Fundrise vs. DiversyFund: What you absolutely need to know

    If you have read a variety of personal financial blogs, you know that real estate investing is a hot topic. On these sites, bloggers plug and review companies like Fundrise, Realty Mogul, and PeerStreet, while also providing readers with financial tips and tricks.  A relatively new, but highly competitive fund in this space is DiversyFund. The team at DiversyFund asked me to take a look at their fund.

    What follows is a review of our findings and what we think makes DiversyFund unique in the marketplace. At the end of the post, we think you’ll agree that if you’re considering investing passively in real estate, you should give DiversyFund a look.

    With that brief introduction, let’s dive in and take a closer look.

    Publicly traded REITs

    As of 2019, the most common and readily available way to invest in real estate is via real estate investment trusts or REITs (pronounced Reets). REITs purchase a variety of different types of real estate (residential, commercial, multi-family, etc.) Many REITs offer a diversity of these types of real estate in their funds. Most REITs are publicly traded securities offered on stock exchanges via ETFs or mutual funds. The firms offering these REITs must register them with the Securities Exchange Commission (SEC). They are subject to SEC rules and regulations regarding the formation, purchase, and sale of the securities.

    The firms that offer them are investment firms. Registration for investment companies offering products is different than those of private investment funds. I’ll explain that shortly.

    Private equity

    In years prior to 2019, private equity real estate funds had been only available to rich people. Individuals must be accredited investors to get into the typical fund. Accredited investors are those with at least $200,000 in income ($300,000 joint) or a $1,000,000 net worth (exclusive of residence). That cuts off the vast majority, who aren’t as rich, from investing in private equity real estate funds. Only the 1% get into the game. That’s been the biggest complaint and downside of private equity funds.

    The other knock on these funds is the high fees. In the beginning, they had what’s called the two and twenty fee structure. That meant investors paid a management fee of 2%. If the fund made profits, management took 20% of the profit. Most people feel those fees are expensive. Competition and public pressure have brought down these fees. They are still among the highest in the industry.

    Private equity funds are pooled investment funds, not investment companies. As such, they don’t have to register as investment companies with the SEC. They get what’s called an exempt status under the SEC Private Advisor Rule.  In many ways, this is an advantage to the fund and its investors. Complying with the investment company rules is costly and time-consuming. Reporting requirements, in particular, are eased under the Private Advisor Rule.

    Some cringe at what they view as the lack of accountability for private advisors. While the larger investors have been pouring billions of dollars into these funds since the started.

    Crowdfunded real estate funds

    In recent years, crowdfunding has made its way to real estate investing. Crowdfunded REITs are most often offered in private funds; meaning they are not publicly traded. These newer funds register with the SEC as exempt funds, usually under the SEC’s Regulation Crowdfunding. Crowdfunding in real estate, like with individual or small business crowdfunding allows smaller investors into an investment space that hasn’t been available to them in the past.

    Both FundRise and DiversyFund are crowdfunded real estate funds. Crowdfunding provides a way for less rich investors to invest in things commonly only available to the wealthy via sites like FundRise and DiversyFund. It’s been a disruptive force in the investment and small business communities. The ability to invest on these sites offers a method of fundraising that can bypass big banks with high rates and fees. In the end, the winners are we consumers. In crowdfunded real estate, investments are no longer exclusive to the rich whereby non-accredited investors can play in the same playground as the big boys. I know when I was around 30 with not much capital to invest, these funds would have been excellent options for me to enter this specific market.

    With that background, let me tell you about DiversyFund.

    DiversyFund fee structure

    What makes DiversyFund unique is its platform structure. Platform means the arrangement under which the fund raises money, purchases the assets, distributed profits, etc. Many private equity funds hire outside firms to do everything from researching and buying properties to raising money from financial investors. Every outside entity used for these things has a cost to it. The more outside resources a firm uses, the higher the costs.

    DiversyFund is a vertically integrated financial platform. They do everything in-house. Their team looks for the properties, analyzes them for value, cash-flow, and growth. They buy properties that need upgrades. They handle upgrades as well. Once purchased, they manage the properties themselves. Investors don’t pay brokerage or middle-man fees.

    Their website says they are the only real estate fund with no platform fees. I haven’t personally found other sites making that claim. Though management and platform fees have dropped, most REITs still have fees. Fees add up and can reduce investor financial returns. Keeping them low is one of the keys to success.

    DiversyFund has that covered.

    Fundrise fee structure

    Fundrise lists its platform fees (Fundrise eDirect) at 1% as follows:

    Investment advisor fee – 0.15%

    Asset management fee – 0.85%

    Additional acquisition fees range from 0% – 2%.

    Even at 3%, the Fundrise fees are far below what the traditional private equity fund fees opened to accredited investors charge. Though fees have been reduced from the two and twenty, fees of 1% of assets and 15% of profits are common. Many of these firms can get very creative with their fees, sometimes amounting to almost 30%.

    I have read that crowdfunded platforms like Fundrise and DiversyFund and others are far more transparent with their fees. As you can see, they are much lower than the 30% average most accreditor investment funds try to charge.

    Fund investments

    Like with publicly-traded REITs, most private equity funds in 2019 can invest in many different types of real estate. Some funds concentrate on commercial properties like small strip shopping centers. Others may focus on residential real estate from single-family homes to multi-unit family housing (apartments). Others invest in downtown commercial office space.

    Before investing in anything, investors should always know what you’re getting. That’s especially important in real estate. Property location, the type of property, the lease structures, and many other things help determine the return investors receive.

    Below I’ll outline the investments Fundrise and DiversyFund make for you to read.

    DiversyFund investments

    At DiversyFund, they keep things simple. The team believes (and historical returns confirm) that the safest and best performing commercial real estate investments are value-add multi-family units. According to Wikipedia, I have read that multi-family units are  “multiple separate housing units for residential inhabitants are contained within one building or several buildings within one complex.[1] Units can be next to each other (side-by-side units), or stacked on top of each other (top and bottom units).”

    Let’s break this down and see why this matters to investors.

    Apartments, townhouses, and the like are more affordable housing than single-family homes in most areas. When the team at DiversyFund researches properties, they look for two important things.

    First, the area has to be in an economically growing market. Second, the properties they purchase must be cash-flowing. In other words, they have to be already making money for the owners.

    The third part of the decision is where the value-add strategy comes into play. They buy properties that need some improvement. I don’t mean foreclosures or rebuilds. Maybe the units need to be modernized. Perhaps they need some exterior cosmetic enhancements. These improvements allow the fund to increase rents, which increases cash flow, and increases the potential for higher growth in the value of the properties.

    The goal of the fund is simple – sell the properties at a highly appreciated price over what they paid for the property and any improvements made — having this as the only focus allows them to focus on the properties that meet these criteria.

    They are not trying to be all things to all people. Investors in their fund should be looking for long term capital appreciation.

    Fundrise investments

    The Fundrise platform offers three core plans as follows:

    Supplemental income

    The goals of the supplemental income fund, as the name suggests, is to produce income. The fund pays out quarterly dividends and invests in income-producing properties. The primary fund investments are in debt real estate assets (real estate loans).

    Balanced

    The balanced fund’s goal is to offer a blend of both income and growth. To do that, they invest in both debt and equity real estate assets.

    Long term growth

    Dividends and income are not a goal of the long term growth portfolio. Managers are looking for properties to appreciate during the holding period. They don’t invest in debt assets. They only buy hard assets.

    Here is a detailed comparison of the three strategies showing the mix of debt vs. equity and the expected returns of each.

    What about liquidity?

    Any investments in stocks that are for real estate should be for the long-term. You should not invest if you need your money in the next year or two. Unlike publicly traded REITs, Fundrise and DiversyFund are private funds. Money invested in them is not liquid. In other words, if you want to get money out before properties get sold or the fund closes, there are restrictions.

    DiversyFund liquidity

    Because of the long-term nature of their investments, DiversyFund does not offer liquidity to investors before they sell their properties. High-income and high net-worth investors build wealth by owning and selling properties at a profit. That’s the DiversyFund strategy.

    An investor who wants an income from their investments should not invest in DiverfyFund. That is not the goal. Investors in this fund need to understand the value of long-term growth on your investments.

    Some investors may look at this as a disadvantage I do not. The folks at DiversyFund know who they are and what they want from their real estate. They are not trying to be all things to all people. I like that too. They know who they are and stay true to their strategy.

    Fundrise liquidity

    Fundrise investments state that their investment time frame for offerings is five years. They offer no guarantee that they will liquidate in the five years. Investors receive quarterly dividends. Invested capital and capital gains come with the sale of properties.

    Does Fundrise pay dividends?

    According to Well Kept Wallet, the annual dividend for a Fundrise starter portfolio is 6.55% as of March 22, 2019. Investors can take these dividends and capital gains in cash or reinvest them.

    Fundrise also allows you to invest in more advanced plans when your account balance reaches $1,000. With more advanced plans, you can do a variety of things with your accrued capital gains such as being able to localize investments in areas like Los Angeles and Washington D.C., have supplemental income, perform balanced investing, and pursue long-term growth.

    Investment risks

    Like any investment, crowdfunded real estate has risks. No fund offers guarantees investors will get the results of the past or the expected returns going forward. Nor is there a guarantee investors won’t lose money. There are economic risks in real estate investing. In a slowing economy and bad job market, tenants may not be able to pay their rents. The value of the properties may not appreciate as expected.

    A good tip is that every investor should take into consideration the risks of this or any other investment they make. A general investment principle is this – the higher the expected return of the investment, the higher its expected risk. In other words, risk and return are related.

    Accredited investors tend to have higher amounts of money invested in real estate. Why? They can afford to take more risk.

    Smaller investors should carefully consider how much they put into real estate, whether publicly traded REITs or private equity funds like Fundrise and DiversyFund.

    Final thoughts

    There are many ways to invest in real estate and helpful tips I could offer. I hope you have a better understanding of how to do that after this discussion. Private equity investing has been the domain of the wealthy for far too long. Crowdfunded real estate funds open the door to investment previously unavailable to smaller investors.

    If you’ve always wanted to get into real estate but felt it was out of your league, Fundrise, DiversyFund and other crowdfunded real estate funds open the door of opportunity for you to do just that.

    Is it worth investing in Fundrise?

    With Fundrise as the other big player in the space, you may still be wondering which REIT investment is right for you, albeit my recommendation above.

    Diversification is important when investing, whether in stocks, bonds, or real estate. Keep that in mind when considering real estate funds. They may be an excellent addition to your current investment strategy. With $500 minimum investments for these two funds, you can start small and see how it goes for you. Both funds offer ways to add additional money.

    Is it worth investing in DiversyFund?

    If you have a limited amount of capital to invest in REITs, my recommendation is to stick with the real estate growth strategy offered by DiversyFund as it’s the best one I’ve read about in 2019. You’ll be getting a diversified portfolio of well managed, multi-family properties expected to sell at a price higher than the money invested in the properties and improvements on them.

    The team has vast experience in this space. The DiversyFund team invests predominantly in California-based commercial real estate, and being that the team is based in California, you know they’ll be able to invest on your behalf in what they know best.

    The team doesn’t take profits until investors. They manage every aspect of the process from start to finish. There are no platform fees. There are no gimmicks. It’s just good, sound real estate investing.

    If you’re thinking about adding money to this asset class, you should take a look at DiversyFund.

    Is it worth investing in Fundrise?

    With Fundrise as the other big player in the space, you may still be wondering which REIT investment is right for you, albeit my recommendation above. Again, if you have additional money you’d like to invest, I highly recommend you diversify where you invest. Fundrise is also a great option because it welcomes non-accredited investors from all 50 states and the barrier to entry is fairly low. You only need to invest $500 to create your starter portfolio and Fundrise will invest your money in a diverse set of commercial and residential properties located all across the country. It is definitely worth checking out as well.

    This article was originally published at The Money Mix and used with permission - We have updated this article with the latest information.

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