Real estate investments are considered to be a crucial component of a diversified portfolio, but gaining access to private real estate can be a little daunting.
Fortunately, unlike days past, you don’t need hundreds of thousands of dollars to invest in real estate. There are real estate crowdfunding platforms and REITs which allow small scale and new investors the chance to invest in commercial and private real estate.
In this article, we’ll look at two different options to access real estate investments in a Fundrise vs VNQ comparison, to help you decide which real estate assets make the most sense for you.
A Few Words on Real Estate Investments
As mentioned above, getting into real estate can be overwhelming. When most people think about investing in real estate they think about buying a property and renting it out. I can tell you first hand, this is way more work and time than you realize!
The truth is, buying a rental property is not the only way! There are many different real estate investment options… this article dives into a couple of Joe’s favorite real estate investment options (he is an investor in both Fundrise and VNQ!).
Be sure to check out our article where we breakdown our real life year by year Fundrise returns.
The Fundrise Basics
Fundrise has been around since 2012, and in the intervening years, it has become regarded as one of the best real estate investment platforms.
To date, Fundrise has raised over $1 billion in capital and works with more than 150,000 investors. The funds the platform generates are invested with crowdfunded real estate projects, particularly multi family condos, office spaces and other commercial properties.
Fundrise is considered a front runner in the eREITs niche with an average investment of $5,000 producing annual returns of between 10 and 14%. This makes the platform a popular choice with newer investors or those who are keen to explore real estate with a lower risk profile.
Currently, there are two types of Fundrise investment opportunities; eREITs and eFunds, both providing easy access to commercial real estate investments.
The VNQ Basics
VNQ is a real estate index fund offered by Vanguard. Vanguard has an extensive history dating back to 1975, but even back then, the brand was associated with low cost investing.
In fact, Vanguard was started with a long term philosophy of serving the buy and hold investor. Since real estate holdings are typically a long term investment, VNQs fit perfectly into this ethos.
An interesting aspect of Vanguard is that it is owned by its shareholders. The company has removed outside interests and owners to eliminate competing loyalties.
This is reassuring to those who are wary of an industry with a reputation for some companies adopting shady practices to offer “free” trading.
Key Differences Between Fundrise and VNQ:
Before we delve into a direct comparison between these two investment options, it is important to note that while Fundrise offers eREITs, VNQ is a publicly traded REIT.
Fundrise introduced the eREIT as a new approach to the traditional structure of REITs, while VNQ is considered one of the most popular REITs on the market.
Non Traded REITs, as with Fundrise, and Publicly Traded REITs, such as the Vanguard VNQ both offer investors access to the real estate market, but there are some key differences between them.
Publicly Traded REITs are traded on a stock exchange. This allows investors to buy and sell their shares as they could with any other type of stock. This provides greater flexibility, since they are more liquid. But, this is typically associated with higher fees which can make it harder to maximize returns.
Non Traded REITs, such as Fundrise are not traded on stock exchanges. They are directly offered to investors and they can only be sold back to the company.
Fundrise vs VNQ: How They Work
Fundrise provides investors access to proprietary real estate investment trusts known as eREITs and eFunds which are not available to the general public. There are five account tiers of the Fundrise platform, with each tier offering new features. The tiers are:
Starter: This is the lowest Fundrise tier and is available with a $10 minimum investment. However, even with such a small amount, you can create a diversified portfolio via the Flagship Fund. You can set up auto investment payments from $10 per month and you can automatically reinvest your dividends. This is a decent option for those who are new to investing in real estate and may not have a large investment fund.
Basic: This tier offers all of the Starter plan features, but it adds the capability to set your investment goals, you can also invest via an IRA and you can access the Fundrise IPO. However, the minimum investment threshold is increased to $1,000.
Core: This tier has a minimum investment requirement of $5,000, but it adds a number of features to the previous tiers. You can customize investment goals to meet your specific needs including balanced returns, income and growth. There is also diversification across various funds including potential access to open eREITs. At this level, you’ll have six months of advisory fees waived for every person that you refer to the platform.
Advanced: This tier requires a minimum investment of $10,000 and it offers all of the features and benefits of the previous tiers with some additional perks. These include being able to directly invest into the eFund. This offers access to more portfolio diversification, plus plans and tax advantaged funds. The referral bonus also increases to nine months of advisory fees waived for each referral.
Premium: This is the top account tier and it requires $100,000 minimum investment and Premium investors must be accredited. As a Premium investor, you would get Core and Advanced plan features, but you also get priority access to Fundrise’s investment team. You’ll also get one year of advisory fees waived for each referral.
Vanguard has a more traditional brokerage platform structure. The platform places a high priority on offering investing education with a focus to help you set your own financial goals and create action plans to achieve them.
There are a variety of educational resources on Vanguard including research papers, news articles, blogs, videos, webcasts and more that cover topics from financial planning and investing products to retirement.
Vanguard is a low cost investing platform, which means that you can simply purchase VNQ shares as you would any other security. You can determine how much you would like to invest according to your portfolio diversification goals.
However, you can also purchase VNQ through various other investing platforms including Robinhood and Webull. So, if you’re already using an investment platform, you can simply check to see if VNQ is an available asset to purchase.
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Investment Minimums in Fundrise vs VNQ
One of the main draws of Fundrise is that it is possible to get started with a small sum. The investment minimums are determined by the membership tier, but the starter tier requires just $10. The other minimum investment requirements are:
Premium $100,000 and you must be an accredited investor.
However, it is important to note that although tempting to invest the bare minimum, the higher tiers offer alternative opportunities. As an example, if you want to invest via an IRA, you will need a Basic membership at least.
Likewise, for customized investment goals, you’ll need Core tier or higher. The higher tiers also provide direct investment into the eFund and at Premium, there are accredited investor opportunities.
The VNQ minimums are a little more straightforward. You can invest with a minimum of one share. However, Vanguard STAR funds and retirement plans require an initial investment of $1,000 or more, while other Vanguard plans have a minimum initial investment of $3,000.
These minimum investments may be a little high for some newbies, but you can simply purchase one VNQ share via your usual trading platform.
With sound investing strategies, both Fundrise and VNQ offer the potential to make money, but as with any investment, there are no guarantees. However, you can examine the record of past performance to evaluate the average annualized returns across recent years. While past performance does not provide a guarantee of future returns, it can provide a useful indicator.
The average Fundrise annualized returns in recent years are:
The average annualized returns for VNQ over the same period are:
While the returns vary year on year for both platforms, over this seven year period, the average return for Fundrise is 11.64%, while the average for VNQ is 10.64%.
Fundrise charges a fee for its advisory services. The current fee is 0.15% for annual advisory fees, which works out at $1.50 for every $1,000 you invest per year. This fee covers automated dividend distribution, automated tax management processing, portfolio construction and customer support.
Additionally, there is an annual 0.85% flat management fee for Fundrise’s real estate funds, which includes eREITs, the Income Real Estate Fund and the Fundrise Flagship Fund.
There are no fees for buying or selling VNQ. Vanguard does not impose a fee for this and it is offered on various brokerage platforms. So, if you use a low cost or commission free trading platform, you’re unlikely to incur any fees for buying or selling VNQ.
Pros and Cons
As with any investment product or platform, there are both positives and potential negatives associated with Fundrise and VNQ. You should be aware of these points to make an informed decision.
Low investment threshold: The minimum investment for the starter tier is only $10, which eliminates the financial barrier to entry for most investors.
Transparent fee structure: Fundrise takes pride in offering a transparent and easy to understand fee structure. Many new investors feel overwhelmed by “hidden costs” of real estate crowdfunding platforms, but Fundrise makes it simple.
Reasonable management fee: The management fee for Fundrise products is reasonable and compares favorably to competing platforms.
Automatic dividend reinvestment: There is the potential to earn compound interest on your investment via the quarterly dividend automatic reinvestment.
Retirement account options: From the Basic tier onwards, you can invest via a self directed retirement account.
Limited liquidity: Although it may be possible to liquidate your investment early through a quarterly redemption window, you are likely to incur a fee and there are no guarantees it will be possible. If there is an economic downturn, the demand for buyers is likely to outstrip the potential sales from nervous investors.
Tax Implications: All dividends from Fundrise are taxed as an income source rather than capital gains. This may create taxation problems if you’re not sufficiently prepared.
No buy or sell fee: Vanguard does not impose a buying or selling fee for the VNQ. It is offered on various brokerage platforms, which means that in many cases, you can perform transactions without incurring fees.
Low expense ratio: Vanguard places great emphasis on low fees and this is exemplified with the VNQ ETF. It has a low expense ratio of only 0.12%.
Quarterly dividends: VNQ dividends are paid out quarterly and have a historical rate of approximately 4%, which is a solid yield.
Flexible: Since you can purchase VNQs via a brokerage platform, you have the flexibility to buy or sell your shares as best suits your investment strategy. You don’t need to worry about liquidity, you can simply track the performance.
Lower annualized average returns: VNQ does have a less consistent annualized average returns compared to Fundrise and the overall average across recent years is also lower.
Lower overall performance: VNQ is outstripped by S&P 500 index funds, so may not offer the best option for your portfolio. For example, VOO is slightly cheaper and typically performs better.
Whether Fundrise or VNQ is the best choice for you will depend on your investment goals and portfolio diversification strategies. You will also need to assess whether you prefer non traded REITs or REITs you can purchase on the stock market.
Fundrise offers non traded REITs with several account tiers, each with their own investment minimums. This creates opportunities for accredited and non accredited investors. However, this does come with management fees and a lack of liquidity.
On the other hand, VNQ is the Vanguard real estate ETF, which means that you can purchase shares on the stock market via a variety of trading platforms. You can purchase one or more shares according to your preferences and requirements.
Overall, Fundrise eREIT investments represent lower investor cost compared to VNQ, but there is a potential for better returns. You will simply need to be prepared to hold your investment for the long term.
If you’re a new investor with limited funds, Fundrise could be a good option for you. But, if you’re seeking a dividend income and a product offering long term growth, VNQ may be a better choice.