Adding real estate to your investment portfolio can be a great way to generate strong returns and protect yourself against market downturns or inflation. If you are not interested in buying and managing a property on your own, there are alternatives. REITs and platforms like Fundrise make real estate investing easier and more accessible to investors. However, while Fundrise may look very similar to basic REITs, these two investment options have some important differences worth noting. Here’s what you need to know. With all the options you have for investing in real estate assets, it can be a good idea to work with a financial adviser when choosing these securities.
What is Fundraising?
Fundrise, which is a type of REIT, is an online platform that allows investors to buy shares of real estate interests. Through Fundrise, investors can diversify their portfolio, adding low-cost real estate investments without having to buy, renovate or manage these properties.
It also makes real estate investing possible for more people. Rather than requiring all of the capital needed to purchase a property, Fundrise has lower minimums that make real estate investing accessible to newer or low-budget investors.
Fundrise operates as a crowdfunding business model. Investors buy shares of predefined portfolio strategies; their funds are then diversified into various funds within this strategy. Fundrise uses this capital to buy, renovate, market and occupy a range of property types while charging investors an annual advisory fee and management fee.
Over time, the investment properties held in Fundrise’s portfolios may appreciate in value and generate income. In turn, investors can see the value of their own portfolio increase and can even receive quarterly dividends as a result.
How REITs work at Fundrise
One of the easiest ways for investors to add real estate to their portfolio is to set up a real estate investment trust, or REIT. Buying shares of a REIT is similar to buying shares of other investments such as mutual funds, exchange-traded funds (ETFs), or even individual stocks.
When investing through Fundrise, investors buy shares of private equity REITs, or “eREITs,” which is a trademarked term. These investments provide capital for various residential and commercial real estate projects, providing investors with a return on the property as it appreciates in value.
Equity REITs may be publicly traded or publicly traded; in the case of Fundrise, their eREITs are open to all investors but are not exchange-traded. There are no brokers and no sales commission for investors buying eREITS; they are sold directly by Fundrise.
Fundraising versus investing in REITs
Investing in REITs – especially publicly traded REITs – is a lucrative option for many investors. Not only do these investments traditionally have good results, but most of the time they boast of a higher yield yield than the S&P 500. The REITs offered through Fundrise are, however, private investments. This means they may not offer the same returns or benefits as public REITs purchased through a brokerage account.
That said, Fundrise REITs generally cover a wide range of investment types. As a result, they can better hedge against market declines than some specialist REITs or individual real estate purchases. Here is an overview of some of the important differences between the two REIT investing methods:
Fundrise offers low investment minimal: To start investing through Fundrise, investors are only required to make a minimum investment of $10. Other REITs may have significantly higher requirements – sometimes in the four or five digit range – especially when dealing with unlisted or private REITs.
Fees may be higher with Fundrise eREIT: Fundrise charges investors a total of 1% annual fee. This includes an advisory fee of 0.15% and an asset management fee of 0.85%. The typical publicly traded REIT charges a fee of about 50 basis points, or 0.50%, per year. This makes Fundrise twice as expensive as public REITs, on average.
Private REITs do not offer the same liquidity as public REITs REITs: Generally, REITs work best as long-term investments. However, if you ever need to liquidate publicly traded REITs, you can often do so fairly quickly through your brokerage platform. Fundrise REITs, however, are private and non-traded, meaning your shares could take significantly longer to sell.
The Fundrise platform can be easier to use: There are many different REITs out there, but finding the best one for your goals and investment schedule can be tricky, depending on where and how you invest. Fundrise offers predefined investment portfolios, allowing investors to choose the one that suits their goals. All funds invested will be disbursed according to this portfolio allocation, without much shopping or digging required.
All REITs are required by the IRS pay at least 90% of their taxable income to investors. These are paid out as dividends. Although dividends (and overall returns) are never guaranteed, this requirement can make REITs a great choice for investors looking for passive income streams.
Fundrise vs. REIT: which is better?
So, between investing through Fundrise or investing in public REITs, which is better? Well, the difference will really depend on your goals and priorities as an investor. Both can be good options depending on what you’re trying to accomplish. While traditional REIT options might be more plentiful and more affordable to invest in, Fundrise will offer a more automated and much easier to manage solution.
That said, if you’re just looking for the ease of managing your REIT investments, you might just want to consider working with a financial advisor who can manage your entire portfolio, including REIT investments.
Standard REITs can be publicly traded, listed or unlisted. Fundrise REITs are private and therefore may be somewhat illiquid, may be simpler for some investors, and only require an initial investment of $10. Investors can simply choose the predefined portfolio that best suits their goals. Fundrise platform fees are 1% per annum, which is higher than the average fee for public REITs. Although the Fundrise investment model is quite straightforward, returns may be lower than public REITs, depending on the portfolio you choose.
Tips for investing
Consider working with a financial advisor when weighing the pros and cons of various real estate assets. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you reach your financial goalsstart now.
REITs can be a key part of your retirement nest egg. To plan for your retirement, you need to know how much you’ll need to maintain your lifestyle once you’re done working. SmartAsset’s free retirement calculator can give you an idea of how much money you need to save.
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