REIT vs. Fundrise – Which One Is Right For You?

What Is Fundrise?

Founded in 2010 by Ben and Dan Miller – and with almost 2 million active investors – Fundrise is an online real estate crowdfunding platform headquartered in Washington, DC. Since it was launched in 2010, Fundrise fundamentally changed the real estate investment space by making it possible for the average investor to gain exposure to this asset class.

Fundrise has an industry-low minimum investment of just $10 and is open to non-accredited and accredited investors. Fundrise has a total portfolio value of $7+ billion and more than 294 active projects.

With Fundrise, you can choose from four different strategies and build your portfolio around your risk profile. Some of the premade strategies include fixed income and opportunistic, designed for investors with low-risk profiles looking for regular dividend payments and investors looking for long-term growth, respectively.

In this quick REIT vs. Fundrise review, we’ll break down some of the key differences between Fundrise, a REIT, mutual funds, and more, and we’ll make a recommendation based on the type of investor you are.

What Are REITs?

Real estate investment trusts – also known as REITs – are a type of investment company that pools together the capital from multiple investors to access some of the most profitable investments that have historically been reserved for the very wealthy.

Generally, REITs are divided into two types. Equity REITs focus on investing in income-producing properties like office buildings, apartment buildings, and retail stores. Most of its income comes from rent and capital gains from property sales.

Mortgage REITs, on the other hand, invest in real estate debt. Mortgage REITs tend to offer higher returns than equity REITs and are a better hedge against inflation – but they also come with a higher risk profile.

What’s The Difference Between Fundrise And REITs?

The main difference between public REITs and private investments like Fundrise is liquidity. Most REITs are publicly traded assets that can be purchased – or sold – like shares in the stock market.

Unlike publicly traded REITs, Fundrise shares are not listed on securities exchanges, and there’s no secondary market where you can sell them. If you’re looking to liquidate your Fundrise shares, you have to submit a liquidation request. Requests are reviewed quarterly in early January, April, July, and October. Additionally, there’s a running 1% early redemption fee if you’ve held your Fundrise shares for less than 5 years.

Where does Fundrise shine? Fundrise shines when it comes to yield, fees, and customizability. Fundrise offers considerably higher returns than public REITs, up to 20% higher yield over a 6-year period. Fundrise also has an industry-low minimum investment of just $10 – compared to an average of $1,000-$5,000 for public REITs, which means virtually anyone can invest in Fundrise.

Finally, Fundrise Pro subscribers can optimize the allocation strategy of their portfolio – for just $10/month. Public REITs are very limited when it comes to customizing your allocation strategy or matching your investments with your long-term goals.

What Are The 5 Types Of Real Estate Investments, And Which One Is Right For Me?

No matter if you decide to go for the higher yield of private REITs like Fundrise, or if you decide to go for the more liquid public REITs; you’ll need to narrow down your search when it comes to the type of real estate. Broadly speaking, real estate properties are divided into:

• Multifamily and residential

• Commercial

• Industrial

• Farmland

• Other

Multifamily and residential properties refer to apartment buildings, complexes, and retirement homes. Some of the most significant benefits include high demand based on localization and employment options in the area, a large number of tenants – so there’s no overreliance on a single one, and short-term lease contracts, which can easily be readjusted based on shifting market conditions. Residential real estate offers one of the lowest yields, but it’s one of the most resilient types of real estate properties.

When it comes to commercial real estate assets, there are a wide variety of options. Some of the biggest include office buildings, shopping malls, and grocery-anchored retail stores. Commercial and retail properties tend to offer the highest yield, and it’s very common for there to be clauses where tenants agree to pay an additional ‘rent fee’ based on business performance.

The industrial real estate sector includes manufacturing facilities, warehouses, and distribution centers. A well-located warehouse or industrial property can be more stable than commercial real estate in terms of yield. However, these properties tend to rely on a single tenant, making it a risky investment.

Farmland is an often overlooked sector of real estate. When we think of real estate, we often think of houses and buildings, but even large cities need farmland. After all, no matter the economic shifts, food is always necessary. One downside of farmlands as real estate investments is that they’re often reserved for accredited investors only and require a significant investment.

Do REITs Outperform The S&P 500?

Yes, Fundrise and REITs have consistently outperformed the S&P 500 over the last decade. The average income return for publicly traded REITs is 4.08%, compared to 5.29% for Fundrise and 2.03% for the S&P 500. Keep in mind that the performance of a real estate investment trust will largely depend on the focus. REITs that invest in apartments, retail, industrial, and self-storage properties have shown the best performance over the last few years.

Do REITs Outperform Inflation?

Yes – REITs and other real estate investments are excellent options if you want to hedge against inflation and build a more rounded portfolio. Historically, the real estate investment asset class has been one of the best-performing classes, with high-dividend yields and long-term solid returns. Additionally, rents and property value can increase in tandem with inflation.

Mortgage REITs, in particular, are highly correlated with inflation and are an excellent hedge. Inflation reduces the demand for mortgage-backed bonds, so the price of this type of securities also drops. This results in an increase in the interest rate for all mortgage types.

Is Fundrise Better Than A REIT?

Even though Fundrise and public REITs focus on real estate, both are fundamentally different investments. Private REITs like Fundrise tend to offer a higher annual yield, a lower minimum investment, and lower management fees. We recommend Fundrise for most investors, especially for beginners. You should invest in Fundrise if:

• You’re a retail investor who wants to gain exposure to a private real estate investment trust

• You don’t mind the low liquidity of private real estate properties

• You’re looking to gain exposure to a high-yielding real estate investment strategy

• You’re comfortable with a long-term investing horizon (5+ years)

Fundrise Sign-Up Process

Fundrise is open to accredited and non-accredited investors in the US. The sign-up process is very quick, and you can get started in less than 5 minutes. Here’s how:

• Visit Fundrise’s website

• On the top right menu, click Get Started

• Enter your email address

• Fill in some of your basic information

Sign up using our link, and you’ll get full access to Fundrise Pro for 30 days. Additionally, you’ll get $10 worth of Fundrise shares credited directly to your account.

Fundrise Reviews

The Fundrise app has excellent reviews on the Google Play Store and the App Store, with an average score of 4.6/5 and 4.8, respectively. Here’s what some of those users have to say about Fundrise:

• “So far, a very smooth experience using the app. It makes it easy to update, invest, and set up auto-investments based on specific goals, etc. I also like the project updates in the dashboard, rather than having to dig through my emails.” – Zack K.

• “I think the app could use more detail, but overall I enjoy it simply because it gives me access on my phone with a convenient pin login. I like Fundrise, and it’s been enjoyable and far more lucrative than a savings account.” – Jonah T.

• “Highly Recommend Fundrise Fundrise has been an incredible investment for me. I began small with just a few thousand dollars in 2020. I believe at the time I had a “growth” portfolio and at the end of the year had made an 8% return.” – Celeste N.

• “App itself is very good. Investment with Fundrise is easy. Just pick income or long-term growth, deposit money, and that’s it. Income seems to be more stable than the long-term growth.” – One A.

Conclusion

Investing in real estate is no longer reserved for the very wealthy. With real estate investing platforms like Fundrise, retail investors can gain exposure to this growing asset class with just $10. Fundrise is an excellent platform for both beginners and experienced investors alike. For beginners, Fundrise offers premade, diversified real estate portfolios.

For experienced investors who want to build their portfolio from the ground up, there’s Fundrise Pro. For just $10/month, you can fully customize your portfolio and access advanced research data from the Fundrise dashboard.

FAQs

Are REITs Regulated?

Yes – all public REITs are heavily regulated by the Securities and Exchange Commission (SEC). To maintain corporate tax benefits, REITs must:

• Generate at least 75% of their income from real estate-related investments

• Pay at least 90% of their taxable income to shareholders as dividends

• Be managed by a board of trustees or directors

Can You Earn Passive Income With A REIT?

Yes – REITs are one of the best ways to earn passive income. REITs generally generate revenue through rent. The fact that they have to pay out at least 90% of their income back to investors to maintain their tax benefits makes REITs an excellent source of passive income.

However, when it comes to capital appreciation, REITs offer very little. Since they can’t reinvest income back into the REIT, there’s little to no growth. Public REITs also tend to have higher minimum investments and management fees than crowdfunded platforms like Fundrise.

Do You Pay Taxes On REIT Dividends?

Yes – all investors must pay taxes on REITs’ dividend payments. REIT dividends qualify under ordinary income and are taxed depending on your marginal tax rate. In the US, the tax rate brackets for 2023 are as follows:

As a corporation, REITs and other trusts qualify for tax benefits and generally don’t pay corporate income taxes – as long as they distribute 90% of their taxable income to shareholders. Additionally, at least 75% of the assets under management must fall under the real estate investment category – whether properties, mortgages, cash, or other.