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Investing in real estate is a proven way to grow wealth, but you may not want all of the responsibilities and potential headaches involved with owning or managing property. Real estate crowdfunding platforms like Diversyfund, Realty Mogul, and Fundrise have become extremely popular with investors because they offer the upside of rental income and appreciation without the downside of being a landlord.
Although there are a lot of real estate crowdfunding platforms, not all of them are equally suitable for new investors. Some are open only to accredited investors or require high minimum investments that simply make them unrealistic options for many investors.
Fundrise and DiversyFund are the two options that are the most suitable for new investors, as well as more seasoned investors. Fundrise is one of the most popular and well-known real estate crowdfunding platforms. DiversyFund is not yet as well known, however, both platforms have a lot to offer.
What follows is a review of these two options, their similarities, and their differences. After comparing the details of Fundrise and DiversyFund, you’ll be able to decide which one is right for you.
Just getting started? Jump down to learn more about real estate investment alternatives.
|Real Estate Crowdfunding: Diversyfund vs. Fundrise|
|Fee Structures||Zero Platform Fees||1-3% annual fee|
|Investments||Multi-family apartment buildings||Commercial and residential|
|Liquidity||No liquidity (no premature withdrawals)||Limited liquidity through quarterly redemption plan|
|Overall||Highest potential for long-term returns||Multiple options for investors|
DiversyFund fee structure
One of the things that makes DiversyFund unique is its platform structure. This involves the way the company raises money, vets properties, makes investment decisions, and manages the properties. While many private equity funds use outside consultants for these aspects, DiversyFund takes care of everything in-house.
Obviously, hiring other firms and consultants would result in increased expenses, which would then lead to fees that are passed on to investors. Through vertical integration, DiversyFund is able to operate efficiently without the need for those expenses, ultimately benefiting investors.
DiversyFund’s team looks for potential investment properties and analyzes their potential to generate cash flow and appreciate in value. They purchase properties that are the best fit and allow for the highest returns for investors. DiversyFund will also take care of upgrades or renovations that may be needed. By handling the entire process from identifying potential investments to managing the properties, DiversyFund is able to cut out the middleman.
When comparing real estate investment options, DiversyFund’s approach is unique. Even common investments like REITs and mutual funds will have some fees. This is one of the most significant ways that DiversyFund stands out.
Fundrise fee structure
The Fundrise website lists its platform fees at a total of 1% annually. This includes a 0.15% fee for their advisory services and 0.85% for asset management. There may be an additional 0-2% fee for asset origination/acquisition related to originating, negotiating, and closing on debt and equity investments.
These fees may seem high compared to some other types of investments like mutual funds, but they are very low in comparison to most other alternative investments. Fundrise provides the ability to invest in a diversified portfolio of commercial real estate and residential real estate for a total fee of 1-3%. The fee structure of Fundrise is also very transparent, which is not always the case with other investments.
There are many different types of REITs (real estate investment trusts) available, both privately and publicly traded. Most REITs will focus on a specific type of property, like office buildings, strip mails, retail storefronts, condos and apartment complexes, or residential. Some also specialize in property based on location, such as urban areas or major cities.
As an investor, it’s always important to understand exactly what you’re investing in, and this is certainly true with real estate. Because there are so many different types of investment properties, you should take the time to become familiar with the details of any fund before making an investment decision.
DiversyFund takes a very specific approach to the types of properties that they purchase by specializing in value-add multi-family apartment buildings. As of May 2020, the investments within the DiversyFund portfolio range from a small property for student housing to a much larger 200-unit apartment building.
These investments produce rental income for DiversyFund and investors, with dividends being reinvested. DiversyFund renovates the properties to increase rental prices as well as to increase the value and maximize appreciation.
There are currently three properties listed in DiversyFund’s portfolio. Two of them are located in California and one in Texas. Two properties in North Carolina are currently listed as “coming soon”, and each has more than 200 units.
DiversyFund’s success at achieving high historical returns is due to the fact that they have an investment process and very specific criteria that they look for when evaluating potential investments. They look for three key factors in any property before purchasing:
- The property must be located in an area that is experiencing economic growth
- The property must be cash flowing (already making money for the current owners)
- There must be potential to improve the property
DiversyFund’s value-add strategy hinges on the third key. They are able to increase the value of the property (and the return for investors) by making improvements. This may involve updating or modernizing apartment units, improving the exterior cosmetics of a building, or other improvements that would allow for an increase in rental pricing. The higher rental income results in greater cash flow, which leads to higher property values and better returns for investors.
The goal is to use investor capital wisely, manage the properties and generate rental cash flow for a few years, and then eventually sell the properties for a price significantly higher than the purchase price. As a result of this approach, DiversyFund is ideal for investors with a long-term approach that are willing to wait for the right opportunity for DiversyFund to sell the property and produce a return on the investment.
The approach from Fundrise is considerably different from the approach taken by DiversyFund. Fundrise investors will own a share in a diversified portfolio of properties that include debt investments and equity investments. This may include apartment buildings, residential homes, commercial real estate development, and in some cases new construction.
Fundrise offers a few different options for investors, and the specific properties included in the portfolio will vary depending on which plan is chosen.
The Starter Portfolio was created with new investors in mind. The minimum investment is just $500 (lower than the other options covered below) and it includes a variety of different properties to provide diversification.
While the Starter Portfolio is an easy way to get started with real estate investing, Fundrise also offers three different Core Plans that make it possible for investors to get portfolios that are more accurately aligned with their own goals through effective use of invested capital.
The goal of the supplemental income fund is to provide investors with a consistent income stream through cash-flowing real estate. There is a much greater focus on dividends with lower potential for long-term appreciation. This plan is ideal for retirees or other investors who place a greater emphasis on dividend income over long-term growth.
The balanced fund’s goal is to provide investors with a blend of dividend income and appreciation. The potential total return is higher than an investment in the supplemental income fund thanks to a greater emphasis on investing for appreciation. The balanced fund is currently the most popular of the three core plans offered by Fundrise.
Investors who choose the long-term growth fund will receive dividends, but the focus of this fund is to maximize the total return, and that is mostly accomplished through appreciation. This fund will produce lower dividends than both the balanced and supplemental income funds, but it offers higher potential for the total return. Most long-term investors will prefer this option because of the potential for maximum returns and growth in net worth.
Here is a detailed comparison of the three core strategies that may help to visually explain the differences.
What about liquidity?
If you’re interested in real estate investing, you should only invest money that you won’t need in the foreseeable future. Like other types of real estate investments, both Fundrise and DiversyFund are not ideal for short-term investors. These investments are intended to maximize long-term growth (or dividend income in the case of Fundrise’s supplemental income fund), but you’ll need to be willing to sacrifice in terms of liquidity. You may not be able to get cash out of your investment at all, or there may be significant restrictions in terms of when and how fast you can liquidate the investment.
Liquidity is a significant issue that should be considered before making an investment decision. Limited liquidity isn’t necessarily a bad thing, but the details around liquidity should impact how much you invest and how you invest.
DiversyFund is a long-term investment that offers zero liquidity. Their goal is to buy the right types of properties, add value, manage them effectively, and ultimately earn a profit by selling the properties. Investors will not receive cash until the properties have been sold.
If you’re looking to maximize your long-term return on investment, you’re not concerned about generating cash flow through the investment, and you won’t need the money for several years, DiversyFund could be a good fit for you.
DiversyFund lists five years as the target length of the investment, but that is a loose guideline. In order to maximize the return for investors, DiversyFund will aim to sell the property when its value is high, which could be more or less than five years.
Fundrise is not a liquid investment either, but the details are much different than DiversyFund. Like DiversyFund, Fundrise is intended for investors with a minimum time horizon of approximately five years.
One of the primary differences between Fundrise and DiversyFund is the fact that Fundrise investors will receive quarterly dividends that have been generated through rental income. Distributions can be reinvested or taken as cash.
The value of the investment will also increase or decrease at times due to appreciation or depreciation. Investors may periodically receive cash distributions as properties within the portfolio are sold.
In terms of liquidating an investment, Fundrise offers a redemption plan that allows investors to cash out their shares quarterly, subject to limitations. It’s important to note that Fundrise does not guarantee liquidity and they have the right to deny liquidation requests if needed.
Although both DiversyFund and Fundrise are intended for long-term investors and neither would be considered a liquid investment, Fundrise does offer some options for cashing out while DiversyFund does not.
Does Fundrise pay dividends?
Fundrise does pay quarterly dividends to investors. The dividends are typically paid in the middle of the month following the close of the quarter. For example, first quarter dividends are paid in mid-April. Investors have the option to have the dividends automatically reinvested or transfered to a bank account. However, dividends are not guaranteed.
The amount that you’ll receive in dividends will depend on a number of factors, including the plan that you choose. As was mentioned earlier, the supplemental income fund has been designed to produce maximum dividends.
Like any other investment, investing in real estate comes with risk. There is no guarantee that your investment will produce a positive return, and there is no guarantee that your principal won’t be lost. The success or failure of any investment in real estate will be heavily influenced by property values, which can be impacted by economic conditions. Aside from property values, investment return will also be impacted by a tenant’s ability to pay rent as expected.
Of course, investment risk is often directly correlated to potential return. While investing in real estate does present some risk, the potential for excellent returns is also there. One of the reasons that platforms like Fundrise and DiversyFund are appealing is that investors don’t need real estate experience. Fundrise and DiversyFund have the expertise and they manage the investments, which helps to reduce the risk for inexperienced investors.
Due to the potential risks, investments should be made carefully and each investor should be sure to perform their own due diligence. Investments in real estate crowdfunding should be a small part of your overall portfolio for diversification purposes.
While real estate is an attractive alternative investment for many people, historically, it hasn’t been a realistic option for the average person. Many people aren’t able to come up with the down payment needed to purchase a property, or they simply don’t want the responsibilities associated with it.
Real estate crowdfunding platforms like Fundrise and DiversyFund have drastically changed the situation for smaller investors. With a minimum investment of $500, there’s no need to come up with a large down payment. Investors also benefit by having experienced project managers handle all of the details.
If you’ve been interested in real estate or other alternative investments, these two platforms may be a good fit for you.
Is it worth investing in Fundrise?
Fundrise reports historical annual returns of 8.7% - 12.4% (after fees). They offer a starter plan with a minimum investment of just $500 and three other core plans have a minimum investment of $1,000.
With very solid historical returns, low minimum investments, and multiple plans that are suited to different types of investors, Fundrise has plenty to offer.
Is it worth investing in DiversyFund?
DiversyFund reports historical annual returns of 11 - 18%. The minimum investment in their growth REIT is just $500, making it a realistic option for almost any prospective investor.
Unlike Fundrise, DIversyFund does not pay dividends to investors and does not offer multiple plans for different types of investors. However, their growth REIT is intended to provide maximum returns over a time period of roughly five years. If you’re looking for an investment with high upside and you don’t need dividends, DiversyFund is an option that you might want to consider.
Background Info: Understanding alternative real estate investment strategies
While you’re evaluating options like DiversyFund and Fundrise, it may help to familiarize yourself with the bigger picture of alternative real estate investments.
The easiest way for anyone to get started with real estate investing is via real estate investment trusts or REITs (pronounced Reets). REITs own portfolios of income-producing real estate. Some REITs specialize in a particular type, like multi-family rentals or commercial real estate for example.
REITs can be publicly-traded securities on a stock exchange, or they can be private. There is a big difference between public and private REITs in terms of liquidity. Publicly-traded REITs can be bought or sold at any time, just like a stock, ETF, or mutual fund. As a result, they offer liquidity to investors. Private REITs are not traded publicly and they are generally illiquid investments. Publicly-traded REITs are subject to SEC regulations, whereas private REITs are not.
Because publicly-traded REITs are easy to purchase and because they offer a high level of liquidity, they present an easy way to get started with real estate investing.
Historically, private equity investing has not been an option for the average investor. Most private equity investments were only available to accredited investors. In order to qualify as an accredited investor, you must have at least $200,000 in income ($300,000 for joint filers) or a $1,000,000 net worth (exclusive of your primary residence). Since the vast majority of people don’t qualify as accredited investors, that means that private equity investments were options only for a small minority of investors.
Aside from a lack of accessibility, these funds were also notorious for high fees that essentially cut into the potential returns for investors. Although a high level of competition has resulted in a reduction in fees, they are still higher than most other alternatives.
Additionally, private equity funds are pooled investments that don’t have to register with the SEC under the Private Advisor Rule. This results in lower costs for reporting, but also comes with reduced accountability.
Crowdfunded real estate funds
Real estate crowdfunding is still relatively new. The JOBS Act of 2012 opened the door for this new type of investment that wasn’t available to the public prior to that time. Since then, more than 100 different real estate crowdfunding platforms have launched.
Through crowdfunding platforms like Fundrise and DiversyFund, smaller investors are able to get started in real estate investing through private offerings. Average investors now have access to some of the investment types that were only accessible to the top 1% in the past.
Some crowdfunding platforms are only open to accredited investors, but others like Fundrise and DiversyFund are open to non-accredited investors as well.
If you’re looking for a way to build wealth through real estate investing, Fundrise and DiversyFund both have a lot to offer.