Category: Non-accredited investor funds
Honors:None
What is Fundrise?
On one hand, Fundrise has one of the largest variety of non-accredited investor funds in the industry. It's one of the few sites that puts full-fledged bankruptcy protection on every fund, which gives investors extra peace of mind. The $500 minimum on one of its options is one of the lowest around. It has an extremely polished and easy to use website. And the relatively high projected returns may be be appealing to certain aggressive investors. On the other hand, even slightly sophisticated investors may be quite put off by how difficult (or impossible) the platform makes it to understandexactlywhat they will be investing in,before purchase. And conservative investors may find the underwriting standardsof at least some of the offerings unsuitable. How does Fundrise work?
Fundrise is a website that specializes in commercial and residentialinvestments in bothequity and debtofferings. Investments are generally available to all investors (including non-accredited).
Fundrise sells it's own offerings(which they often call eREITs or eFunds) and that investors can participate in. These offerings can hold properties and investments that they themselves completely originate, are joint or minority ventures originated by other firms, and/or real estate securities.
Fundrise changed the way it markets it's investments somewhat recently, and is now radically different than any other site. Typically, competitors sell the investor on a deal by giving them detailed (or very detailed) information on the properties they will be in. Fundrise goes the opposite route and shows little to nothing about them on the website (other than buried in over athousand pages of SEC filings and legalese). This is a big change from how they used to provide a lot of very well-designed and eye-catching information on the different offerings on their site. So using the new Fundrise may feel to somelike going to a clothing store where they make it as difficult as possible to see the clothesand won't let you try them on.Instead they sell you on the general importance of why all clothes can keep you warm from cold and protected from rain. This may be a big turnoff tosome investors.
Here's how Fundrise now works. The investorfirst chooses between three"start investing" options. The more money an investor's willing to put in, the larger the number projects they can diversify into:
Starter: $500 minimum. 5 to 10 projects
Core: $1000 minimum. 40+ projects
Advanced: $10,000 minimum. 80+ projects,
Then the investor choose an "investment plan". Some sophisticated investors may find it strange to see an "investment plan" with no mention of risk nor a way to understand the risk/reward differences between the choices. Nor are there any percentage return projections or mentions of trade-offs between them. Instead the choices are:
Supplemental income: "Create an attractive, consistent income stream."
Balanced investing: "Build wealth confidently with high diversification"
Long-term growth: "Pursue superior overall returns over the long term"
The site then goes right for the pocket-book and asksfor all the investor's confidential contact and bank account information. Investors withlittle experience on other sites will no doubt be fine with this. Others with that experience are used to being told what they might be investing in, before being hit up for banking info. These may find this veryabrupt and perhaps even borderline inappropriate. The next page is called "agreements". This appears to be the only place an investor will see something to explain what they're actually investing in. There arelinkshere to over a thousand pages of SEC filings and legalese. Investors who have the free-time and patience to wade through will finddetailed info on investments. I personally suspect such investors are few and far betweenand most do not adequately understand what they are purchasing. Even investors who read the legal disclosures are not then given a chance to see what percentage of their money will be allocated to different funds before the investment is made. Instead Fundrise deducts the money and the investor is invested in the deal. This is very abrupt compared to almost every other site.
What are Fundrise Pros and Cons?
Advantages: Wide variety of non-accredited investor funds. One of the lowest minimums at $500.No promote charged on many deals. Full bankruptcy protection. Relatively high projected returns may be veryattractive to aggressive investors.Very easy to use website.
Disadvantages: Sophisticated investors may not like howdifficult to impossibleit is to know and/or fullyunderstand what investor is actually investing in before purchase. Conservative investors may find underwriting standards unsuitable.
Accolades: None.
Fundrise has one of the largest varieties of non-accredited offerings of any site. As example, here's a list of the funds from way back in late 2017 when they were already the largest. Since then they have exploded in size even more:
Los Angeles eFund:
Development of land into for-sale housing to first-time move up active adult home-buyers in Los Angeles.
Return: N/A (new).
Washington DC eFund:
See AlsoUsing a Self-Directed IRA to Invest in Real Estate?Will REITs Drop When Interest Rates Rise? | The Motley FoolDevelopment of land into for-sale housing to first-time move up active adult home-buyers in Washington DC.
Return: N/A (new).
West Coast eREIT:
Commercial real estate debt and equity from the West Coast of the United States.
Return:8% dividend (+/- any appreciation)
Heartland eREIT
Commercial real estate debt and equity from the Midwest of the United States.
Return:8% dividend (+/- any appreciation)
East Coast eREIT:
Commercial real estate debt and equity from the East Coast of the United States.
Return:8% dividend (+/- any appreciation)
Income eREIT:
Debt and debt like securities.
Return:10% dividend (+/- any appreciation)
Growth eREIT:
Commercial real estate assets they feel have the potential to appreciate in value over time. Centered onopportunisticstrategy multifamily that they claim are of institutional quality and sub-institutional size.
Return: 8% dividend (+/- any appreciation)
Note however, that the newly revamped Fundrise no longer allows picking and choosing of funds, nor the ability to see which investments you are purchasing(and/or in what %) until after you hand over your money and complete the purchase. This could be a dealbreaker for some.
Fundrise has some of the lowest minimums in the industry at $500for it's "starter" (and least diversified) option. The minimum for more diversified "core" is $1000 which matches the industry average (of $1000). And the minimum for the most diversified "advanced" is $10,000 which is far above the industry average.
The Fundrise funds are one of the few non-accredited offerings that are set up withfull bankruptcy protection(bankruptcy remote and shareholders can vote on replacement manager if it goes bankrupt). This provides potential investors with someextra peace of mind. They also have a very easy to usewebsite. And they have by far the fastest on-boarding process in the industry,which was detailed above. (Somesophisticatedand experiencedinvestorsmay not see this as apositive).
In general, fees are average: neither the highest nor the lowest in the industry, but somewhere in between. However, they do not charge a promote, which many others do and is a nice plus.
And aggressive investors will probably love Fundrise'shigher than normal projected returns.
On the hand: as mentioned above many times Fundrise makes it difficult to impossible to know and/or fully understand what an investor is actually investing in before purchase. Even slightly sophisticated investors may find this a big turnoff. And conservative investors may also find underwriting standards unsuitable. (Much more detail on theselast 2 itemscan be seen under, "What does a Fundrise investment look like?")
Is Investing In Fundrise Legal?
Fundrise markets to investors under regulation A+, meaning that it's available to both accredited and unaccredited investors. Non-accredited investors can't invest more than 10% of their income and/or net worth (excluding their house).
What does a Fundrise investment look like?
Also I'm a very conservative investor, so something that's way too risky for me might be the perfect fit for someone else who is more aggressive. Finally, I'm not a financial advisor, attorney or accountant. So this is just my personal opinion and always consult your own financial professionals before making any financial decisions. I started by clicking on the "invest" button and was given three choices:
Here is my step-by-step due-diligence on a random Fundrise investment. So it may or may not be a typical investment.
Starter: $500 minimum. 5 to 10 projects.
Core: $1000 minimum. 40+ projects.
Advanced: $10,000 minimum. 80+ projects
I generally like to diversify as much as possible. So the "core" option seemed much better to me than "starter" (even with the higher minimum, which in my opinion was not that much higher and was fair pricing). However, the minimum for "advanced" was so much more than competitors, that it didn't feel comfortable picking it. So I went with "core". Another investor coming from a different place may find a different option more suitable.
Then I came to the "investment plan":
Supplemental income: "Create an attractive, consistent income stream."
Balanced investing: "Build wealth confidently with high diversification"
Long-term growth: "Pursue superior overall returns over the long term"
As a conservative investor, I don't make any investment decision without fully understanding the risks I might be taking. I also compare that to the projected return to figure out the risk/reward trade-off involved with the investment. And then I compare that with other options and make my final decision. Fundrise doesn't provide any of theinformation neccesary to do this. And the descriptions of each option do not mention having to make any trade-offs between them. So there was not enough information for me to make a choice I could feel comfortable with.
Normally this would be a red flag for me and I would move on to a competing site that provided the information I require. However, since I was doing a review, I continued forward. More aggressive investors or those looking for a simpler investing process may not have an issue with any of this and be perfectly fine with the choices.
The lack of the information I needed on this screen also gave me the impression that it's targeted to unsophisticated and/or inexperienced investors. In my experience, these kinds of investors rarely get good deals and I'm usually not interested in the same things they are. So this gave me an uneasy feeling. Other investors may like the simplicity and the ease-of-use of this screen, and come away with a very positive impression.
At this point I was asked for my confidential contact information and private bank account details. I was surprised by this because it's really unusual. Mostsites first provide some (or a lot) of information on the actual properties/deals I'm purchasing. It's very rare for one to just make a grab for my walletso quickly. This made me feel even more uneasy. But an investor who was more comfortable with everything before this point, might be fine with this and appreciate the end-to-end simplicity of the transaction.
Then I got to a screen called "agreements". At the top were 6 links (and a "view all" link to a total of 17 documents) for me to agree to. I clicked on the links and found both subscription agreements and public SEC disclosures. In total there were over 1000 pages of legalese to wade through. It took several hours to do just an extremely high-level scan of the documents and get my bearings. I did indeed find some detailed information on the properties and deals in the eREITs and eFunds (which is where I pulled some of the information for my deep-dive analysis in the next section). At the same time, I suspected 99% of investors would simply check the boxes and continue.I felt this was much less transparent than the last version of Fundrise (which at least tried to explain each option).
I also felt the individual eREITs and eFunds are all taking on very different strategies with different (and sometimes substantial) execution risks. Many of them did not meet my own personal minimum underwriting criteriafor investing at the stage of the cycle. And I would not have wanted them in my own portfolio. A more aggressive investor may feel very differently. Anyway, I expected to see exactly what % of my money Fundrise was proposing to allocate into each of these, and to be given a chance to accept this or not. However, this never actually happened. Instead I got what was essentially a "You're done!" message. Then to my horror there was anotification that they were going to take the money out of my bank account! I hurriedly canceled the transaction. To Fundrise's credit, they did so promptly and immediately and before any charges were made. So I was able to take a breath in relief.
Deep dive on an eREIT
If I hadn't canceled, I would've been invested. So I wanted to understand what that might have looked like. I randomly selected one of the investments in the disclosure: the Income eREIT. This is also one of the older investment vehicles and in the old days might've been considered one of Fundrise's flagship investment deals.
As an old timer, I knew of a "trick" to help speed up my research. Fundrise used to publish detailed information on the eREITs and eFunds. And while the links to those have been removed from the onboarding process, they still exist on the website. So I went tothis for the Income eREIT.
Note that I was not confident the data I saw there was 100% accurate because there were someinconsistencies. So anyone looking to duplicate this with the most reliable data needs to wade through the 1000+ pages of SEC disclosures. As an example, one of the property strategies said that it was "stabilized" which normally means virtually no execution risk. However, when I read the description it was clearly a value-added rehab which has more execution risk then a truly stabilized property. Also, many of the preferred equity investments were incorrectly listed as "debt" in numerous places (but not others). However, since this was used to publicly advertise Fundrise deals for quite a long time, I felt it probably was a decent source of data.
The data:
There was a lot of information.So I compiled it all into a spreadsheet which I have shared here.
This eREIT is a combination of debt and preferred equity investments. I started with the debt investments since they are the quickest and easiest to analyze. If you're interested in how I evaluate debt/hard money loan investments, see: "The Comprehensive Guide to Hard Money Loan Investing").
LTV analysis:
As a conservative investor, I don't invest in debt deals that loan more than the maximum that industry veterans consider to be prudent to avoid loss of principal (from a downturn, unforeseen problems, etc.). That maximum is 65% loan to value.
As you can see from the spreadsheet, one of the loans didn'thave full data. So I excluded it from the analysis. Out of the ones that did, 9 out of 10 of them exceeded 65% LTV. The median LTV is 79.65% and more than a few of the LTV's are in the 80s and 90s. For me this was an immediate red flag and I personally would not want to be in this eREIT. However, a more aggressive investor, may like the fact that these have higher projected returns and be okay with assuming the risk.
Judicial versus nonjudicial:
There are some states that allow foreclosure through a nonjudicial process which generally takes only a fewmonths and is relatively cheap. And others require a judicial/court process which usually takes a year or more and is very expensive because it requires hiring attorney and litigating. So I personally avoid all loans in judicial-only states, because they can quickly eat up the entire equity cushion. When they do, theinvestor can experience losses. Most of the loans in the eREIT were made in non-judicial states which to me was good to see. However, a hotel rehab in Pittsburgh Pennsylvania (which is the one that did not have the information on the debt LTV) is in a judicial only state. For me, this is a dealbreaker and I would not be interested in this investment. On the other hand, a more aggressive investor one less concerned about downturn might be fine with assuming the risk for the higher projected return.
Strategy:
The more execution risk a borrower takes, the higher the chance they may default on the loan and have to be foreclosed on. The safest loans are on acquisitions where there is basically no execution risk. The next safest is on light rehabs where there is relatively low risk. Then there is heavy rehab and construction which can have moderate to higher execution risk.
One step above this is construction on land that that does not yet have permits. These permits can be tricky to acquire and may take a lot longer than expected or never be acquired. A few of the "ground up" multifamily construction projects in the eReit mentioned that they had to acquire permits. For me these were deal breakers to investing in the Income eREIT. Again a more aggressive investor might be okay with the risk in exchange for the projected return. Next I took a look at the preferred equity investments. Unfortunately the information disclosed here was very sparse and incomplete compared to other sites and was not enough to gauge the risk. Perhaps there was more information in the disclosures, but after everything I had seen so far, I didn't feel like jumping into that tar pit again. So I stopped since at this point it was obvious that the Income eREIT was not a match for me.
If the investment passed all my initial checks, I would have dived in further to check out the sponsor,more on the property itself, the projections, etc. To learn how I do those things, check out The Conservative Investors Guide to Due Diligence.
Where can I discuss Fundrise deals?
You can do this with thousands of other investors in theprivate investor club. While the club is free, membership is restricted to investors who have no business connections to sponsors or platforms. Also, all members must agree to keep all club info confidential by signing a nondisclosure agreement. Click hereto join or get more info.
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For more raw data on the site (including investor and sponsor fees, legal structure etc.), or to easily compare it with the data of competitors, see thefeature by feature comparison matrix.
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