Real estate investing has been a popular way to build wealth for many years. Traditionally, investors had two options: buy a property outright or invest in a real estate investment trust (REIT). However, with the rise of technology, new platforms like Fundrise have emerged, offering investors an alternative to traditional REITs. In this article, we will explore the differences between REITs and Fundrise, and help you decide which option is best for you.
What is a REIT?
A REIT is a company that owns, operates, or finances income-producing real estate. REITs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. REITs can be publicly traded on stock exchanges, or they can be private. Publicly traded REITs are subject to the same regulations as other publicly traded companies, while private REITs are not.
What is Fundrise?
Fundrise is a real estate investment platform that allows individuals to invest in private real estate deals. The platform pools investor funds to purchase and manage properties, and investors receive returns based on the performance of the underlying assets. Fundrise offers a variety of investment options, including eREITs (similar to traditional REITs), eFunds (which invest in specific types of properties), and custom portfolios.
One of the biggest differences between REITs and Fundrise is the investment minimums. Publicly traded REITs can be purchased for as little as the cost of one share, which can be as low as a few dollars. Private REITs typically have much higher minimum investments, often in the tens of thousands of dollars.
Fundrise, on the other hand, has a minimum investment of $500. This makes it much more accessible to the average investor who may not have tens of thousands of dollars to invest.
Another key difference between REITs and Fundrise is diversification. Traditional REITs typically invest in a specific type of real estate, such as office buildings or shopping centers. This can lead to concentration risk if that particular sector experiences a downturn.
Fundrise, on the other hand, offers a variety of investment options that allow for greater diversification. For example, investors can choose to invest in eFunds that focus on specific types of properties, such as multifamily housing or industrial properties. Additionally, Fundrise offers custom portfolios that allow investors to select specific properties to invest in.
Liquidity is another important factor to consider when comparing REITs and Fundrise. Publicly traded REITs can be bought and sold on stock exchanges, making them highly liquid. Private REITs, on the other hand, are much less liquid and may have restrictions on when investors can sell their shares.
Fundrise investments are also less liquid than publicly traded REITs. While investors can sell their shares on the Fundrise platform, there may not be a ready market for those shares. Additionally, Fundrise may charge fees for early redemptions.
Fees are an important consideration when investing in any type of asset. Traditional REITs typically charge management fees and may also charge performance fees if certain benchmarks are met.
Fundrise also charges management fees, which range from 0.15% to 0.85% depending on the investment option. Additionally, Fundrise charges a 0.85% annual asset management fee.
Tax considerations are another important factor to consider when investing in real estate. REIT dividends are taxed as ordinary income, which can be a disadvantage for investors in higher tax brackets.
Fundrise investments are structured as partnerships, which means that investors receive a K-1 form each year detailing their share of the partnership’s income or loss. This income is typically taxed at the investor’s individual tax rate, which may be lower than the ordinary income tax rate.
All investments come with some level of risk, and real estate is no exception. Traditional REITs are subject to market risk, interest rate risk, and concentration risk if they invest heavily in a particular sector.
Fundrise investments also come with risks, including market risk and the risk of default on underlying assets. However, Fundrise attempts to mitigate these risks by diversifying across a variety of properties and by conducting thorough due diligence on potential investments.
Transparency is another important factor to consider when investing in real estate. Traditional REITs are required to file regular reports with the Securities and Exchange Commission (SEC), which provides investors with detailed information about the company’s financial performance.
Fundrise also provides regular updates to investors, including quarterly reports and annual tax documents. Additionally, Fundrise offers a robust online platform that allows investors to track their investments in real-time.
In conclusion, both REITs and Fundrise offer investors the opportunity to invest in real estate without owning property outright. However, there are significant differences between the two options that investors should consider before making a decision. REITs offer greater liquidity and may be more suitable for investors who want exposure to a specific sector of the real estate market. Fundrise, on the other hand, offers lower investment minimums and greater diversification options. Ultimately, the choice between REITs and Fundrise will depend on an investor’s individual goals and risk tolerance.