The TRUTH about Fundrise Real Estate Investing

What's up you guys? It's Graham here. So this gets brought up a lot: Fundrise real estate investing with some pretty substantial returns. So what do I think about it? Is it legit? Is it a good way to invest in real estate, or is it just an overly simplified website full of buzzwords to get you hyped on giving them your money? Well, let's find out.

And just to preface this video, I had absolutely no idea just how much research goes in behind the scenes to make a video like this. I thought it would be as simple as just reading through their website and then coming up with my own conclusion, but boy, was I wrong. To make a video like this, I spent four hours reading 225 pages of their fine print. If you guys appreciate that, make sure to give the video a like.

So let's start here: What is Fundrise? I literally can't say "Fundrise" without stumbling over my words. What is Fundrise? Now it sounds like I'm just mumbling. So, let's start here: What is Fundrise? Because I had absolutely no idea what this company was until you guys brought it to my attention a lot. So, I did my research—lots of research.

Okay, so Fundrise is a real estate investing service that allows you to access private market real estate deals that they say should deliver superior risk-adjusted returns over time versus a portfolio of publicly traded stocks. They even suggest that you could be getting a 12.3% annualized return. So how legit is this?

Okay, so right off the bat, this reminds me of a REIT, which is just a Real Estate Investment Trust. This is pretty much a company that owns a portfolio of real estate that you can buy shares of, much like buying a stock in a company. You could buy shares of a REIT and be entitled to those ownership benefits of that property. However, Fundrise is a little bit different than the typical REIT you see traded on the stock market.

The biggest difference here is that Fundrise is not publicly traded on any stock exchange, but it is publicly available. By being publicly available, this means that anyone can invest in their fund because they comply with SEC regulations and disclosures. This way, they don't limit themselves just to accredited investors—much like Grant Cardone of Cardone Capital.

Well, this means that anyone is able to invest in Fundrise as long as they meet the minimum $500 deposit for the starter plan. Now, because Fundrise is not publicly traded, this means you can't just simply go online and sell your portion to get your money immediately like you would with a REIT, and that essentially ends up locking up your money.

Now, this is a big concern that I will address later on in the video. So the site says that they control $1.4 billion worth of real estate, and as stated, the advantage is pretty simple. Much like most real estate investors out there, first off, they have large access to capital, which is you, from which they can aggressively negotiate real estate deals with.

As I say on their website, to capture maximum growth potential in real estate, the key is to buy ahead of major demographic or cultural shifts, understand emerging neighborhood growth, or recognize untapped property potential. I have to say, to me, this seems like a pretty reasonable goal, and this is exactly what I would be doing myself.

Now, the second thing they do is then add value to the property, and again, this is exactly something that I've been doing myself anytime I remodel a property. Again, as their website says, most classically in real estate, we produce value through intelligent zoning, development, and leasing—building new urban housing, renovating rundown apartments, and renting vacant buildings. Again, I don't disagree with that one bit.

Now, the third thing they do is profit, either through the loans that they originate, through rents, or future value appreciation. Again, as they say on their website, there is normally greater demand for complete real estate developments. There are many more potential homebuyers for a renovated home than for a rundown shack and more renters for new luxury apartments near a metro than for the previously vacant land. Like I said previously, I totally agree with this, and I'm 100% on board with that strategy.

So, I looked into it further to see what their investments looked like, and in the process of doing so, I found some great examples in Los Angeles—a market I know really well. So, I'm pretty confident that I can use these as a benchmark to see what they're doing. Now, most of the properties located in Los Angeles did not show up on Google’s reverse image search. I wanted to find out exactly where these properties were, look at the public records, and find out more details about them.

But I did notice a commonality between the homes that were on Google’s image search that did come up: they all had the same selling real estate agent. So, I took the liberty to look up this agent's sales history, and in doing so, I was able to identify a lot of the properties that did belong to Fundrise. This also includes many properties that were not listed on their website.

Then, upon looking closer at the public records of each property that this agent represented, I noticed another common theme: they were all owned by the same LLC located in Washington, D.C., and every different LLC was numbered. We had Neighborhood Partners 6, Neighborhood Partners 3, Neighborhood Partners 4, and so on and so forth. This is definitely them, as also referenced and confirmed in their fine print.

So, right off the bat, since these are areas I know really well, and I see firsthand, I gotta hand it to them. I really like the areas that they're investing in, and I really feel like in five to ten years, these areas will have vastly improved. Right now, I'm seeing a lot of investor money pouring into these areas because it's really one of the last affordable areas in Los Angeles where you can still buy a house for under $600,000. And because of that, so many people want to buy in; it's eating up all the supply. The demand is going through the roof, and by doing so, the prices are also going through the roof.

So long-term, I'm really bullish on these areas, and not only are they buying cash-flowing rental properties, but they're also investing in hard money loans for development in those same areas. So, I took it a step further to look through their market analysis, and I have to say I did not find one thing I disagreed with.

For instance, they cited buying around the metro line here in Los Angeles, and this is a train that runs all the way from downtown LA all the way to the beach. They cited this as a good reason to invest because of potential growth around it, and they're 100% correct. That's exactly what I'm saying; that's also exactly where I bought my duplex and where I want to buy a second property.

I'm noticing a ton of new developments around this Expo Line, and it's just moving east. Right now, they are buying ahead of the curve by maybe a few years, so we're still a few years away from those areas just really reaching their full potential. And not only that, but their business plan for Los Angeles development is exactly what I would be doing if I had the capital and if I had the time: buy single-family residences, rezone them for small subdivisions, and then sell them off one by one.

They're completely right that there is a huge housing shortage here in Los Angeles, and by doing that, it's a pretty low-risk way to profit. So, I'd venture to say, notwithstanding a total economic collapse or war, that they're going to be doing pretty well with those subdivisions. And it also goes without saying that buying in an up-and-coming area is just a good thing to do.

So, from a Los Angeles perspective, they seem to have a pretty good grasp about what is poised to take off in the future and what will be doing well. So, there's got to be a catch to this right? 12 percent returns? 6.6% to 7.3%? You don't just get that for investing $500 minimum into a fund, or do you? Now this is really where the research comes into play. Anyone can look through their website and get hyped on all the fancy words and high promises, but how many people read through 225 pages of their fine print? This guy—this guy right here.

Well, here's what I found. Now, besides a lot of legal jargon, here are the five things that stood out. The first one is lack of liquidity. By investing in Fundrise, you really just end up tying up your money for five years or potentially longer. Even though if you do want to sell, they do offer a lower redemption rate to buy back your shares, but they make it very clear that there is no guarantee they will have somebody to buy your shares.

As they say in their fine print, "if we do not successfully implement a liquidity transaction, you may have to hold your investment for an indefinite period." It then goes on further to say Fundrise has the authority, in its sole discretion, to limit redemptions by each shareholder during any quarter, including if the manager deems such action to be in the best interest of the shareholders as a whole.

Basically, they're just saying if you want to sell early and get your money back, we'll do our best, but there is no guarantee we're gonna be able to sell it, and there's no guarantee you're gonna be able to get your money back when you want it. To me, this is really one of the biggest drawbacks. Now, even though I believe real estate should be a long-term play—you should not be getting into it just to ride the appreciation wave and sell it like a year later—I do acknowledge that things happen.

Things do happen with the market, and you may want to rebalance your portfolio or just need access to your money. In this case, you're not guaranteed to get your money back. Now, in Fundrise's defense, on the bright side, this also reduces panic selling. Imagine if we had another 2009 recession where everyone wanted to sell at the same time. This would be absolutely detrimental to not only Fundrise but to all the other investors who would then have this and lock in their losses at a discount in a down market.

But imagine if a 2009-like recession did hit and everyone wanted to sell, and instead, Fundrise just said, "You know what, you guys? We're not selling. We're gonna hold it. We're gonna wait for the market to go all the way up, then we're gonna sell it right over here. You want to sell? Well, I just like an unsub from you." There we go. And that was a terrible Cartman impression—like absolutely bad.

But anyway, you see what I'm trying to say here. They're really trying to protect you against yourself, and for all the people who did sell in 2010 and '09, they got screwed. If they just held on, chances are they would be making money today. But ultimately, even though I do believe in the buy-and-hold strategy long-term, just having your money tied up to a point where you don't know if you're gonna be able to access it if you need it is a bit alarming to me.

Another smaller concern I have with this is that it is also likely that your shares would not be accepted as the primary collateral for a loan. This means that any event you wanted to use all of your equity in Fundrise as collateral for another loan, chances are you're not going to be able to do that. This is much different than if you own physical real estate or have a stock brokerage account or a 401k or an IRA. Basically, your money is there, and you really can't do much with it besides leave it there.

Now, the second concern I have with them are their fees, which they say are 1% annually. Now, this to me seems a little high when you compare it to other lower-cost REIT options, like Vanguard's REIT fund, which only charges 0.26% annually. That is 74% lower than Fundrise. But in Fundrise's defense, they are a smaller company that does invest in riskier assets that should hypothetically generate higher returns, which should compensate for the higher management fee.

But their 1% isn't really the only fee. There is a potential origination fee for anytime they buy something—up to 2%. And then, on top of that, there are also disposition fees anytime they sell something. So all in all, your fees could range anywhere from 1% to 3% annually, depending on what they buy or sell that year. This means that even though they advertise a 12% return with dividends reinvested and with appreciation, you could be left with as low as 9% after fees—not accounting for inflation.

Now, compare this to the S&P 500, which, first of all, has over a hundred years of proven history behind it and has also generated a 12% return before inflation. And assume you invested in an S&P 500 index fund, like Vanguard's, which only charges a 0.04% annual management fee. This is still 3% higher than what you would get with Fundrise, with a hundred years of history behind it, and without tying up your money long-term and also without the uncertainty of investing in a new company.

So from this perspective, Fundrise just doesn't seem as good. Now, my third concern—and this is probably one of the main reasons why I would never invest in Fundrise—is that their dividends are taxed as ordinary income at your ordinary income tax rate. Now, in Fundrise's defense, this isn't necessarily a fault of Fundrise; it's a fault of just dividends being taxed at a higher rate, and this would be the same no matter what stock you invested in that paid you out dividends.

See, the thing is, one of the main advantages of holding an investment long-term is being able to capture the long-term capital gains tax rate—which for most people is probably going to be between 0% or 15%. And also, anytime you own physical real estate, you're able to depreciate the value of the property against the rental income, potentially leaving you with all the rental income completely tax-free.

Now compare that to being taxed 20% or higher on Fundrise's dividends, plus any state income tax on top of that, or paying a long-term capital gains tax rate of probably 15% or absolutely no tax at all if you depreciate the rental property against the rental income. Now, my fourth concern with Fundrise is: what would happen to these returns in a down market? Now, even though I have to say I totally agree with where they're investing and their strategy, at some point, their growth will plateau. At some point, this is bound to happen—whether it's a year from now, five years from now, or ten years from now. This type of growth is, at some point, unsustainable.

So even though these returns are very much possible right now, maybe in the future you see that the growth is slowing or you see more potential elsewhere. And again, tying up your money in something like that at the sole discretion of Fundrise—whether or not you should get it back—really limits your options in the future to seek and exploit out new opportunities. And they very much acknowledge this in their fine print: "The significant growth we have experienced, particularly with respect to assets under management and revenues, will be difficult to sustain."

Now, the fifth concern of mine—and again this isn't a huge issue by any means, just a tiny concern—is with their referral fees. Well, it's definitely a very nice gesture to give your customers something for referring you business, and I am totally okay with that business practice—a hundred percent. It does make you think: are people giving better reviews than they otherwise would have because they want to get the sign-up bonus or referral bonus? Right now, they're giving away three months of free management for everybody you refer into Fundrise, and it appeared as though, before this, they were offering $100 for everybody you referred.

When this does happen, honest reviews and constructive criticism tend to get buried under falsely positive reviews for people that just want the bonus. Like I said, anytime you see a positive review with a referral link, it is harder to gauge whether or not this is a legitimate review or if it's made to sound better than it actually is because the person just wants the referral. And like I said, that isn't necessarily a fault of Fundrise, and many, many companies do it, but it is just something to consider in the back of your mind.

So, anyway, overall given this, I personally just don't see the rewards as being worth it for investing in Fundrise. Between Fundrise and all the other investment options out there to choose from, I still believe owning physical real estate would be the top most profitable choice. And anybody who doesn't want to do that—just owning an S&P 500 index fund—would give you very similar returns, better tax treatments, and more liquidity, just making it overall, in my opinion, a better investment overall than Fundrise.

Right now, I really like what Fundrise is doing, and I like the areas that they're investing in, but between the high management fees and tax treatment, it just puts it at a disadvantage. And long-term, sustaining these types of returns will get more and more difficult as time goes on. So overall, no, Fundrise is not a scam. They're completely legitimate, and there are a lot of positives that I see with this. But unfortunately, the downsides from my perspective just outweigh the upsides, rendering other investments as just being more attractive when you put them side by side.

Again, all of this is for entertainment purposes only, not financial advice—do your own research. So, as always, you guys, thank you so much for watching. And like I said, this video took forever—forever!—just to plan this out. So, if you guys appreciate that, make sure to drop a like on the video. You don't have to smash anything—people break in their phones or breaking their computers or sending bills in the mail for broken phones. You don't have to do that anymore; if you just tap the like button.

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