Fundrise is a fantastic place for novice real estate investors to get some exposure to the real estate sector without ads taking on the risks and hassle of owning a rental property. However, this may also come with the down sides of less leverage assets. So, how leveraged are Fundrise assets?
The leverage that fundrise uses depends on on the type of investment real estate. The highest leverage is used for commercial real estate Investments with a loan to value ratio of 50 to 55%. For residential real estate, Fundrise uses a leverage of around 60% and for developmental real estate there is no leverage used at all.
In this article, we will explore in more detail how fundrise uses leverage and weather the amount of leverage that is used is a a good risk adjusted for you. Also go into detail on comparing an investment in fundrise to leveraging debt to buy your own rental property.
Before we dive deeper into the topic let’s discuss what Fundrise actually is. This is important because the type of investment vehicle called that Fundrise actually offers will determine how this leverage effects your inherent investment risk and has further implications for taxation.
Fundrise is not a real estate syndication. What underlies offers is is for its users to acquire shares in a real estate Investment Trust (REIT). This real estate Investment Trust is a private offering to it’s investors and thus is not publicly traded. This also means that the shares you require when investing in fundrise cannot be sold on the open market and are therefore more iliquid.
FYI: The best way I've found to invest in ETFs is through M1 Finance. It's free and you even get an instant line of credit! Have a look here (link to M1 Finance).
Does Fundrise use debt?
Fundrise uses debt in various ways to finance its investment properties. However, some cases – such as in developmental real estate – there is no debt used at all. When looking at the overall debt that fundrise uses, one important is metric is the loan-to-value ratio.
This ratio determines how much of the underlying asset’s value is being leveraged for a loan. The lower this ratio is is the more leverage is being used to finance the property. When buying an individual property it is often typical how to only have a down payment of 10 to 20% of the property value, thus resulting in a loan to value ratio of 20 to 10%.
NOTE: The easiest way to add diversification to your portfolio is to invest in real estate through Fundrise. You can become private real estate investor without the burden of property management! Check it out here (link to Fundrise).
How leveraged are Fundrise’s assets?
Let’s look at exactly how leveraged fund prices assets are when it comes to the three different real estate categories of residential, commercial and developmental.
- Residential: The residential properties that are acquired by fundrise have an average loan to value ratio of 60%. This can be considered an overall low-leveraged real estate investment.
- Commercial: Commercial real estate Investments on the other hand and most a hire TVL of 50 to 55 percent. However, since leases tend to be a lot longer with commercial real estate this higher-leveraged asset makes sense in the commercial category.
- Development: When it comes to real estate in development, Fundrise uses no debt to finance its Investments.
In edition Fundrise has released the following statement on its website detailing its developmental real estate policy:
“We chose to not place any debt on the assets the funds own directly that are either in development or that we intend to begin development on in the near future. As a result, there is little to no risk of loss from a property lender. Most projects are recently acquired and in pre-development.”
FYI: Another great way to get exposure to the real estate sector is by investing in real estate debt. Groundfloor offers fantastic short-term, high-yield bonds that can add diversification to your portfolio!
Can you use more leverage on individual properties?
When buying an individual investment property the TVL can often be much lower that what you would get from Fundrise. His results typically in higher returns but also in higher risk. With broadly diversified REIT such as Fundrise you will not want to see over-leveraged assets that can cause a domino effect in a bear markets when interest rates rise and asset price fall.
Overall, Fundrise uses moderate to low leverage to finance its investment properties.
Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:
P.S.: The links below are affiliate links, which means I receive a small commission at no extra cost to you when you sign up for one of the services. Thank you for your support!
1)Personal Capital is simply the best tool out there to track your net worth and plan for financial freedom. Just their retirement planner alone has become an invaluable tool to keep myself on track financially. Try it out, it's free!
2) Take a look at M1 Finance, my favorite broker. I love how easy it is to invest and maintain my portfolio with them. I can set up automatic transfers, rebalance my portfolio with one click and even borrow up to 35% of my assets at super low interest rates!
3) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).
4) Groundfloor is another great way to get exposure to the real estate sector by investing in short-term, high-yield real estate debt. Current returns are >10% and you can get started with just $10.
5) If you are interested in startup investing, check out Mainvest. I've started allocating a small amount of assets to invest in and support small businesses. Return targets are between 10-25% and you can start with just $100!
To see all of my most up-to-date recommendations, check out the Recommended Tools section.