immerse yourself in the world of real estate investing and work with only the best people. Depends how much time and brain power you want to apply.

    https://www.forbes.com/sites/brettowens/2018/07/29/the-best-reits-paying-up-to-8-youve-never-heard-of/#20b1971d5e3b

    1Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y
    @Jim Truman

    The main difference between personally investing in real estate vs giving it to a fund to invest is that you are agreeing to the terms/costs of the syndicator.

    You need to read the agreement to understand all the costs/terms but some may be as follow
    1. There is a fee given to the fund manager for finding/purchasing the property
    2. There is a fee given to the fund manager based on performance of the fund
    3. There is a fee given to the fund manager based on assets you have in the fund
    4. There is a fee given to the fund manager for selling the property
    5. You are not eligible to take out your money from the fund for X years

    With that said - You are paying a fee to the manager because of his experience, time and contacts.

    Depending on the fund/fund manager; they may or may not use leverage. You should read the goals/plans of the fund that you plan to invest in to find out.

    There are also different tax implications between investing personally vs investing through a fund. Investing through a fund may require you to suspend the losses(if there is a loss) and carry it forward.

    [email protected]917-280-8544
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  • Jim Truman
    OP
    Member since 2018 · 52 posts · 12 votes
    7y

    Thanks for all of your detailed responses. I certainly don't expect anyone to do my research for me but it is nice to hear some opinions to clarify what I'm learning through my own research.

    I thought Fundrise was different from a publicly traded REIT in that I am actually an owner in the properties as opposed to just a stockholder of a company who owns properties. I clearly have to study REIT's further.

    The way I'm understanding it now is:

    -Think of Fundrise's eREIT as any other REIT

    -REITs may have less risk and time investment vs personal properties

    -with that comes possibly less return

    -REIT could be fundamentally similar to a syndicate but on a larger scale

    -REIT's have costs associated with them, as described by @Basit Siddiqi. But could this be comparable to my realtor fees and closing costs to buy/sell, and property management costs?

    -Money isn't liquid with some funds like Fundrise. But money isn't liquid if I purchase a SFH either.

    Assuming the management is trustworthy, the costs are worth it, I'm willing to accept possibly less return, etc, is Fundrise (or similar outfit) a decent way to own real estate when I don't have the time/expertise to invest in and manage out of state individual properties?

    I guess I'm still hung up on the whole idea of mortgage pay down. It makes sense to me that an individual property will eventually be paid off but the rent income continues. This is the whole concept that attracts me to real estate. With a REIT, I'll never own a paid off property. But the company does eventually pay off the properties, or purchases them with cash. So, as a shareholder in a Fundrise investment, can I expect my dividends to go up as the properties are paid off (because they cashflow better?)

    Thanks again for all your help. I'm sure I'm not the only one with these questions.  

    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y

     
    Jim - The fund that you invest in will be purchasing/selling properties. As such, they will be paying realtor fees/closing costs. They may be able to avoid realtor fees if they are finding off-market properties but for the most part these costs will be similar.

    Investing in real estate is less liquid of an investment as compared to other asset classes.
    Personally investing in real estate - you have to list the property and find a buyer. If the buyer is using financing; you normally have to wait 45 days to close. Alternatively, you can find an all-cash buyer and close quicker.
    Investing in a fund - Again, you have to read the rules of the fund but they may have something like you can't pull out money for 3 years and if you pull out money; you can only do so during certain dates of the year.
    With that said - personally investing in RE is more liquid than investing in a fund.


    The benefit of mortgage paydown is going to depend on the goals of the fund. There are funds that remain open for eternity. There are other funds that have an exit plan of 5-7 years(normally when the loan will balloon)(also as a way for the fund to benefit from the fees they can collect from a sale).

    Sorry to sound like a beaten horse; but it really does depend on the goals of the fund you plan to invest in. If you ever get close to investing in a deal; let me know and I can take a look at the fund's plan to help you better understand it.

    [email protected]917-280-8544
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  • Account Closed
    Rental Property Investor · Brooklyn NY · Member since 2018 · 263 posts · 469 votes
    7y

    @Jim Truman

    "I am exploring the possibility of getting started in real estate investing.  My wife and I really don't have an interest in real estate."

    I think you all may want to evaluate your why in RE.  What if you get into RE, have a bad experience and never get back into RE again? 

    0Reply
  • Jim Truman
    OP
    Member since 2018 · 52 posts · 12 votes
    7y

    @Account Closed

    Too late...we already had a bad experience. We were forced into being a landlord when we move to another state for work having just purchased a townhome (2008). The market tanked, we couldn't sell, and we tried renting it out. The tenant destroyed the house. Based on this experience, we never wanted to get involved in real estate again.  

    Our financial situation has changed and we're willing to give it another shot. This time, we'd find a house where the numbers actually worked and we can afford vacancies, maintenance, etc. But, clearly our past experience makes us hesitant to jump in. Even beyond the hesitation from this negative experience, we simply aren't "excited" about real estate. We didn't enjoy shopping for our current house, we don't watch house flipping shows, we don't want to spend our spare time working on a rental unit. We're willing to learn if we decide to go down the REI route but this is why I'm attracted to other options such as Fundrise.

    0Reply
  • Jim Truman
    OP
    Member since 2018 · 52 posts · 12 votes
    7y

    Thanks for the very nice offer. I'm looking at one of Fundrise's circulars now.  

    0Reply
  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    7y
    Originally posted by @Jim Truman:

    @Account Closed

    Too late...we already had a bad experience. We were forced into being a landlord when we move to another state for work having just purchased a townhome (2008). The market tanked, we couldn't sell, and we tried renting it out. The tenant destroyed the house. Based on this experience, we never wanted to get involved in real estate again.  

    Our financial situation has changed and we're willing to give it another shot. This time, we'd find a house where the numbers actually worked and we can afford vacancies, maintenance, etc. But, clearly our past experience makes us hesitant to jump in. Even beyond the hesitation from this negative experience, we simply aren't "excited" about real estate. We didn't enjoy shopping for our current house, we don't watch house flipping shows, we don't want to spend our spare time working on a rental unit. We're willing to learn if we decide to go down the REI route but this is why I'm attracted to other options such as Fundrise.

    If you're looking at SFRs, you could find someone experienced in your market who'd agree to review deals with you, perhaps for a fee. I am far from being an expert in the DC market, but I'd expect cash flowing opportunities out there to be few and far between at this point in the cycle.

    Have you considered syndicated deals, if you're going the passive route? You can partner with experienced investors, get tax benefits, earn cash flow, and diversify across numerous tenants, properties, and markets.

    0Reply
  • Jim Truman
    OP
    Member since 2018 · 52 posts · 12 votes
    7y

    @Taylor You're right, I think cashflow will be tough around here. I'm looking outside the area and even in cheaper markets I'm finding it tough to locate properties that cashflow by the time I run the numbers with property management. 

    0Reply
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