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Investors are always looking for new ways to diversify their portfolio. Investing in real estate is one way to do this, but it often comes at a high cost. Fundrise promises a solution to this dilemma by offering investments in their eREITs and eFunds for as little as $10. However, they have been accused of scandal. Can you trust this company and should investors still use them for their investment portfolios?
The former CFO of Fundrise, Michael McCord, claims that the company mishandled some real estate transactions. After being reviewed by an independent accounting firm and investigated by the SEC, it was concluded that no crime was committed.
Learn more about the Fundrise scandal and how safe your investments are in this detailed breakdown.
What Was the Fundrise Scandal?
Many prospective real estate investors lack the funds to invest in properties right away. Fundrise promised a solution with big dividends through crowdfunding.
Non-accredited investors were given the opportunity to play a role in shaping the real estate market and to earn a profit from their initial investment.
While it seems like a good offer, reality can be a bit murky.
Fundrise claims that Michael McCord, former CFO to the company, tried to extort them for close to $1 million plus additional shares in the company’s stock back in 2016. This led to CEO Benjamin Miller contacting both the Securities and Exchange Commission as well as the local police department.
To put the minds of their investors at ease, he opened up the books to an independent accounting firm.
McCord argues that his termination at the company was directly related to his whistleblowing on some fraudulent activity within the company. He reported his concerns to Miller, but one hour later found himself locked out of the website with no access to information systems.
Fundrise claims that the accusations he made regarding the improper handling of two real estate transactions was baseless, and served only to further McCord’s goals of extorting money from them. In his absence, Benjamin Miller took over the role as interim CFO and treasurer.
The SEC investigated the claims made by both parties to determine who was telling the truth in this sticky situation.
What Was the Outcome of the SEC Investigation of Fundrise?
The SEC does not comment on confirming or denying the accusations lodged against Fundrise by McCord. However, the company itself has established and told its investors that nothing is amiss according to the survey of the books done by their independent accounting company.
According to ChonReznick, the accounting firm, the valuation of the two properties McCord claimed were fraudulent were considered to be relatively normal for the industry.
In other words, there was no reason to be concerned or to demand additional funds from the company in an attempt to cover them up.
The police department where Miller filed the claim against McCord did comment on the situation at hand. They said that there was no sign that a real crime had occurred because McCord had not followed through with any of his threats to the company.
Should You Still Invest in Fundrise?
Despite the scandal involving the former CFO, Fundrise still appears to be a worthwhile strategy for those interested in diversifying their portfolio. It allows non-accredited investors to pull their money together to invest in real estate assets such as eREITs and eFunds.
This is an opportunity that many may not have outside of Fundrise.
The good news is that the barriers to entry are relatively low. Potential investors can get started with as little as $10.
Their team handles every aspect of your investment by working with real estate developers to manage client portfolios and facilitate real estate transactions. It is available in all 50 states.
Some of the advantages of utilizing Fundrise include:
- Low minimum investment
- User-friendly interface on both the website and mobile app
- IRA accounts optional
- Open to everyone
If you have this small investment, you can and should consider getting started with Fundrise. However, investing in real estate may not be for everyone.
Disadvantages to Investing with Fundrise
While there are a lot of persuasive advantages that may lead you to invest with Fundrise, there are a few drawbacks investors should be aware of as well.
Understanding the full scope of what the company offers is important to ensure that you are making a wise investment.
Lack of Liquidity
The first complaint that many investors have is that they cannot pull their money out of the app quickly. When it comes to thinking about real estate investing, it should be known that purchasing properties is a more illiquid investment than buying and selling stocks.
It can take some time for money to be freed up again for you to be able to pull out your investment.
Fees
The other major complaint voiced by many is that the fees do not vary based on the level of your investment. All users get the same rates that are determined based on a percentage of what you invest.
While this means some will pay more than others for heavier investments, it is proportionally the same regardless of your initial investment.
To get a better idea of what the fees are, most of the time they are charging about 1% (0.15% in an annual advisory fee and 0.85% in an annual asset management fee).
Of course, there are additional fees that you may be asked to pay as well, including:
- Origination fees (0% to 2%)
- Early redemption fees (1% to 3%)
- IRA fees ($125)
Despite the additional costs to investing with Fundrise, they are still more affordable than some of the other platforms such as Vanguard which charges a 0.30% advisory fee (compared to Fundrise’s 0.15% fee).
For the most part, they are open and transparent about what you can expect to pay, so be sure to do your homework before investing. Some of their funds may charge additional fees which can be found in their offering circulars made specifically for investors.
Keep in mind that these circulars are not found on the main website.
Who Should Invest in Fundrise?
Many people love the idea of investing their money in Fundrise because it is simple and easy. To invest, you don’t need a sizable savings account or any experience with real estate investments. Understanding the ideal client for Fundrise can help investors to make a wise decision about their own investments.
Fundrise is really ideal for those who intend to invest for the long haul. Because the assets are not as liquid as they might be with mutual funds and stocks, it can take some time to get money back out of these investments.
If an investor suspects that he or she may need to access those funds again quickly, it might be best to reconsider investments in eREITs and eFunds. Because they are not traded on a public exchange, Fundrise can offer no guarantees that a buyer will be available whenever an investor is ready to sell.
For those who already have stocks and bonds in their portfolio, Fundrise can be a great way to diversify their portfolio.
It adds another layer to your investment strategy that can yield big dividends if you invest heavily in their real estate endeavors.
Last but not least, Fundrise is ideal for those who want to do their own due diligence. There are four different types of funds to choose from, so be sure to do your homework to figure out which one is right for you.
Redemption Fees with Fundrise
Be aware that getting out of your Fundrise investment may be a bit more challenging. This is one reason why investors are hesitant to get involved with the company. Knowing the details of their redemption program is a significant aspect to consider when deciding where to invest.
Fundrise allows investors to sell back their shares to Fundrise – but it comes at a cost.
They will charge a fee against you which will get paid directly into the eREIT or eFund. These fees are calculated as a reduction to the share price, but they depend on how long you have held the shares:
- 0% if sold within the first 90 days
- 3% if held for 90 days but less than 3 years
- 2% if held for 3 years but less than 4 years
- 1% if held for 4 years but less than 5 years
- No share-price reduction if held 5 or more years
Decide how long you intend to hold these assets in order to see how much you could potentially lose with investments. Most investors will decide to keep their funds with Fundrise for at least five years to avoid these additional fees.
Investing in Fundrise’s Interval Fund
For those investors who prefer a more liquid investment strategy, Fundrise also offers their Interval Fund that is quite popular. It features more liquidity than eREITs and eFunds. At each quarterly interval, you can choose to invest in more shares.
The real benefit to these funds is that you can sell shares without penalty on a quarterly basis.
Along with more liquidity, the Interval Fund is also a great deal larger than the other funds found by Fundrise. This means that it can hold more assets and add diversification to your portfolio in a way that their standard eREITs and eFunds cannot.
Levels of Investing with Fundrise
Because they have investors who range from a $10 commitment to more than $100,000, they have various levels that you can consider when investing with Fundrise. Access to features is restricted or granted based on the amount of money you invest in this platform.
Here is a quick breakdown of what you can expect at each level:
- Starter Portfolio: This is the bare minimum for investing at just $10. You will pay the 1.0% fees (split into an annual investment advisory fee and an annual asset management fee) in exchange for access to a mixture of real estate projects throughout the United States.
- Basic Account: When you can invest a minimum of $1,000, you get some added benefits. A basic account allows you to auto-invest and to reinvest dividends. You can also set investment goals, as well as take advantage of IRA investing and Fundrise IPO investing.
- Core Plans: With a $5,000 minimum investment, you can access three unique investment plans: supplemental income, balanced investing, and long-term growth. You can see the portfolio allocation and the expected returns before making a decision. These plans also offer the same features as the basic account with auto-investments, dividend reinvestments, and IRAs.
- Advanced: If an investor has at least $10,000 to invest, you can take advantage of Plus plans as an add-on to the Core plans. With this feature, you can allocate a certain percentage of your portfolio to certain real estate funds or strategies.
- Premium: For those who are serious about a $100,000 investment, you gain all of the same features on the lower accounts as well as access to the advice of an investment team found at Fundrise.
As you can see, there are plenty of options for how seriously you would like to invest in Fundrise.
Should I Still Invest in Fundrise?
Fundrise had a bit of a sticky spot in the past with the dilemma between the former CFO and the CEO of the company. They had a falling out over a dispute that no one seems entirely clear about.
What is clear is that there appears to have been no judgment issued against the company in the wake of this PR disaster. While the SEC never comments on their findings, police state that they had no evidence of a crime committed.
Despite the past scandal, it is still a solid investment opportunity for the right individual. If you plan to invest for the long-term and want to diversify your portfolio, this can be an excellent investment opportunity. It is particularly great for those who don’t have much to invest in the very beginning.
Be sure to sign up for Fundrise today to see how they can help you earn more and diversify your portfolio!
