I’ve been talking a lot about Real Estate Crowdfunding in the last year. I’ve even gone so far as to write an Amazon ebook on the topic.
The reason that I want to put RECF on everyone’s radar, along with Fundrise’s new Income and Growth eREIT, is because I believe that technology is fundamentally changing a historically archaic industry.
Whenever an industry is being disrupted by a tech startup, my ears perk up. You can smell opportunity in the air. I love it.
However, just because these new investment options exist, doesn’t mean that they are right for you.
That’s why I want to delve in-depth into some of the differences between an eREIT and a traditional REIT, along with whether or not you should add a Fundrise eREIT to your real estate investment portfolio.
A Traditional REIT
REITs, or real estate investment trusts, came about in the 1960s to give investors a way to invest in real estate the way they invest in stocks. Basically, the REIT owns income-producing real estate and you, as the investor, own shares of the REIT. These shares pay out dividends and naturally have market value.
As of 2014, “The global index included 456 stock exchange listed real estate companies from 37 countries representing an equity market capitalization of about $2 trillion (with approximately 78% of that total from REITs).”
The majority of REITs out there are publicly traded on the stock market, giving them a high degree of liquidity. If you want to get out of an investment, you just have to sell your shares.
When you’re investing, there are two types of REITs to choose from, Equity REITs and Mortgage REITs.
As you’d guess, Equity REITs focus on delivering dividends to their investors from income-producing properties. The mangers of these properties will be collecting rents from residential and commercial real estate. You’ll also benefit from their efforts spent buying and selling assets that are a part of the portfolio.
On the other hand, Mortgage REITs invest in real estate mortgages and mortgaged-backed securities. Think of these as simple debt or fixed-income investments. You’ll be collecting dividends when the mortgages pay out interest or when the portfolio managers sell off mortgages. Mortgage REITs are also publicly traded.
If you’d like to learn more about REITs, I’d recommend checking out this simple guide which provides a good overview of the investment class.
The biggest takeaway from traditional REITs is that they’re:
- Liquid
- Publicly traded
- Bought through a broker
Fundrise’s eREIT
Fundrise announced the launch of their eREIT at the end of 2015 and it’s been growing like wildfire, with over $70 million already invested in 2016.
Their eREIT falls under the newly created Regulation A+ rules, which allows offers to solicit investment from the general public for up to $50 million over a continuous period. This means that both accredited and non-accredited investors can invest in their Income or Growth eREIT.
With investment minimums as low a $1,000, Fundrise’s eREIT is similar to a traditional REIT, but there are a few key exceptions.
Liquidity: The eREIT is NOT publicly traded. This is both a pro and a con. On the positive side, the price of your shares is not subject to the volatility of the stock market. On the downside, it’s not as easy for you to instantly sell your shares and get out of the investment. Think of it as more of a long-term investment.
Fees and Investment Model: When you’re purchasing a traditional REIT, you’re going through a broker. You make the order and they make the purchase. You’re naturally going to incur fees from the middle man. With Fundrise, you’re purchasing the securities directly through the platform. You’re directly interacting with the offerer. That’s why the fees will differ with Fundrise.
“Assuming a fully subscribed offering, each eREIT anticipates having a reimbursement of organizational expenses of approximately 2%, marketing and distribution expenses of each offering up to 1%, and annual ongoing asset management fees and operational expenses of approximately 1-1.5%.
Ongoing asset management fees of between 1-1.5% is significantly lower than the fees that are associated with a traditional REIT, which also doesn’t take into account broker costs.
Remember how we divided traditional REITs into the Equity or Mortgage category? You can adopt a similar mindset when looking through the Fundrise Growth eREIT and Income eREIT.
The website reads, “The Income eREIT intends to acquire assets that pay returns on a more current basis, which is anticipated to produce more predictable and reliable cash flows; however, the Growth eREIT intends to acquire assets that it expects to have greater appreciation over time, which may produce larger returns but less frequent distributions.”
Basically, the Growth eREIT focuses on equity assets that appreciate over time and produce cashflows and the Income eREIT focuses on debt or fixed-income assets that produce cashflows from interest payments.
The biggest takeaway is that you can use Fundrise to invest in real estate with lower fees, but the REITs won’t be publicly traded.
Which should you choose?
It comes down to your investment goals, time horizon, and comfort when it comes to risk. Keep in mind that all investments are inherently risky. Real estate crowdfunding is no different. Al
If you’re interested in learning more about Real Estate Crowdfunding, go and check out my other website with all of my best content on the topic. I’ll also include a YouTube video down below sharing some of the other top real estate crowdfunding sites in the space. Also, this post contains affiliate links.
Happy investing!
