In “The Rise of Remote Real Estate Investing,” HousingWire describes how online access to nationwide inventory and investing services is helping real estate investors to buy beyond their own backyard.
As the CEO of one national real estate firm noted, “Investors are no longer constrained by state or other geographic borders when it comes to finding the optimal markets and properties for their investing strategy . . . .”
Two of the most popular online platforms for investing in real estate today are Roofstock and Fundrise. In this article, we’ll look at some of the key similarities and differences between the two companies, and how to determine which is right for you depending on your investment strategy and goals.
How Roofstock and Fundrise Work
Roofstock and Fundrise are similar to each other in that both platforms are designed to make investing in income-producing real estate easier.
Roofstock is a good choice if you prefer to own rental property directly, while Fundrise is a crowdfunding platform. Yo
u can participate in large private commercial and residential projects from Fundrise, but instead of owning the property directly, you own shares of the investment entity that owns the property.
Although investment property purchased through Roofstock is owned directly, the majority of investors turn the daily management over to a local property manager.
So how does each company make money?
Investors buying or selling property using the Roofstock platform pay a small, one-time transaction fee. On the other hand, investors using Fundrise can expect to pay recurring annual fees of about 1% of the capital invested, which is more than publicly-traded REITs or index funds charge.
Roofstock is best suited for investors seeking direct ownership of single-family and larger portfolios of residential rental property. Property on Roofstock’s marketplace is purchased directly from the seller, using the same process any other residential transaction would follow, with Roofstock acting as the facilitator.
However, unlike a regular real estate transaction, the rental properties on Roofstock are certified and come with a 30-day money-back guarantee.
In addition, Roofstock helps buyers do better due diligence by vetting property markets and assigning ratings to each neighborhood, using key factors such as neighborhood, school district, and crime rate.
After the transaction, Roofstock can introduce buyers to pre-screened local property managers who handle the daily management and maintenance of the property, making it much easier to invest in real estate long distance.
The fee structure on Roofstock is similar to buying or selling property through a real estate agent, although at a much lower cost:
- Sellers pay a 3% fee of the sale price or $2,500 (whichever is greater)
- Buyers pay a fee equal to 0.5% of the purchase price, or $500 (whichever is greater)
- No recurring fees are paid to Roofstock after the initial sales transaction
After the rental property is purchased through Roofstock, investors are responsible for the traditional recurring expenses of owning rental property:
- Mortgage (if the property is financed)
- Property taxes
- Property insurance
- Maintenance and repairs
- Property management fees (if using a property manager)
Generally, incoming cash flow from the tenant rent payments can cover these expenses, unless the property is vacant during a tenant turnover period.
Investors can research available property, negotiate with the seller, and purchase pre-inspected rental property on Roofstock. Research is made easy with pictures and street views, floor plans, property inspection reports, current tenant lease information, and tenant payment history.
Available properties can be searched for using key metrics including:
- List price
- Neighborhood rating
- Minimal repairs
- 2-4 units
- 1% rule
- Best schools
- Higher appreciation
- Price reduced
- Higher yield
- Gross yield
- Cap rate
- Annual appreciation
- Monthly rent
- Large deal flow of several hundred transactions per month
- Available to non-accredited investors
- Easy way to passively invest in long-distance real estate in major, secondary, and tertiary markets across the U.S.
- Single-family houses, small multi-family homes, and entire portfolios of residential rental property are available for purchase
- Cash flow begins immediately with property that has been pre-inspected and is already leased to qualified tenants
- 100% direct ownership of the property with no limitation on how or when the property can be sold
- Due diligence can be easier with single-family houses and small multifamily buildings versus more complex commercial real estate buildings or development projects
- Low one-time transaction fees, vetted local property managers, and fast closings that are facilitated by Roofstock
- Liquidity of the real estate investment is increased because a secondary market for rental properties is always available, and investors can re-sell using the Roofstock platform if they choose to do so
- Retirement accounts and 1031 exchanges may be used to invest in property through the Roofstock platform
- High minimum investment needed to make a down payment if financing the purchase or paying for the property in all cash
- Additional capital may be required after the initial purchase for maintenance, repairs, and capital improvements
- Real estate is a long-term investment that is illiquid, meaning that it can take time to sell if money is needed for other uses
Fundrise is a good consideration for investors who are seeking a crowdfunding approach to real estate investing. Investments are made in private commercial and residential properties by pooling capital with other investors on the Fundrise platform.
The main investment products on Fundrise are eREITs and eFUNDs:
- eREIT invests in debt and equity real estate opportunities that match the specific goal of the eREIT, such as consistent cash flow or long-term growth
- eFund allows investors to invest directly in a diversified portfolio of for-sale housing in high-growth neighborhoods in major U.S. metro areas
Shares in an eREIT or eFUND are purchased by buying one of four Fundrise portfolios: Starter, Supplemental Income, Balanced Investing, or Long-Term Growth. Fundrise selects the underlying properties in each portfolio, and determines the balance of eREITs and eFUNDs in each portfolio.
The fee structure at Fundrise in many ways is similar to the expense ratio of an ETF or the costs of a traditional index fund:
- 0.15% in annual advisory fees for Fundrise managing your account
- 0.85% in annual management fees for real estate funds, eREITs, and eFUNDs
- eFUNDs have a potential development fee of up to 5% of the total development costs (excluding the land) and a potential disposition fee of 1.5% of the net proceeds when an eFUND sells a property
- $125 annual asset fee paid to Millennium Trust Company if you invest with an IRA
- 3% maximum early redemption fee
Investors should also note that Fundrise states it may suspend redemptions during periods of extreme economic uncertainty in order to protect the entire Fundrise investor community.
Fundrise offers four account levels for investors, although investing in an eREIT is limited to holders of core, advanced, or premiums accounts while eFUND investors must have an advanced or premium account:
- Starter - $500
- Core - $1,000
- Advanced - $10,000
- Premium - $100,000
- Low minimum investment of only $500
- Available to non-accredited investors
- Allows small investors access to large private real estate investments
- Quarterly dividend payments from rental income can be reinvested with Fundrise using a dividend reinvestment plan
- Larger number of investment options with core accounts or higher
- Portfolios are focused on income-producing rental properties or growth-oriented real estate development projects
- 100% passive investment
- Retirement accounts may be used to invest with Fundrise
- Total fees can be higher than investing in a publicly traded ETF or mutual fund
- Complex investments that may require more due diligence
- Fundrise investment products such as eREITs and eFUNDs can only be bought and sold using the Fundrise platform, making them highly illiquid
- Early redemption fees of up to 3% for selling before the end of the stated timeline
- Redemptions may be frozen by Fundrise at its sole discretion during periods of extreme economic uncertainty
Self-Directed IRA: Roofstock vs. Fundrise
A self-directed IRA offers the same retirement savings tax benefits as a traditional IRA or 401(k), but also allows a wider variety of investments such as precious metals, tax lien certificates, private placements, and residential and commercial real estate.
According to the most recent research by the Federal Reserve, retirement plan balances for families in the top half of the country’s income bracket range from about $237,000 to over $641,000. That’s a lot of money to leave in the hands of “too big to fail” banks and brokerage firms that may not have your best interests in mind.
With the stock market becoming increasingly unpredictable, a growing number of people are using self-directed IRAs as a way to diversify retirement portfolios into real property, especially since real estate can act as a hedge against stock market volatility.
In this section, we’ll look at the benefits of using a self-directed IRA to invest in real estate using Roofstock and Fundrise.
Roofstock Self-Directed IRA
Roofstock partners with Advanta to provide investors with an integrated way to buy and hold real estate in an IRA. You can open a new account, transfer or rollover funds from your existing IRA or a 401(k).
Opening a self-directed IRA with Roofstock and New Direction Trust Company is done in three easy steps:
- Open and fund your IRA with Advanta, or rollover or transfer an existing IRA or 401(k).
- Find preferred property on the Roofstock marketplace using Roofstock’s intuitive financial calculator to assess the best properties that meet your investing guidelines.
- Purchase just one property or an entire portfolio of income-producing properties to diversify your retirement savings and investment strategy.
More information about a self-directed IRA from Roofstock can be found at https://www.advantaira.com/partners/roofstock/
Fundrise Self-Directed IRA
Fundrise works with Millennium Trust Company to allow IRA funds to be invested in diversified commercial real estate investments. According to Fundrise, Millennium was chosen as the firm’s self-directed IRA partners because of their low fees and best technology integration.
Currently, IRA accounts are only eligible to invest in an eREIT product from Fundrise. There are over 15 eREIT investment options, including portfolios focused on growth and income, and several regionally focused eREITs. Investment minimums typically begin at $1,000 and offer quarterly redemptions, ultra-low fees when compared to traditional REITs, and “direct-to-investor” online distributions.
More information about a self-directed IRA from Fundrise can be found at https://fundrise.com/ira
Roofstock or Fundrise: How to Decide?
While both Roofstock and Fundrise aim to make passive real estate investing easier, they go about it in two different ways.
Since you directly own the real estate purchased through the Roofstock platform, more money is required to invest. Many investors see a big advantage to direct ownership because the property and income streams are not being shared with other people.
Roofstock also makes long-distance real estate investing easy, by providing you with a way to invest in smaller markets where prices may be lower and returns higher, while a vetted property manager takes care of the property for you.
Fundrise is a good option for people who prefer real estate crowdfunding investments. The company operates similarly to a private REIT, which has its advantages and disadvantages.
On the plus side, an investor can spend as little as $500 to gain access to sophisticated commercial and residential projects. However, while the barrier to entry is lower on Fundrise, investments are also much less liquid because they can only be bought and sold on the Fundrise platform.
For people who want direct control over income-producing rental property that is easy to understand - such as single-family rentals – Roofstock can be the preferred choice. Investors who want a quick and easy way of diversifying their portfolio may opt for placing money in a Fundrise portfolio, even though the level of ownership will be much lower.