Final update July 2023, with full cashout. It has now been nearly 6 years for my experiment comparing a Fundrise Real Estate portfolio and the Vanguard Real Estate ETF. In Fundrise, we have a start-up with “crowdfunding” beginnings that offers users a share of a concentrated basket of properties actively chosen from the private market. In Vanguard, we have a one of the largest real estate ETFs in the world – users own a tiny passive slice of ~165 public-traded REITs. I invested $1,000 into both in October 2017 and cashed out in July 2023, for a holding period of 5 years and 9 months.
Fundrise Starter Portfolio background. When I bought in, the Fundrise Starter Portfolio was a simple 50/50 mix of two eREITs: the Fundrise Income eREIT and the Fundrise Growth eREIT*. Since these are finite baskets of entire properties, over time they will close one fund and start another similar basket. What new investors are buying today will be different apartment complexes and office buildings than what I bought in 2017. Here were my holding as of the end of June 2023:
Each private eREIT works within recent crowdfunding legislation that allows all investors to own a basket of individual real estate properties (not just accredited investors with high net worth). The minimum deposit is now just $10. You must buy shares directly from Fundrise, and there are only limited quarterly liquidity windows as this is meant to be a long-term investment. There are also additional options available with higher investments:
Vanguard REIT ETF background. The Vanguard REIT ETF (VNQ) is the ETF share class of a $60+ billion index fund that invests in publicly-traded real estate investment trusts (REITs). You can purchase it via any brokerage account. You have the liquidity of being to sell on any day the stock market is open. A single share currently costs about $100, but many brokers offer fractional dollar-based trades if you want. All shareholders are holding the same ratio of (tens of?) thousands of office buildings, hotels, storage centers, nursing homes, shopping centers, apartment complexes, timber REITs, mortgage REITs, and so on. Here is a recent breakdown:
Expenses. The Fundrise Starter Portfolio has an 0.85% annual asset management fee and a 0.15% annual investment advisory fee (1% “all-in” total). The Vanguard REIT ETF has an expense ratio of 0.12% on top, but each public REIT also has their own internal costs like employee salaries to manage their properties. In each case, investors are paying for real estate management, office space and salaries for those employees, etc. REITs may also use debt to increase their real estate exposure (leverage). Is the technology offered by Fundrise a more efficient way to invest in real estate?
Final performance numbers. Based on an initial $1,000 investment in October 2017 and immediately reinvestment of all dividends, here are the monthly balances of my Fundrise portfolio vs. the Vanguard REIT ETF.
Again, there are quarterly redemption windows, and I initiated my request for a full withdrawal May 26, 2023 in preparation for the end of the second quarter on June 30th. On July 4th, I was notified that my request was approved, and I received the funds into my bank account on July 7th.
While the balances have much closer at times, the final balance was $1,931 (12.2% annualized return) for Fundrise, compared to only $1,272 (4.3% annualized return) for the Vanguard REIT ETF. The final endpoint is probably the widest margin during the entire experiment.
Commentary. One issue with this comparison is that this chart uses two different types of NAVs (net asset values). Vanguard updates the NAV daily based on the combined agreement of millions of investors. Every trading day, there is a price where you can liquidate your VNQ shares. Meanwhile, Fundrise NAVs are only estimates as there is no daily market value available since they hold entire apartment complexes, office buildings, and so on (similar to your house, but with even fewer comps). Your liquidity from Fundrise is limited to quarterly windows that are not guaranteed. That is why I wanted to finish this experiment will a full cash-out, so we can at least somewhat test if the NAVs are realistic. I was honestly a bit skeptical that the Fundrise NAVs could keep going up while the VNQ NAVs were struggling, but they did cash me out at the NAVs they posted. I have to give them credit for that. In the end, perhaps Fundrise is closer to owning a basket of pieces of real apartment complexes and buildings, in that the rising interest rates really didn’t hurt residential housing prices so far either.
The potential drawbacks still remain. In a more stressful bear market, the liquidity is not guaranteed and neither is the NAV if you were forced to liquidate the entire thing as opposed to trading existing shares to new investors. I made my withdrawal request before the sudden PeerStreet bankruptcy filing, but Fundrise is also a young company without a long history of profitability. (Fundrise does benefit from earning ongoing management fees on the assets under management, while PeerStreet earned a cut of the loan proceeds. Without a steady stream of new loans, PeerStreet quickly stopped making as much money.)
Bottom line. I have finally concluded a nearly 6-year experiment (5 years was the initial goal) where I compared investing $1,000 each into real estate via Fundrise direct active investment and the passive REIT index ETF from Vanguard. Based on actual cash-out numbers, Fundrise final balance was $1,931 (12.2% annualized return), while the Vanguard REIT ETF final balance was $1,272 (4.3% annualized return).
You can learn more about all Fundrise Real Estate options here. Anyone can invest with Fundrise; you don’t need to be an accredited investor.
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Jonathan – a neat experiment that I look forward to reading updates about! By the way, you wrote “As of 12/13/17, the VWO holdings are worth $995.95.” I believe you meant VNQ, not VWO.
Ack! Thanks 🙂
Looking forward to your results as well! I just invested in the Fundrise eReits and I’m considering the Vanguard Reit ETF as well. Hmm.. what to do..
Jonathan – Do you have an update on this?
I should have an update once they release the first quarter 2018 results.
I’m curious to see how this plays out.
I received my Q4 2017 dividend on 1/9/18, so I expect my Q1 2018 dividend by mid-April.
Posting for reminder of update, thanks for the leg work!
Cheers
Why would anyone want to own VNQ with the state of REITs in general and Commercial Property Real Estate specifically. VNQ has a nice yield no doubt about it but the share price has gone no where over the last 5 years and with the state of the Retail Industry and higher mortgage rates to come things can only get worse.
Shrug, my investment policy doesn’t time in and out of sectors. You could be right that the near-team outlook for REITs isn’t great. But as the saying goes, oftentimes you pay a high price for a rosy/cheery consensus.
thanks for the comparison. as you said, too early to make conclusions, but i too am curious if Fundrise (and similar sites) live up to the hype. i too have invested in Fundrise since last year.
“Despite the name, the Fundrise Starter Portfolio is actually a simple 50/50 mix of their first two eREITs: the Fundrise Income eREIT and the Fundrise Growth eREIT.”
___
I just opened a Fundrise account, and in my account the Starter Portfolio is a 33.333/ 33.333/ 33.333 mix of 3 different REITs, one for the east coast, one for the west coast, and one for the “heartland”– i.e., 3 not 2, and differentiated by geography not by investment style.
On another note: why the comparison with VNQ, which is not a REIT but a BASKET of REITs? A better comparison would be to compare Fundrise with a single company, e.g., one of the REITs that is actually held inside the VNQ ETF basket.
Thanks for the info. Perhaps my REITs were fully funded and now the new money is being shifted to those newer REITs.
I could compare with a specific REIT, but which one? Why that one and not another one? I think a VNQ is a better comparison because many more people hold VNQ in their portfolios than any one REIT. It is a more common alternative, like comparing a single stock to the S&P 500 and not just Apple or ExxonMobil.
how about comparing fundrise with NLY ?
You could compare them, but NLY is a mortgage REIT that mostly owns a leveraged portfolio of mortgage bonds. I would think a better comparison would be with an REIT that holds a mix of commercial and residential properties.
I take your point about “which one” of the many REITs to compare to Fundrise, but I would respectively point out that you have been willing to pick one private REIT here (i.e., Fundrise) to compare to VNQ, and so I wouldn’t think it would be any more difficult to pick one public REIT to compare to Fundrise.
If you compare VNQ to Fundrise, then obviously only one part of difference is the liquidity issue and consequent pricing issue; a major difference is that VNQ is not a REIT in the first place and, unlike Fundrise, doesn’t make any decisions about which properties to acquire. Rather, the management behind VNQ essentially just buys REITs in proportion to their market capitalization. It doesn’t take any specifically real estate expertise to manage VNQ, because the managers of VNQ don’t make any real estate-related decisions. That’s why I think comparing Fundrise to an actual REIT (one that is inside VNQ, no doubt) is the better comparison.
I also would add that any investor who would be comfortable picking an individual company like Fundrise ought to be, in principle, comfortable choosing an individual public REIT over a *basket* of public REITs.
As you say in your reply to Sam (on April 24), comparing Fundrise to a REIT with a mix of commercial and residential properties would be the way to go. I quite agree.
On another note: have you ever looked at Emerging Trends RE Corp, which parters with the developer New Nordic? I have had a bit of money with them for a while. It’s far less diversified even than Fundrise but, like Fundrise, is all about illiquidity. It is most heavily focused on Thailand but also has branched out into other parts of Southeast Asia; it is not really about residential but more about hotel/ resort properties and is a play, especially, on growing Chinese tourism in the area.
(Finally, let me add that I enjoy your blog very much).
I’m not against comparing against an individual REIT, but you’d just have to track dividends and reinvestment. With VNQ I can let Morningstar do the math for me. I notice Realty Income (O) a lot in individual portfolios. If I could find a good data provider we would compare that.
thanks for the post. i also started investing in Fundrise in 2017 (partly due to feedback from blogs like yours, and i was curious).
Generally, i give high marks to Fundrise for their communication and transparency. The only time I was disappointed was when the Heartland REIT that i own stopped giving dividends starting Nov 2018, without any notice. I emailed Fundrise customer support to ask what happened. They said dividends will restart in 60 days or so – let’s hope so.
Wow, a ~10.4% return in the first 12 months. That’s impressive. I wish I found this when I was looking for a Commercial Real Estate fund back in June of this year. I was only able to find TIPRX, and the only reason I have access to it is through my wife’s retirement account through Schwab. The fees are very high (2.29%), but it was worth it to me for the diversification and the long run return is just over 8% per year.
Still, it doesn’t seem to beat this, and like you said, our money is fairly locked up. I’m not sure how long it’s going to take to get it back out.
With what happened to Realty shares during the boom time I’m skeptical of Fundrise surving the downturn (whenever it occurs)
A couple of factors that should help Fundrise weather a downturn:
-portfolios are intended to focus on up and coming areas less likely to be devastated by an economic slowdown
-Fundrise investors should be prepared to hold their investment for a long time, and Fundrise is up front about the fact that investors will not be able to pull their money out en masse should a downturn occur.
-Fundrise sees a potential downturn as an opportunity to get a good deal on cheap properties to spur future growth
-Fundrise usually holds preferred equity, so a property would have to lose 10-20% of its value before Fundrise equity is impacted
-Fundrise’s holdings, especially in the cash flow eREITs, consist of debt as well as equity.
How about taxes? Do I get to deduct my contribution to a vangard VQN>? I know I cannot deduct contributions to my Fundrise
Can you update your numbers for April 2019? I’m very interested. Thanks!
Me too!!
Just updated everything as of April 2019. Thanks for reading.
How much does Fundrise income complicate your taxes, as compared to owning an REIT mutual fund/ETF? Is it any different?
Taxes are pretty simple and similar to owning an ETF. You just get two 1099-DIV forms per year. One for Growth REIT and one for Income REIT.
It’s actually easier than when I owned an oil futures ETN that distributed a K-1 form (that was also really late every year).
I looked into Fundrise awhile back and didn’t like the risk/payout structure. Your investment only lasts a certain amount of years. (I think it was 18 years). At that point you get it all back regardless of whether you would prefer to let your investment keep going like an REIT or traditional real estate purchase.
You’re taking a good deal of risk that any particular deal will fail along the way. 18 years is basically long enough that the risk is gone. If it hasn’t already crashed and burned you made a great investment… or rather the preferred equity holders made a good investment. They now own 100% of the investment despite passing a good deal of the start-up risk onto other people.
In another comment Dan notes that these preferred equity holders share some of the risk early on, “Fundrise usually holds preferred equity, so a property would have to lose 10-20% of its value before Fundrise equity is impacted” which is true. But through that mechanism they receive 100% of the risk and gains later on, a time where the risk is basically 0. I’d sign up to for Fundrise’s preferred equity shares immediately except that they are not available to the public..
Thanks for the experiment! It’d be great if you can split out the unrealized gains of each investment option. As you may know, the dividends are typically taxed at ordinary income rates and the “unrealized” gains at capital gains when realized. Depending on the income level of the reader, these could be seriously different (e.g. $200k earner in CA would have a marginal tax rate of >40% while capital gains is 25%).
Jonathan, how do you think fundrise will perform in the current environment as both a buyer and a seller?
Can you please review farmtogether and acretrader – crowdfunding for farmland?
This is a good suggestion and I’ve definitely looked at them but haven’t done a proper deep dive into it yet.
Jonathan,
Would you please share your updates on Fundrise?
Thank you
You got it 😀
Perfect, Thank you, Jonathan. 🙂
By the way, did you invest only $1,000 or $10,000 initially because the examples show how $10,000 turned into $15,000 that was only for illustration purposes?
Also, Jonathan, if you had to invest a larger amount, would you choose Fundrise or VNQ?
Jonathan,
Do you invest with any other similar company, like Fundrise?
Also, have you received a note about Fundrise offering an iPO?
Jonathan – What is your take on ‘Arrived Homes’. I would like you to review it please.
It’s interesting because the chart paints a rosy picture for Fundrise, but the more I think about it, the more I’d be worried about having funds in Fundrise (for the record, I don’t have shares in Fundrise or VNQ).
I think you mentioned that the quarterly liquidity windows aren’t guaranteed. Regardless, I’d be tempted to get out as soon as possible because if they’re letting some people close out their positions at a value I suspect is inflated (based on that chart), that means that there will be less left on average for remaining shareholders.
Hopefully I’m wrong.
@Eric – interesting hypothesis. I am a fundrise investor and have enjoyed many aspects of it: The platform, app, transparency and new offerings like their innovation fund. Last but not least, stellar performance (but yes, rising tide lifts all boats).
However I’d never considered the implications of allowing quarterly liquidity draws until you mentioned it. My limited guess would be that perhaps it’s only on realized gains? They are always sending out emails about projects that have successfully paid back. Perhaps withdrawals are restricted to this.
All that to say I have enjoyed the platform and based on their apparent transparency I would assume they have something in place to prevent the scenario you raised.