Okay, you’ve decided to explore the real estate crowdfunding space. After some research on the leading crowdfunding sites, you decide you want to start with investments offered by Fundrise, a Washington D.C.-based company whose platform has quickly become a favorite for non-accredited investors looking to invest in commercial and residential real estate.
Is it a wise choice? InvestorPlace’s Luke Lango recently reviewed Fundrise and generally had good things to say about it:
“Fundrise is one of the oldest and largest crowdfunding platforms in the market. Its track record and size alone make it one of the more reputable crowdfunding platforms out there. But, even further, the company regularly files reports with the Securities and Exchange Commission (SEC). As one can see from those reports, this is a very well-capitalized company, with a strong balance sheet, and little insolvency risk,” Lango writes.
As Lango also states, the fees are reasonable at just 1% of net asset value. Like exchange-traded funds (ETFs), fees do matter when it comes to long-term performance. But with the novel coronavirus still hurtling through our lives and markets, there’s much to question about the stability of investing, let alone real estate crowdinvesting.
Mark Roberts, Executive Director of the Texas Real Estate Center at McCombs UT Austin, recently spoke to InvestorPlace about how the coronavirus pandemic affects the real estate market. “While some real estate crowdfunding [sites] exist, many have fallen by the wayside,” writes Roberts. “There could be some challenges for price discovery on the value of the assets. Further, because the business model may in some part rely on funding from those making less than the maximum allowed, as unemployment claims [rise], it’s reasonable to expect the flow of funds into crowdfunding sites subsides over the near term.”
“That said, it’s really too early to tell,” Roberts writes. To give readers an idea of what type of real estate transactions Fundrise is participating in, I’ll take a look at a Fundrise investment from last September, and an active project that it only acquired on Feb. 7. Both are located in exciting West Coast cities in neighborhoods full of vibrancy and growth.
Expect more of these types of projects to come to light in the weeks and months ahead.
Seattle Multifamily Residential
On Sept. 5, 2019, Fundrise partnered with Seattle-based Evergreen Housing Development Group LLC, a company that’s been developing multifamily real estate projects since 2005.
Fundrise invested $7 million in a project that will see a 195-unit multifamily apartment complex built in the Seattle suburb of Lake Stevens, an area that’s experiencing a shortage of quality apartments.
The investment in preferred equity is projected to generate an annual yield of 10.75%. It is the sixth project in which it has partnered with Evergreen, providing investors with an above-average level of comfort that the development will be completed.
Further, Evergreen has committed $8.5 million equity to the project, or 20% of the $41.6 million in funding for the project. Washington Federal (NASDAQ:WAFD) is providing the remaining $26.2 million in the form of senior debt.
Evergreen broke ground on the development last June. It expects to complete the project by the end of 2020. This is an investment that would be of interest to someone looking for supplemental income.
Los Angeles Mixed-Use
On February 7, 2020, Fundrise acquired the Los Angeles Design Center for approximately $15 million. The property is located in the Hyde Park area of Los Angeles. It is situated on 1.75 acres, has three buildings with a mix of office and warehouse space, totaling 75,000 square feet.
In addition to the $15 million it spent acquiring the property, it will invest another $1 million on improvements to accommodate a new tenant. The immediate goal is to generate consistent income from the property. Down the road, if Hyde Park grows as much as expected, redevelopment of the property becomes a real possibility.
In terms of neighborhood safety, the Los Angeles Times Violent Crime map has Hyde Park in 21st place for violent crimes at 48.1 per 10,000 people. By comparison, Westwood, where the University of California, Los Angeles UCLA) is located, has just 6.5 violent crimes per 10,000.
The expected annual return on this property is 10.8% to 15.3%, which is dependent on future leasing revenues. While the property’s not much to look at, it’s got potential for sure.
The Bottom Line on These Real Estate Crowdfunding Investments
Based on Fundrise’s rating system, the Seattle multifamily investment gets a “D1” while the LA mixed-use gets a “B2.” These ratings aren’t indicative of the project’s quality, but rather the risk/reward for each of them.
“For example, a C3 rating would connote more estimated risk than a B1 rating. Therefore, an investor would expect to receive a greater return on a C3–rated project than a B1–rated project as a consequence of the project’s relatively greater risk,” states the Understanding the Fundrise rating page.
As investors get more comfortable with the Fundrise platform, the rating system should help investors understand the risk involved with each of the properties held within the various eREITs.
My only concern about Fundrise is that the platform is not very transparent for those looking for more information about the properties held within each eREIT before investing in one of its plans. Hopefully, it will change that in the future.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.