Fundrise vs. REITs

You can take many different avenues to invest in real estate, and it may be challenging for investors to choose the best way to get exposure to the real estate market in their portfolio. Investors could invest in real estate investing apps and platforms, as well as stocks, funds and real estate investment trusts (REITs).

Fundrise is a real estate investing app that aids investors in building their real estate portfolios. But some people may wonder if it’s more efficient to invest in REITs directly, rather than use a platform. If you’re trying to decide on Fundrise vs. REIT, you’ll want to check out this comparison to discover the benefits and drawbacks of each.

How Fundrise Works

Fundrise is an investing platform that provides investors exposure to real estate eFunds and eREITs. Investors start by creating an account, answering a few questions about their financial goals and situation to determine an investment strategy and funding their account. Once the account is funded, Fundrise professionals will allocate your capital to investments that align with your strategy.

The biggest benefit to Fundrise is how accessible it is. Any U.S. citizen can create an account, with no accreditation needed. And you only need $10 to get started. It’s important to note that Fundrise has a tier system, and you’ll need to have at least $5,000 in your account to access the eREITs. If you have less than that, you’ll only be able to access eFunds. 

Fundrise is also great for beginner investors because there’s no need to actively manage your portfolio. Your capital will be automatically invested, diversified and regularly checked and rebalanced for the greatest chance of success.

Pros

• Great for passive investors
• Low minimum investment
• Only 1% fee annually 
• Easy to use platform

Cons

• Can’t access eREITs until in Core tier with $5,000
• Illiquid because of long hold periods

How Real Estate Investment Trusts (REITs) Work

REITs are real estate funds typically managed by a real estate company. The company purchases a variety of properties and puts them in the REIT, and investors in the REIT are invested in that portfolio of properties. In return, investors are paid their share of the REIT profits. 

There are REITs for all types of real estate. Some may be primarily focused on commercial and retail spaces, while others own apartment complexes and multi-unit properties. Some may be a collection of many types and could be primarily focused on one region.

REITs can be public or private, meaning some are open to any investor and are traded on public markets while private REITs are preserved for accredited or institutional investors. Most private REITs have high minimum investment requirements, but investors can purchase a share of some public REITs for less than $100. 

Pros

• Exposure to a diversified portfolio of properties
• Managed by a real estate company 
• Public REITs are more liquid 

Cons

• Private REITs have high minimum investments
• Can be hard for newer investors to identify the best REITs 

Key Differences Between Fundrise and REITs

Fundrise may offer REITs, but the experience of investing in Fundrise vs. REITs is different. Here are a few ways they contrast.

Investment Structures and Regulatory Requirements

With Fundrise, you fund your account and the team selects funds or REITs for you. Also, all of the eFunds and eREITs are privately traded, meaning non-Fundrise members cannot access them. Fundrise is registered and regulated by the U.S. Securities and Exchange Commission (SEC), which can provide some peace of mind to investors.

To invest in REITs, investors need to select the REIT and invest in it themselves, unless their portfolio is managed by a professional. Public REITs are registered and regulated by the SEC, but many private REITs aren’t. 

Investment Minimums and Accessibility

Fundrise is available to investors who are over the age of 18 and U.S. citizens. Investors can get started with $10. Public REITs are available to any investor with a brokerage account, with the minimum investment being the price of one share. Share prices will fluctuate with the market and differ between funds, but some cost less than $100. 

Private REITs are mostly inaccessible unless you’re an accredited or institutional investor with a couple of thousand dollars that you’re willing to invest.

Control and Transparency in Investment Decision-Making

Fundrise allows you to easily view the holdings in your portfolio, so it’s very transparent. However, investors have little control over their investments. They answer questions at the creation of their account to inform Fundrise of their needs and goals, but investors cannot pick their own investments. However, Fudnrise does list all of its offerings so investors can learn more about each.

When investing in REITs, investors can choose what REITs to invest in, unless their portfolio is managed by an adviser. Investors should also be able to research the REIT to see what properties are held within the trust. Transparency will vary between trusts and companies.

Liquidity and Exit Strategies for Investors

Fundrise is intended to be a long-term investment and isn’t a great option for investors who need a lot of liquidity. Since Fundrise’s offerings are private, selling shares in their eFunds and eREITs takes longer. Plus, withdrawing prematurely may have some monetary consequences.

Public REITs are much more liquid and can be bought and sold like public stocks. Private REITs are not very liquid, and investors will need to wait for the investment term to be up or they find a buyer before exiting.

Tax Considerations and Implications

Fundrise will provide qualifying investors with a 1099-DIV to report distributions and dividends paid to the investors. These earnings will need to be reported for taxes. REITs are also taxed as ordinary income.

Historical Returns

Fundrise doesn’t always outperform public REITs, but it has done so most of the time in the past. Fundrise offers client return data from 2017 to Q3 2023. Out of those seven years, Fundrise has outperformed public REITs five times. However, past performance doesn’t guarantee future success.

Factors to Consider When Choosing Between Fundrise and REITs

Before deciding whether you want to invest in REITs or start a Fundrise account, you’ll need to consider your goals and situation.

Investment Objectives and Risk Tolerance

First, consider why you’re investing. Are you trying to save up for a goal or growing your wealth? Your objective will help you determine your risk tolerance as well. For example, if you’re investing for the long term to grow your wealth, a less liquid investment like Fundrise may be beneficial. However, if you require more liquidity, you may want to explore public REIT options.

Desired Level of Control and Involvement

Do you want to control your investment? Then a platform like Fundrise may not be for you. Public REITs in an individual brokerage account will give you more control over your own portfolio. However, if you don’t want to actively manage your own account, Fundrise is a great way to grow your wealth without needing to be involved.

Returns Expectations and Investment Horizons

What is your desired level of return over a period of time? REITs have various levels of risk and returns to consider. Fundrise isn’t just one investment, it’s creating a portfolio. Check out Fundrise’s strategies to see if they suit your needs.

Performance

No comparison between investing options is complete without looking at performance. Once you have two investment options open to you such as public REITs or Fundrise, performance is perhaps the most important metric. Below is a chart that tracks the average annual return from public REITs compared to Fundrise offerings from 2017 to the third quarter of 2022. 

Diversification Preferences

Fundrise creates a diverse portfolio of real estate eFunds and eREITs depending on your tier. By investing in REITs, you’ll need to see how diversified each trust is and ensure you are investing in a diverse collection of trusts.

Accessible Real Estate Investing

Fundrise is a real estate investing platform whereas REITs are a type of real estate asset vehicle. Fundrise allows investors to passively invest in real estate eFunds and eREITs with low minimum investment and fees. For more control, investors can also invest in public REITs, though they may experience higher minimum investments and fees, plus they’ll need to manage their own portfolio. 

Choosing between Fundrise vs. REITs comes down to investor preference and needs. Public REITs may offer more liquidity but may require more capital and management. Fundrise can be great for passive investors and beginners but should be used for long-term investing. If you need help determining your risk tolerance and liquidity needs, ask a trusted financial professional for personalized advice.

Frequently Asked Questions

***This is a testimonial in partnership with Fundrise. We earn a commission from partner links on Benzinga.com. All opinions are our own.