Fundrise VS REITs – Which Is The Better Investment?

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There are so many ways to get involved in real estate, from renting your home on Airbnb to buying an investment property. But if you don’t want to be a landlord or if you don’t have the money to buy a property outright, don’t sweat it. You don’t need a ton of cash on hand to get involved with real estate, thanks to budget-friendly crowdfunding options like Fundrise and REITs.

Fundrise is a better beginner-friendly option that offers low fees and allows investors to access real estate investments on the go, all for as little as $10. However, REITs are better for experienced investors because of the higher costs, lack of control, and options to buy commercial real estate.

Did you know that real estate is one of the best ways to build wealth? Seriously: 90% of the world’s millionaires made their fortunes with real estate. 

I’m not saying investing in a few real estate deals will make you a rich, mighty real estate mogul, but it’s clear that real estate is a valuable way to grow your money. 

But what’s the difference between Fundrise versus REITs? What’s the best option for your finances? Let’s break down how Fundrise and REITs work, as well as their biggest differences.

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Fundrise VS REITs

Look, real estate investments are all inherently risky — nothing is guaranteed. But it’s risky putting all of your eggs into one basket (AKA the stock market), so real estate investments are a great way to diversify your money. 

The question is, should you get started in real estate with a platform like Fundrise, or by investing in REITs?

Let’s look at Fundrise versus REITs, including their similarities and differences, so you can pick the best option for your investing goals.

What Is Fundrise?

Fundrise is technically a REIT, which I’ll get into later, but its setup is so unique that it deserves a category of its own.

Fundrise is a real estate crowdfunding platform. It’s been around since 2010, so it has a track record that’s over 12 years long. The big selling point of Fundrise is that you can pool your money with investors to buy shares in real estate deals. 

So nope, you don’t need thousands of dollars to buy a single investment property — and all of the headaches that come with managing a property. 

How Does Fundrise Work?

With Fundrise, you create an account, pick a plan, and set your investment goals. From there, the app will buy very small shares in real estate deals based on your pre-set portfolio strategy. 

If you upgrade your plan, you can actually cherrypick which investment deals you have access to, but most beginner users will have to rely on Fundrise to pick investments for them. You don’t own or manage these properties, either; they belong to Fundrise.

Fundrise Fees And Minimums

Fundrise’s investments are largely managed as private equity REITs, which it calls eREITs. 

Most of its investment properties are residential, but Fundrise also offers investments in: 

• Debt
• Equity
• Commercial

Now, Fundrise needs to make a buck, so it does charge a 1% fee to its users, broken down like this:

• 0.15% advisory fee
• 0.85% asset management fee

Fundrise does have account minimums, but they’re pretty reasonable for real estate. Depending on the features you want, the minimums range from an initial investment of just $10 to a whopping $100,000.

The good news is that, if you want to get started with investing but don’t have a lot of money, the $10 Starter option makes real estate accessible to you. 

You get more say in where your money goes with the Core membership package, which allows you to allocate your money to specific funds.

How Much Money Can You Make With Fundrise?

Your dividends depend on your investment objectives, investment performance, and how many shares you bought. But overall, Fundrise says investors receive a 2.15% annualized yield.

Fundrise generates quarterly dividends, although these are never a guarantee. You also need to keep your money in the investment for at least five years (or whatever the investment’s time horizon is) to see reasonable returns. 

But if you need to get your money out early for some reason, Fundrise lets you redeem shares every quarter. This is never guaranteed, though, and you’ll pay a 1% penalty, so think about this option carefully.

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What Are REITs?

Real estate investment trusts, or REITs, became an option for American investors back in 1960. Congress passed legislation allowing single investors to buy a share of commercial real estate deals — without the need to buy and own the commercial properties themselves. 

This is a huge benefit because it means that non-accredited investors and folks with a lower net worth can get in on real estate deals that were previously unattainable.

A REIT is a type of company that owns real estate, but its main goal is to own income-producing properties in the form of rent. 

Every REIT is different, but more often than not, they invest in properties like: 

• Apartments
• Retail centers and malls
• Office buildings
• Hotels
• Retail space
• Warehouses
• Student housing
• Senior housing

If you’ve ever invested in a mutual fund, a REIT works sort of like that, except it holds real estate deals instead of stocks or bonds.

How Do REITs Work?

REITs give you broader exposure to several investment properties in one fund. The bad news is that the REIT pretty much controls which properties your money goes to, so you don’t have very much control over what you’re investing in. 

There isn’t as much transparency here, so if that bothers you, a REIT might not be for you. Also, REITs are allowed to invest 25% of their assets in non-real estate investments, so keep that in mind. 

REITs are highly regulated by the Securities and Exchange Commission (SEC), so they have to follow a complex web of rules to stay compliant. 

For example, REITs are required to pay out 90% of their taxable income to investors, and that comes to you in the form of dividends. 

So, if you want regular checks coming in the mail, REITs can be a useful way to benefit from real estate investments in the short term, too.

REIT Fees And Minimums

Now, how much do you have to pay to start investing in REITs? It’s definitely more expensive than Fundrise’s $10 minimum. 

To invest in a REIT, you need enough money to buy one full share in the REIT. For some REITs, that might be $50, but others might require $1,000. 

Because you buy a REIT through a more traditional broker, you might have to follow the broker’s rules for minimum investments, too. This generally means REITs are more accessible to experienced investors or folks who have more of a budget.

Fundrise VS REITs – How They Compare

If you think Fundrise and REITs sound awfully similar, you’re not wrong. They both offer investments in REITs, so it’s easy to get them mixed up. 

Before we go over the differences between Fundrise versus REITs, let’s get clear on how they’re the same. 

They both allow you to invest in real estate, they both offer commercial and residential properties, and they both generate dividends. 

Outside of that, though, they share a few other commonalities, including: 

Diversification

Both investment options give you a place to invest your money that isn’t the stock market. 

If you want to diversify your portfolio, both Fundrise and REITs are respectable choices.

Income Sources 

Fundrise and REITs are long-term investments, but they can generate income every quarter in the form of dividends. 

You can either keep them as a payout or reinvest the dividends to continue growing your money.

Long-term Investments

Regardless of where you invest, your money is going to be tied up for several years, sometimes five years or longer.

Crowdfunding

Both options allow you to pool money with other investors and buy a fraction of ownership in a property. 

That’s way cheaper than buying an office building yourself, right?

Passive Investments:

You don’t own or manage the property if you invest with Fundrise or REITs. 

Access

Both options are accessible to non-accredited investors.

Fundrise VS REITs – How They’re Different 

Okay, so now that we know how Fundrise and REITs are similar, let’s break down their major differences.

Liquidity

So, what happens if you want to sell your shares? Well, if you bought an eREIT with Fundrise, you’re going to have to wait a while. 

That’s because Fundrise is a private platform with private eREITs. There isn’t a huge market where you can resell your shares, so it can be really tough to get your money out early. 

REITs, on the other hand, are designed to be long-term investments too, but because they’re on a public exchange, it’s much easier to liquidate your money.

Volatility

Fundrise isn’t publicly traded, which means it operates completely independently from the stock market. While REITs are technically independent of the stock market, they tend to perform like the stock market. So if stocks are down, REITs tend to be down, too. This means REITs tend to be more volatile than Fundrise.

Fees

Fundrise charges a 1% annual fee, as well as a 1% early redemption penalty if you take your money out early. 

REIT fees depend entirely on the brokerage and REIT you choose. They’ll charge you an expense ratio, which usually ranges from 0.5% to 1% per year.

But if you can manage to get a REIT with an expense ratio of just 0.5%, that’s half the price of Fundrise. 

Investor Experience

I’ve used both Fundrise and REITs, and as a user, I can say Fundrise is way simpler to understand. 

It’s a fintech app that’s designed to be easy to use, so if you want clarity and transparency, Fundrise is the better option. 

REITs, on the other hand, are usually traded through a brokerage app or website, which aren’t always super modern or easy to understand.

Minimums

Fundrise has a sweet $10 minimum initial investment, which opens the platform up to just about anyone. 

REITs, on the other hand, require at least enough money to buy a single share in the REIT. 

That typically starts as low as $50, but could cost $2,000 or more depending on the REIT. You also have to worry about minimums from the brokerage managing the REIT, too.

Performance And Returns

So here’s the big question: which performs better, Fundrise vs REITs?

Best Quarterly Performance:

Fundrise: 9.4%

REITs: 16.7%

Number Of Negative Quarters:

Fundrise: 0

REITs: 4

Average Return (2017-2022 Q1)

Fundrise: 5.42%

REITs: 4.34%

Both have performed well historically. REITs have decades of historical performance that investors can look at. 

However, REITs have posted negative returns in the past, while Fundrise hasn’t posted a negative quarter to date.

Overall, both Fundrise and REITs have the potential to generate good dividends for investors. Even though REITs have had negative quarters, their performance has eclipsed Fundrise at times. 

The good news is that, regardless of whether you choose one platform or the other, both outperformed the S&P 500 public stocks, which generated an average income return of just 0.35%.

In terms of dividends, Fundrise generates an annual dividend yield of 2.15%. 

REITs average 2.6%, though, so long-term, REITs might actually generate more dividends. We have more data on REITs and Fundrise is still relatively new, so keep that in mind.

Fundrise VS REITs: Which Is The Better Investment For You?

If you want to get into real estate, now’s the perfect time to get started. 

Regardless of whether you choose Fundrise or REITs, you don’t need a ton of cash or a high net worth to get started. 

Fundrise is better for: 

• Newbies who like the ease of the platform
• People who want to invest for just $10 upfront
• Beginners looking for transparency

REITs are better for: 

• Investors who are worried about fees
• People who want regular dividend payments
• Experts that want a more liquid investment

However you choose to invest, adding real estate to your portfolio is a smart way to hedge against inflation and volatility. 

Both Fundrise and REITs make it easy to invest in real estate, although they each have their pros and cons. At the end of the day, you have to understand their features and choose what’s best for your investment strategy.

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