With the rise in popularity of alternative investment options, one place that has always attracted investors is real estate. Real estate is a relatively easy asset to understand. A physical property that has fixed costs to build and fairly predictable costs of maintenance. It is not without risk, of course. Analyzing real estate investment deals can become incredibly daunting, but people can wrap their heads around it in general.
There are multiple ways to invest in real estate. There are public REITs, private REITs, personal investment properties, and quite more recently, there are crowdfunding platforms like Fundrise. Fundrise vs. REITs, which one is better for non-accredited investors looking to diversify their portfolios with real estate?
What is Fundrise?
Fundrise is a crowdfunding platform that raises money to purchase real estate assets.
Here is how they describe it: “We pair our extensive network and expertise with the collective buying power of our investor community to acquire high-quality assets ranging from debt to equity, commercial to residential, and more.”
What is a REIT?
REITs or Real Estate Investment Trusts are companies that own, operate, and finance real estate. Just like Fundrise, REITs pool capital from several investors.
A huge difference that can make REITs attractive is liquidity. Most REITs are publically traded, meaning all they need is a brokerage account for you to buy them. This also means you can sell them with a click of a button. Liquidity is sometimes overlooked, but having the ability to access the money if you ever need to is essential.
Wait a minute, so how exactly is Fundrise different? The answer, it is not. Fundrise is a private REIT.
Okay, so the question is. Which is better, a Public REIT or a private REIT like Fundrise?
Fundrise vs. REITs Fees.
Fundrise charges 1% per year. Here is the breakdown:
They compare it to “traditional investments” that range from 1.37% – 6.45% per year in fees. For it to be a fair comparison, they must compare it to other private REITs.
But we are not comparing private to private here. We are looking at all the means of investing in real estate. The easiest way would be to purchase a public REIT or a Real Estate ETF.
Top 3 Biggest Real Estate ETFs and their fees
|ETF Ticker||Expense Ratio|
All of a sudden, that 1% looks quite expensive.
If we don’t just look at ETFs and look at all public REITs, the average Fee & Expense for a publically traded REIT is 0.5%.
Why are Fundrise and other private REITs so expensive?
Two reasons, scale and internal management of public REITs allows them to be more cost-effective.
Public REITs enjoy much larger pools of money. Fundrise did a fantastic job acquiring over 200 properties and enjoyed explosive growth over the last few years, and that’s great for a relatively new company. But we as investors also can invest in something like Realty Income (Ticker: O) with over 6500 properties, and costs me $0 to buy from my broker.
Private REITs, not necessarily. Public REITs hire people to manage their properties. Private REITs can get away with buying properties and then letting a property management company run them for a fee. These fees don’t scale well with the number of properties purchased. Internal expertise and the average cost per property going down with more properties is why public REITs are cheaper.
Fundrise vs. REITs Performance.
Fees don’t matter at the end of the day if the performance is there to back up any difference in fees. I am okay paying much higher fees for better results. Is that the case, though?
Few caveats upfront. Fundrise is a relatively new company that has performance results going back to December 2015. This is a very short period of time to make any conclusions. Nonetheless, we must know what to expect from one investment vs. its alternatives.
From Fundrise website:
From December 5th, 2015, until January 2020, if you invested $10,000 in their growth portfolio, you would have approximately $16,200 at the end. (It is hard to see the exact number on the graph they present).
That is approximate growth of 62% over the period.
Using our trusty CAGR calculator, that translates to approximately 12.5% compound annual growth.
How did one of the biggest public REITs compare during the same period?
Here is a hypothetical $10,000 invested in Realty Income (Ticker: O) from December 31st, 2014 until today.
O grew by 80% over the same period or approximately 15.8% CAGR.
Here is a hypothetical $10,000 invested in the biggest real estate ETF, Vanguard Real Estate ETF (VNQ), from December 31st, 2014, until January 2020.
VNQ grew by 39% over the same period or approximately 8.7% CAGR.
We have to note that VNQ, being a diversified fund, offers much less volatility than one REIT like O or a private REIT like Fundrise.
Also, it is important to note how COVID has impacted the performance of these assets. Once Fundrise includes the performance of their funds during the COVID period, it will be interesting to see how they have performed.
Both O and VNQ dropped significantly during the rest of 2020, not captured in this performance report. For the rest of 2020, VNQ remained flat while Realty Income has fallen 17%.
You can explore historical prices in the chart below:
Fundrise vs. REITs. Why we prefer REITs and ETFs.
It is impossible to judge Fundrise on the performance because the period is too short, and we don’t know how their funds have performed in 2020 and 2021.
However, we know that REITs offer a few advantages in lower fees, larger size, and, most importantly, better liquidity. Real Estate ETFs provide lower volatility and easy access to a diversified real estate portfolio, all at a much lower cost than private REITs.
We love that crowdfunding platforms are gaining in popularity as they offer access to investment opportunities that were previously reserved for extremely wealthy individuals. But we implore you to do further research and figure out which solution is right for you. It is not always about a pure return. Ease of access, reliability, and liquidity are all crucial factors to consider.
Disclaimer on the results: We performed all the calculations. In some cases, information was limited. Although we trust the sources of information used, they could be wrong, and we could have made a mistake. As always, please do your due diligence before making any investment decisions.