Personal Opinion: All information is provided with my personal view alone as an investor. I am not your financial counselor, an attorney, or an accountant. Always do your own research and check with your licensed specialists before making any investment decisions. Use at your own risk; information is considered accurate but may contain inaccuracies. If you spot a mistake, kindly let me know.
General ratings: No one investment or platform is ideal for everyone, in my opinion, because every investor has a unique risk tolerance and financial circumstance. I won’t touch many deals that aggressive investors adore and vice versa. Additionally, each investor uniquely conducts due diligence. I think there isn’t just one method to do things.
As a result, factors like openness, volume, bankruptcy protection, etc., that I believe are significant to the widest possible variety of investors are used to determine how well-rated a website is. I don’t use my own standards as a criterion for the ratings, despite having my own conservative, due diligence process and discussing how the site’s bargains stack up in the “deep dive part.” So, for instance, just because a site has a good score or rating doesn’t mean I personally would invest in it (and vice versa).
Fundrise: What is it?
A website called Fundrise focuses on residential and business investments in equity and debt offers. All investors can typically access assets (including non-accredited).
On the one hand, Fundrise offers the industry’s broadest selection of funds for unaccredited investors. Because it is one of the only websites that completely shields every fund against bankruptcy, investors may rest easy. One of its alternatives has one of the lowest minimums in the industry at $500. It has a well-designed and user-friendly website. Additionally, some aggressive investors may find the relatively high predicted returns intriguing.
However, even moderately experienced investors may be turned off by how challenging (or impossible) the platform makes it to comprehend the investment before making a purchase fully. Additionally, conservative investors might believe that at least some of the offers’ underwriting requirements are inappropriate.
How does Fundraising operate?
Fundrise sells its own products that investors can purchase. These products are frequently referred to as eREITs or eFunds. These offers may include real estate securities, co-investments with other companies, joint ventures they own or partially own, or other properties and investments.
Recent changes in how Fundrise markets its assets have made it significantly distinct from other websites. Competitors typically persuade investors to invest by providing in-depth (or extremely in-depth) details about the properties they will be in. On the contrary, Fundrise presents very little information about them on their website (other than thousands of pages of SEC filings and legalese). This is a significant difference from how they previously offered a ton of extremely well-designed and attention-grabbing information about the various options on their website.
Thus, utilizing the updated Fundrise can be like visiting a clothing store where the garments are hidden from view, and you can’t try them on. Instead, they try to convince you of the overall significance of how and why you should always wear clothing to stay warm and dry in the rain. Some investors might find this to be a major turnoff.
Here is how Fundrise operates right now. First, the investor selects one of three “start investing” options. The greater the number of projects an investor can diversify into, the more money they are ready to invest:
- Starter: $500 as a minimum. 5 to 10 projects.
- Core: a minimum of $1,000. Over 40 projects.
- Advanced: at least $10,000. 80 plus projects
The investor then decides on an “investment plan”. Some experienced investors might find it odd to see an “investment plan” without any mention of risk or a mechanism to compare the risks vs. rewards of the various options. Additionally, no percentage return forecasts or comparisons of trade-offs between them are made. The alternatives are instead:
- Supplemental Income: Create a reliable, appealing source of additional income.
- Balanced investing: Increase your diversification while building money with assurance.
- Long-term growth: Strive for more extraordinary all-around results.
The website then requests all of the investor’s private contact and bank account information, going straight for the cash. Those with minimal prior experience investing in other sites won’t have any issues with this. Others with that experience are accustomed to being informed about potential investments before being pestered for banking information. These would consider this to be overly abrupt and possibly even inoffensive.
Agreements are the name of the subsequent page. This seems to be the only area where an investor may learn more about their real investment. Here are links to more than a thousand pages of legalese and SEC filings. Investors can discover comprehensive information about investments if they have the time and patience to slog through. Such investors, in my opinion, are few and far between, and most of the time, they don’t fully comprehend what they are buying.
Even investors who read the disclosures are not allowed to determine how much of their money would be divided among the various funds before investing. Instead, Fundrise subtracts the funds, and the investor participates in the transaction. Compared to practically every other website, this is rather abrupt.
The Benefits and Drawbacks of Crowdfunding:
PROS: Wide range of non-accredited investor funds is an advantage. $500 is one of the lowest minimums. On many deals, there are no promotion fees. Complete bankruptcy immunity. For risk-taking investors, relatively high predicted returns could be highly alluring—a very user-friendly website.
CONS: It can be challenging, if not impossible, to completely grasp what an investor is actually investing in before making a purchase that may not be to the taste of sophisticated investors. Underwriting standards may not be suited for conservative investors.
ACCOLADES: none.
One of the broadest selections of non-accredited offers can be found on Fundrise. Here is a list of the funds from late 2017, when they were already the largest, as an illustration. Since then, they have become even larger:
Los Angeles eFund.:
- Development of land into for-sale homes for first-time active adult house buyers in Los Angeles.
- Return: N/A (new).
Washington DC eFund:
- Construction of dwellings on vacant land for first-time active adult homebuyers in the District of Columbia.
- Return: N/A (new).
West Coast (WC)eREIT:
- Commercial real estate debt and equity from the West Coast of USA.
- Return: dividend yield of 8% plus any potential appreciation.
Heartland eREIT:
- An investment trust that focuses on commercial real estate in the Midwest of the United States.
- Return: dividend yield of 8% plus any potential appreciation.
Eastern eREIT:
- Debt and equity from the US East Coast in commercial real estate.
- Return: Dividend yield of 8% plus any potential appreciation
Income eREIT:
- Debt and securities that resemble debt.
- Return: Dividend yield of 10% plus any appreciation.
Growth eREIT:
- Assets they believe have the potential to increase in value over time in commercial real estate. Opportunistic multifamily strategy at its core, which they claim is of institutional quality and size.
- Return: Dividend yield of 8% plus any price growth.
Be aware, however, that the newly updated Fundrise does not allow choice of funds and does not allow you to view which assets you are purchasing (and/or in what percentage) before paying for the transaction. For some people, this can be a deal-breaker.
Fundrise’s “beginning” (and least diversified) option features some of the lowest minimums in the sector, at $500. The minimum for a more diversified “core” is $1,000, which is in line with the $1000 industry standard. Additionally, the minimum for the most diversified “advanced” is $10,000, which is significantly higher than the industry standard.
One of the few non-accredited offers with complete bankruptcy protection is the Fundrise funds (bankruptcy remote, and shareholders can vote on a replacement manager if it goes bankrupt). This offers additional peace of mind to potential investors.
They also have a website that is incredibly simple to use. Additionally, as was said above, they offer the industry’s quickest onboarding procedure. (Some seasoned and knowledgeable investors might not view this as a plus.)
The majority of the time, fees fall within the middle of the industry’s range, neither being the highest nor the lowest. However, they do not charge an advertising fee, which is a wonderful benefit because many others do.
And conservative investors will certainly adore Fundrise’s predicted returns, which are higher than average.
On the other hand, as was already indicated, Fundrise frequently makes it difficult or impossible for investors to comprehend their investments before making a purchase properly. This might be a significant turnoff for investors who are even marginally sophisticated.
Furthermore, conservative investors can find underwriting criteria inappropriate
Is It Legal to Invest in Fundrise?
Fundrise accepts both accredited and non-accredited investors because it markets to investors in accordance with Regulation A+. No more than 10% of non-accredited investors’ income or net worth may be invested (excluding their house).
What Does an Investment in Fundrise Look Like?
Here is my detailed investigation of a fictitious Fundrise investment. The investment may or may not be typical.
Additionally, while I’m a very cautious investor, something that would be entirely too hazardous for me might be the ideal investment for someone who is more adventurous. Lastly, I’m not a lawyer, accountant, or financial counselor. Thus, before making any financial decisions, always seek the advice of your financial professionals. This is simply my own view.
I began by selecting the “invest” button, which presented me with three options:
- Starter: $500 as a minimum. 5 to 10 initiatives.
- Core: a minimum of $1,000. Over 40 projects.
- Advanced: at least $10,000. 80 plus projects.
Generally speaking, I like to diversify as much as I can. Therefore, even with the increased minimum, which in my perspective was not significantly higher and was fair pricing, the “core” choice seemed to me much better than the “beginning.” However, the “advanced” minimum was so much higher than competitors that it didn’t feel natural to choose it. I, therefore, decided on “core.” A different alternative can seem more appropriate to a different investor from a different location.
The “Investment Plan” Is Where I Then Arrived
- Supplemental income: Create a reliable, appealing source of additional income.
- Balanced investing: Increase your diversification while building money with assurance.
- Long-term growth: Strive for greater all-around results.
I am a cautious investor. Thus, I never choose an investment before knowing any potential risks. To determine the investment’s risk against reward trade-off, I also compare that to the anticipated return. I weigh that against my other options and then come to a decision.
Fundrise does not offer any of the data required to do this. Additionally, there is no hint of having to compromise between any of the options in their descriptions. Therefore, I lacked sufficient knowledge to make a decision I could be happy with.
This would typically raise a red flag for me, and I would move on to a rival website that offered the data I needed. But since I was conducting a review, I moved on. It’s possible that more risk-taking investors or those seeking a more straightforward investing procedure won’t have a problem with this and will be happy with their choices.
This screen’s absence of the information I required gave me the impression that it is intended for novice or inexperienced investors. These investors, in my experience, rarely find solid investments, and I frequently have different interests from theirs. I felt uneasy because of this. Other investors might appreciate this screen’s simplicity and usability and form a highly favorable opinion.
I was now prompted to provide my private banking information and secret contact information. This is very unusual, so I was taken aback. Most websites first give me some (or a lot) details on the homes or deals I’m buying. Rarely does someone just reach for my wallet that quickly. This only made me feel uneasy. However, an investor who was more at ease with everything up to this point might be okay with it and enjoy how straightforward the transaction is from beginning to end.
I then arrived at a “agreements” screen. There were six links (along with a “see all” link to a total of 17 documents) at the top that I had to click on. Subscription agreements and open SEC disclosures were available when I clicked on the links. There were nearly a thousand pages of legalese in all.
Just an extensive scan of the documents and becoming oriented took several hours. Most all properties and deals in the eREITs and eFunds are indeed covered in considerable detail which is where I pulled various information for my deep-dive analysis in the next section. I also had a nagging hunch that most investors would simply check the appropriate boxes and move on. Compared to the previous version of Fundrise, I thought this was much less transparent (which at least tried to explain each option).
In my opinion, the individual eREITs and eFunds are all pursuing very distinct strategies with varied (and occasionally significant) execution risks. Numerous failed to satisfy my minimum underwriting standards for investing during the cycle. Furthermore, I would not have desired to have them in my own portfolio. An investor with greater vigor would feel very differently.
Anyway, I anticipated being offered the option to accept or reject Fundrise’s proposal to assign a specific percentage of my funds to each of them. This, however, never actually occurred.
Instead, I received a message that effectively said, “You’re done!” Then, to my dismay, I received notice that they would withdraw the funds from my bank account.
I canceled the purchase quickly. To Fundrise’s credit, they did it right away and without incurring any fees. I was therefore able to exhale in relief.
eREIT In-Depth Analysis:
I would have invested if I hadn’t canceled. I so sought to comprehend what that would have appeared like.
I randomly chose the Income eREIT from among the investments listed in the disclosure. This is one of Fundrise’s older investment vehicles and was maybe one of its premier investment agreements in its earlier years.
As a veteran, I knew a “technique” to quicken my investigation. eREITs and eFunds used to have comprehensive information published by Fundrise. And even though the onboarding process no longer contains the links to such, the websites still host them. I therefore came here for the Income eREIT.
Be aware that there were some irregularities, so I wasn’t entirely sure the data I saw there was accurate. Therefore, anyone wishing to replicate this using the most reliable data must slog through the more than 1000 pages of SEC disclosures.
One of the property techniques, as an illustration, claimed that it was “stabilized,” which typically denotes that there is almost no execution risk. But after reading the description, it was evident that this was a value-added rehab, which has a higher execution risk than a house that has been fully stabilized. Additionally, many of the preferred equity investments were misclassified in several areas as “debt” (but not others).
However, as this was long used to announce Fundrise deals publicly, I believed it to be a reliable source of information.
The Data:
There was a great deal of data. So I put everything into a spreadsheet for analysis.This eREIT consists of both preferred equity and debt assets. Since they are the quickest and most straightforward to analyze, I began with the loan investments.
LTV Evaluation:
As a cautious investor, I avoid participating in debt transactions that lend more than what experts in the field believe to be sensible to prevent principal loss (from a downturn, unforeseen problems, etc.). The maximum loan-to-value ratio is 65 percent.
The spreadsheet shows that one of the loans didn’t have complete data. So I didn’t include it in the study. Nine out of ten of those who did exceeded the LTV of 65 percent. The typical LTV is 79.65 percent, while many LTVs fall between 80 and 90 percent. This immediately raised a red signal for me, and I would prefer not to invest in this eREIT. A more risk-tolerant investor, however, would appreciate the fact that these offer higher expected returns and be willing to take on the risk.
Judicial Versus Nonjudicial:
Some states permit foreclosure through a nonjudicial process that often only lasts a few months and is not particularly expensive. Others call for a legal/judicial process, which typically lasts a year or longer and is quite expensive because it entails engaging in litigation and paying an attorney. As a result, I personally steer clear of any loans in states with judicial-only systems because they can quickly deplete the equity reserve. The investor may sustain losses if they do.
It pleased me that most of the loans in the eREIT were made in nonjudicial states. However, a hotel rehab in Pittsburgh, Pennsylvania (the one that lacked the information on the debt LTV) is in a state where only the courts have jurisdiction. This is a deal-breaker for me. Thus I’m not interested in investing. On the other hand, a more risk-taking investor who is less concerned about a downturn would be content to take on the risk in exchange for the greater expected return.
Strategy:
A borrower’s risk of defaulting on the loan and undergoing foreclosure increases the more execution risk they incur. Loans for purchases, where there is essentially no execution risk, are the safest. On mild rehabs, where there is virtually little risk, is where you are next safest. Then there is extensive rehab and building, which can entail execution risks ranging from moderate to severe.
Construction on a property where no permits have yet been issued is one step above this. These permits may be difficult to obtain, take much longer than anticipated, or never be obtained at all. In the eReit, a few “ground up” multifamily development proposals mentioned the need for permits. These prevented me from buying into the Income eREIT, in my opinion. Again, a riskier investor would be willing to accept it in exchange for the anticipated return.
I then looked at the preferred equity holdings. Unfortunately, the information provided was relatively scant and lacking compared to other websites, making it insufficient to assess the danger. Perhaps the disclosures included additional information, but I didn’t feel like diving into that tar hole once again after what I had already witnessed. I quit since it was clear at this point that the Income eREIT was not a good fit for me.
If the investment had passed all of my preliminary inspections, I would have dug deeper and looked into the sponsor, the property itself, the predictions, etc.
Where Can I Talk About Deals with Fundrise?
You can accomplish this in the private investor club with tens of thousands of other investors. The club is open to all investors, but only those without ties to sponsors or platforms are allowed to join. Additionally, all members must sign a nondisclosure agreement, pledging to keep all club information private.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.