If you’re considering real estate investing, you may have been deterred by the financial barrier to entry. Traditional real estate investing often requires a massive investment, yet you could be waiting some time to see the returns.
This has fueled the growth of real estate crowdfunding platforms like Fundrise, which offers small-scale and new investors the opportunity to invest in real estate. However, you may be wondering how these platforms compare to the more traditional approach of owning rental property. So, here we’ll perform a head-to-head Fundrise vs rental property comparison.
Fundrise vs Rental Property Summary
The main difference between investing with Fundrise and owning rental property is that one is passive and the other is not. Fundrise provides a passive, hands-free way to invest in real estate without the responsibilities of owning or maintaining properties. Buying and owning rental properties requires you to maintain the property and manage tenants unless you hire a property manager.
Another significant difference is that you can start investing with Fundrise for as little as $10. Buying rental property typically requires tens of thousands of dollars in closing costs and a down payment.
That being said, owning rental properties can be an excellent option for the right person because of the long-term potential. However, Fundrise presents a simple option for those who want an easy way to invest in real estate.
Read our Fundrise Review for more details.
Fundrise is a crowdfunded platform that allows investors to access high-end real estate. These commercial projects would typically be reserved for accredited and private equity investors. However, with Fundrise, instead of needing one million dollars of net worth, you simply need a minimum of $10 initial investment.
Fundrise pools investor money, spreading it across a variety of real estate projects. This is similar to a REIT and it ensures there’s diversification to somewhat limit the risk for potential loss. Fundrise also allows investors to access the market without needing to manage physical properties.
According to Alison Staloch, Fundrise CFO, previously you would need to tie up a significant portion of net worth if you wanted to buy an investment property and be prepared for “what usually amounts to a second job” in managing the property. So, Fundrise provides a combination of diversity, passivity, and low cost, which appeals to both experienced and new investors.
Fundrise has been operating since 2012 and over the last five years has had annual returns of 7.31% to 22.99%. The company also offered a portion of the earnings as dividends averaging 5.4% per year. (Read more about Fundrise returns).
Rental Property Overview
Rental properties can be residential, commercial, or even vacation properties that are leased to tenants. The tenant can occupy the property from just a few days to years. Many investors may be familiar with the classic investment property business model, which involves owning a single-family home and having tenants pay a monthly rental.
However, short-term rentals are becoming an increasingly popular choice due to the rise of Airbnb and VRBO. This allows landlords to make money from vacation homes, condos, and even individual rooms within a home.
Before making an investment in a rental property, there are a number of considerations including the purchase price, the amount of rent the property can command, operational costs (this includes maintenance, insurance, property taxes, and mortgage payments), and operational losses such as tenants missing payments, inoccupancy, and damage.
As an example, if you need a mortgage to finance the purchase of your rental property, you can’t simply consider your monthly mortgage payment and add a profit margin to set your rent. You’ll need to look at comparable rents in the area and factor in the additional costs for maintenance.
While this may seem complicated, there’s potential for a more lucrative investment compared to passive real estate or investing in stocks.
If you’re looking for a passive way to invest in rental homes, check out Arrived.
The amount needed to make a real estate investment is a major factor in whether the investment is feasible. While it should not be the only consideration, it’s certainly important to check.
Fundrise Investment Minimums
One of the main attractions of Fundrise is that you can get started for a very small sum. The minimum investment on this platform is just $10 for the starter portfolio. There are other membership levels including:
- Basic with a $1,000 minimum investment
- Core which has a $5,000 investment minimum
- Advanced that requires at least $10,000
- Premium, which is the highest Fundrise membership level and requires a minimum investment of $100,000
Although it may be tempting to start with the bare minimum investment, the higher membership levels offer alternative investment opportunities. For example, if you want to invest in an IRA, you’ll need at least a Basic membership level. The Core membership levels offer customized investment goals like long-term growth, income, and balanced.
The higher tier membership levels provide direct investing into the eFund and accredited investor opportunities.
Rental Property Investment Minimums
The minimum investment for an individual rental property can vary greatly depending on the specific property. Typically, you must put down at least 20% as a deposit, which could add up to $20,000 to $50,000, depending on the purchase price.
So, even if you’re looking at a modest property with a purchase price of $100,000, you’ll need to invest at least $20,000. This is significantly more than almost all of the Fundrise membership levels.
How the Real Estate Investments Work
Fundrise is designed to be easy to use and you don’t need to spend lots of time searching for a property that’s likely to be profitable. Fundrise evaluates each of the properties on the platform to assess their viability and potential for profit. You simply invest in their overall portfolio.
However, it’s important to bear in mind that Fundrise is not designed to offer fast profits. Fundrise typically holds investments for five years and investors are encouraged to keep the funds invested for this period. If you do need to liquidate before five years, Fundrise imposes a 1% penalty. So, if you’re interested in a quick turnaround, Fundrise is not the right choice for you.
The process of investing in an individual rental property is more complex. Not only will you need to evaluate each property to assess whether it’s a good purchase, but you’ll need to complete all of the associated paperwork. This includes applying for a mortgage and other due diligence.
Once you’ve purchased a property, you’ll also need to find and vet potential renters, collect rent payments, and handle any necessary property maintenance. If the renter is not reliable and misses rental payments, you’ll also need to deal with this delinquency. Although it’s possible to hire a property management company to handle some of this stress, it will eat into your potential profits.
As with any investment, it’s important to assess the potential returns before you commit your funds.
Fundrise publishes its historical returns, so the platform is quite transparent about what you can expect. However, each investor’s returns will vary. The real estate investing platform has a solid track record and has accumulated approximately $7 billion in transactions through its 370,000 plus active real estate investors and distributed $226 million in dividends. This represents an average annual return of 5% to 23%.
If you’re considering a long-term investment, purchasing rental properties has the potential to be more profitable compared to using a crowdfunding platform like Fundrise. The returns can vary significantly depending on the property, but there’s plenty of potential. And if the property value increases significantly while you own it, you can make a lot of money when you eventually sell it.
There are no guarantees and whether a rental property is profitable will depend on a number of factors. For example, if you purchase a cheap property in an undesirable area, you’ll have a lower investment cost, but the potential for a profitable return is greatly reduced.
However, there are a number of ways that you can generate potential returns including rental revenue, increasing the value of the property, and gaining rental appreciation.
So, while there’s the potential for greater returns, you will need to be aware of the market conditions. Many old-school investors maintain traditional rental properties in their investment portfolios, but market conditions do change and you’ll need to spend serious time conducting your research.
Pros and Cons
As we’ve highlighted, there are both positives and negatives associated with both Fundrise and rental property. If you’re still unsure about which one is best for you, we’ve compiled a list of pros and cons to help you.
- Low Cost: You can get started with Fundrise from just $10 and recurring investments are also from only $10. This eliminates the financial barrier to entry that many new investors can struggle with.
- Passive Income: In a similar way to a real estate investment trust (REIT), Fundrise offers a large percentage of profits to shareholders as dividends. This can provide an income stream, particularly for those who are interested in hands-free positive cash flow.
- Hands-Off Investing: Every aspect of the investment including purchase, development, and management is handled by the project sponsor. You can passively participate without ever needing to touch the property.
- Access to Commercial Properties: Fundrise clients have the opportunity to access real estate projects, such as commercial real estate deals, which would typically be reserved for only accredited investors.
- Diversification: The investor capital is put into funds which sponsor a variety of real estate projects throughout the United States, creating investment diversification.
- Asset Appreciation: Although Fundrise does offer dividends, you can also benefit from the property’s increase in value. When a project is sold for a capital gain, you can receive shares of the funds.
- Limited Risk: Fundrise’s investment strategy should appeal to investors who are risk averse but want the possibility of higher returns. Fundrise advertises that its projects are less volatile compared to publicly traded REITs or stocks. (Please note, this investment still involves risk and you could lose your money.)
- Long-Term Investing: Fundrise is designed to offer long-term investments due to the time needed for its real estate projects to reach maturity. In fact, if you need access to your money before the end of the five-year term, you’ll incur a 1% penalty.
- Illiquid Shares: As Fundrise shares are not available on the open market, you cannot simply cash out. If you do need to liquidate, you’ll need to wait for Fundrise to sell your shares, which can take some time. In a worst-case scenario, the transaction may be put on indefinite hold.
- No Project Control: While you can see details of projects that you’re contributing to, you have no say over the handling of individual projects.
- Higher Membership Tiers Necessary for Better Features: Although you can get started with Fundrise with just $10, if you want to access the most attractive platform features, you’ll need at least the Core membership level, which requires a minimum investment of $5,000.
- Some Non-Registered Investments: Beginning at Core account levels, there’s the chance to invest in non-SEC registered projects. This is similar to private equity, with minimal third-party oversight, so you’ll need to trust Fundrise about how money is managed and distributed.
Rental Property Pros
- Complete Property Control: It’s up to you the type of rental property you’d like to invest in. You can work within your own price range and look at single-family homes, vacation properties, or condos according to your preferences.
- Location Control: While people typically purchase rental properties close to their own homes, you can decide whether you want to invest in an out-of-state rental property. For example, you could choose a property that’s both a rental and a vacation home for you and your family.
- Potential for Greater Returns: Depending on the specific costs and rental payments, it’s possible to generate a profit of several hundred dollars each month. This represents significantly higher returns than the Fundrise dividend payments.
- Rental Income: Providing you have no issues with tenant rental payments, your investment could provide a consistent income source. If you have tenants who never complain or cause disturbances, you can enjoy a consistent income stream.
- Ability to Liquidate: Since you own the rental property, if you want to sell, you can do this at any time. Additionally, any equity built up from the tenant’s rental payments will be yours in full.
- Tangible Investment: Rental properties provide an investment that you can physically see and touch. This differs from the on-paper equity shares from Fundrise.
Rental Property Cons
- Large Investment: You’ll need to put down at least 20% of the property purchase price, which cost could be tens of thousands of dollars. Additionally, you’ll need to cover further costs such as renovations, insurance, and mortgage costs.
- Risk of Inoccupancy: While having a rental property can be lucrative, this only applies if you have a tenant in place. There could be weeks or months when your property is vacant and generating no income. During these times, you still have mortgage payments and other bills to pay.
- Time Requirement: Most new rental property owners aim to do the majority of maintenance tasks to cut costs, but this does create a large time commitment. You may need to dedicate your nights and weekends to performing light repairs, maintaining the yard, and managing all of the tenant-related issues.
- Potential for Nightmare Tenants: While there are some excellent tenants who always pay their rent on time and create no issues, the reverse can also apply. There are many horror stories of nightmare tenants who cause property damage, pay rent late or not at all, or even cause legal disturbances you’ll need to deal with.
- Legal Implications: This follows from the previous point, but if you end up with an extreme tenant situation, you may need to take the matter to court. There could also be legal implications if an incident occurs on the property since you are the legal owner.
Fundrise vs Rental Property Conclusion
If you’re interested in making money through the real estate market, Fundrise and rental property represent two very different approaches. While both can provide a reasonable income stream, there are some very crucial differences.
The main advantages of Fundrise are that it’s low cost, completely hands-off, and highly diversified. But, the illiquidity, five-year commitment and nonregistered funds may be off-putting for some.