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Passive income is the holy grail of wealth-building strategies, but building it through real estate can be costly and time-consuming. My first crack at real estate investing left me with a leaking oil furnace, angry tenants, an empty bank account, and a firm resolve to make my future investments much more hands-off.
Luckily today, there are super easy and affordable ways to get all of the benefits of passive income through real estate, without owning a property or forking over an arm or a leg.
Apps like Fundrise allow you to generate passive income in private real estate assets called REITs through quarterly dividends and appreciation. Investors receive an average return of 8% according to Fundrise.
Let’s dive into exactly how Fundrise works, and how you can start generating passive income with real estate, without unclogging toilets.
How Does Fundrise Work?
Fundrise allows you to invest in real estate investment trusts (a.k.a. REITs). REITs are to real estate assets as mutual funds are to stocks — managers mix a lot of assets in one big pie, then offer investors slices of the pie so they can get access to all the ingredients. In the case of a REIT, these assets are apartment buildings, single-family rentals, vacant land, storage units, commercial real estate buildings, and other real estate assets.
Previously these private (i.e., not on the stock market) funds were only accessible to the rich and famous. With Fundrise, you can get a piece of the private real estate fund action at a fraction of the cost.
Dividends. Once you buy shares in one of Fundrise’s eREITs, you own a slice of all the apartment buildings, offices, and storage units the fund contains. Tenants of these buildings pay rent to the fund, which generates passive income for fund investors like you!
Dividends are typically distributed quarterly in April, July, October, and January. You can set your account to reinvest those dividends, which will add them back into your investment plan. As another option, you can pull out your dividend money to give you a stream of passive income. Even if the value of your shares goes down, you can still receive a dividend each quarter because the dividend is tied to the rent money paid, not the value of the shares or the assets the fund owns.
Appreciation. What’s more, managers work to improve the properties the funds hold, which increases the property values. This drives up the value of the REITs shares in turn. Each quarter, Fundrise will adjust your shares’ net asset value (NAV) to reflect how much the underlying real estate assets are worth.
Basically, Fundrise allows you to get many of the perks of being a landlord (rental payments and property appreciation) without having to swing a hammer, fix a toilet, or chase down overdue rent checks.
Just as you wouldn’t expect to see your house dramatically increase in value in a few months, appreciation takes time to show up in REIT investments. It can take months or years to see increased property value drive up the value of your shares.
It’s important to keep in mind that Fundrise shares are long-term, buy-and-hold investments, just as a duplex would be. In fact, if you plan to hold your investment for less than five years, Fundrise recommends you invest elsewhere.
How Much Do I Need to Invest in Fundrise to Generate Passive Income?
With most real estate investments, you need to pony up a hefty chunk of change. To buy my first real estate investment, I had to scrimp, save, AND borrow money from my father-in-law for the down payment.
If you opt for a Fundrise real estate investment instead of the typical landlording type, you can spare yourself an uncomfortable conversation with a relative or friend and get started for the price of a take-and-bake pizza.
Here’s a breakdown of Fundrise’s different levels of accounts, as well as the minimum and features for each one.
The Fine Print
*It’s worth noting that you can’t choose which REITs you invest in until you get to the Core level. You get a pre-set mix of real estate assets until you can choose what specific REITs you want to invest in.
Also, it’s worth diving in to understand the differences between the plan levels, and how important additional features really are to you. For instance, the Fundrise website notes that there is no substantial difference between the allocation of investments in the Standard and Plus plans at the time of this writing.
What Kind of Returns Can I Get from Fundrise?
Your returns with Fundrise will depend on which of their REITs you invest in. For Core level accounts and higher, you can choose from several targeted REITs. Some are aimed at growth, while others maximize for income, and still others focus on a specific geographic location.
On the whole, Fundrise reports the following average rates of return across their clientele for the last five years.
As you can see from the chart, Fundrise tends to be a slow-and-steady climber. Historically, it has underperformed public REITs in good years, but it has far outperformed them in bad ones.
Individuals on blogs and Reddit have reported more modest gains than the table shows, around 7-8% per year.
How Much Passive Income will Fundrise Dividends Create?
If you are looking for passive income specifically, you’ll want to focus on REITs with high dividend payments rather than those focused on appreciation growth. To illustrate why, imagine a rental property that you own and manage directly.
For passive income, you’d want to make sure your rental payment covered expenses and then some to create cash flow. An increase in property value won’t make any difference to your bank account until you sell the property. My first rental property had this very issue — massive appreciation in the property value (thanks, COVID) but it didn’t produce any passive income as rent payment didn’t surpass the expenses.
Fundrise’s Income REITs are focused on creating passive income for investors through high dividends (which come from rental payments). They presently have three of these income-focused REITS in varying stages of development. The oldest, most established Income REIT has a 5.96% dividend, while the newest one (which is still in the “ramping up” phase) only offers 2.92%.
Other REITs have varying levels of dividend payments (some of which are not too far behind the Income REITs). But if you are looking to generate passive income, pay attention to the dividend payment noted in the fund’s prospectus, not just the overall rate of return.
Pros And Cons Of Investing In Fundrise
If there were a perfect investment with no risk, high liquidity, and stellar returns, everyone would be investing in it. No investment is perfect, so let’s take a look at the benefits and drawbacks of investing in Fundrise.
Fundrise is about as passive as real estate investing gets. You can make automatic investments each month, then sit back and get your dividend check each quarter. The investment returns are on par with the stock market in general, and the Fundrise REITs tend to be more even keel than public REITs or stocks.
The potential for returns in a Fundrise REIT isn’t as high as it would be if you owned your own real estate asset, but you’ll never have to do any of the legwork. For those who don’t want to devote much time but still want to invest in real estate, Fundrise is a fantastic option.
The main gripe that customers have about Fundrise is the lack of liquidity of their investment. The Fundrise website notes that you should look at your REIT shares as a buy-and-hold investment for a minimum of five years. Fundrise only allows you to sell your shares if there is a demand for them and only at set intervals. So you’ll have a hard time liquidating your investment if you need the money in the short term.
Fundrise also charges management fees. While these are much lower than they are for other private REITs, they still total 1% of your assets under management. Compared to the low fees (usually %.03 to %.2) of an index fund, these are hefty. However, you are unlikely to find a private REIT with lower fees — especially if you aren’t an accredited investor. Fundrise also allows you to waive the advisory fee for 90 – 365 days (depending on your account level) for each person you invite to the Fundrise program.
Should I Invest in Fundrise for Passive Income?
If you’re into real estate but not into repairs, maintenance, or tenants, investing in a REIT like the ones offered through Fundrise is a fantastic way to generate passive income through real estate. You’ll earn quarterly dividend payments, which you can keep or reinvest as you choose. Your shares will also appreciate and become worth more over time, just as stock shares would.
Fundrise (and other similar REIT apps) are making private real estate funds accessible to the everyday investor, and their plans start at just $10. Your investment returns will fluctuate from year to year, and they are highly dependent on which funds you choose to invest in. Most Fundrise investors have seen around an 8% return so far.
To get access to the most passive real estate investment vehicle around, you must be willing to lock away your money for at least five years. You can pocket the dividends your investment generates, but know that your Fundrise shares won’t be easy to sell should you change your mind. You will pay fund management fees as well.
If you’re interested in creating passive income in real estate or you just want to add some diversity to your portfolio, check out the Fundrise app.