eREIT vs. REIT: What's the Best Way to Get into Real Estate Investing?

eREIT vs. REIT: What's the Best Way to Get into Real Estate Investing?

Choosing an eREIT vs. REIT depends on your investment goals and priorities, but either can help you get into real estate investing without high costs.

eREIT vs. REIT: What's the Best Way to Get into Real Estate Investing?
Priscilla Thomas

Published Aug 25, 2022Updated Aug 31, 2022

Real Estate

Real Estate

Long Term Growth

Long Term Growth

Passive Income

Passive Income

In the investing world, real estate means stability, growth, and income. And it's a gem of scarcity—we keep finding more uses for land, but that doesn’t mean they’re making more of it. Unless you have the time and money to buy and manage properties on your own, then you're probably investing in real estate through real estate investment trusts, AKA REITs.

If you're looking to diversify your portfolio and get into real estate investing without purchasing a property of your own, you've got options.

Whether you're interested in investing in farmland, retail, or residential properties, there's a REIT for that. Investing in a publicly traded REIT is as simple as purchasing shares in a public company—you could probably do it by accident by walking around with your phone in your pocket and the Public app open.

public
Public

4.8

Stock Trading

But if you're looking for an even easier way to get into real estate investments, then Fundrise's eREITs might be your move. Let's walk through what you need to know about real estate investment trusts and Fundrise to help you decide on eREIT vs. REIT for your real estate investments.

fundrise
Fundrise

5.0

Real Estate

What is a REIT?

A real estate investment trust is a fund that owns, operates, and sometimes develops real estate assets on behalf of its investors. Usually, a REIT will sell shares of the fund, called units, and then use the money from those sales to purchase or develop properties they believe will generate profit for the unit holders.

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Source: moneymade.io/asset/real-estate

With a REIT, you'll get both dividend payments (usually monthly) and the value of your shares, which should appreciate over time. REITs are mostly considered medium to long-term investments. Equity REITs have returned an impressive 10.5% over the past 25 years. 

While there’s no guarantee of future performance, one thing you can count on is that, like the stock market, REITs will continue to fluctuate over smaller time frames. To get those wealth-building returns of the past 25 years, you would have needed to be invested for at least three to five years. Even longer would have been better. 

The main benefit of REITs is that they're a great way to gain exposure to residential and commercial real estate without the headaches of buying and managing property. Data from 1975 through 2015 shows that REITs performed close to housing returns, although they've been more affected by stock market downturns.

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Comparison of US REITs and US housing return, 1975-2015

Source: Federal Reserve Bank of San Francisco

Notable hits to the market, like the Black Monday crash in 1987 and 2001's dot-com bust, clearly took their toll on REITs. And in general, publicly traded REITs are subject to market volatility. But if you can't find the time and money needed to buy and maintain real estate of your own, REITs are a user-friendly way into real estate investing because:

  • They're required to pay out at least 90% of their operating income as dividends, which makes them great passive income investments
  • They're easy to buy because most REITs are available through a regular brokerage—the same account you’d use to buy stocks.
  • They're run by real estate experts with access to market information and tools that would be difficult, if not impossible, for the average investor to access. 

Let's take a closer look at the advantages and drawbacks that come with investing in REITs.

The REITs and wrongs

Pros

Pros

Earn passive income from property without worrying about mortgages, maintenance, or tenants

Pros

You can invest in real estate even if you don't have a lot of money

Pros

Cash out quickly—easier to sell than a house

Cons

Cons

Public REITs are prone to volatility because they're somewhat correlated to the stock market.

Cons

Private REITs are less liquid than public ones—they're mostly considered long-term investments (5+ years)

Cons

No capital gains tax advantage—dividends from your investment in a REIT will be taxed as income

What kinds of REITs are there?

Real estate investments go beyond residential properties, though there are REITs for houses and apartment buildings. Trusts hold all kinds of properties, opening doors to investing in healthcare, shopping malls, and even farmland. Here's a closer look at some of the different categories of REITs you might invest in.

Green acres 

Farmland is a great portfolio diversifier, but buying farmland outright is an expensive undertaking. Fortunately, there are two U.S. farmland REITs: Gladstone Land Corporation (LAND) and Farmland Partners Inc. (FPI). Buying shares in one of these is an investment in the farmland they own and rent.

Since 1970, farmland has increased twenty-fold from $196 per acre to $3800. While this pales in comparison to the S&P 500’s 50x gain in the same period, farmland has fared far better than the S&P in down years (and it's had far fewer of them). 

In 2022 for instance, while the S&P 500 is down over 13%, FPI is up a huge 18% as of August 22nd. While that makes those REITs great ways to gain exposure to farmland, some may find platforms like Farmtogether to be a more convenient way to access the same asset class.

farmtogether
FarmTogether

5.0

Farmland

Meet me at the mall

REITs owned over 500,000 properties across the U.S. in February of 2022, and approximately 24% of REIT investments are in retail properties. Other commercial real estate assets include healthcare and office REITs.

Just like other commercial real estate investments, what makes these REITs appealing are the longer leases on properties, higher returns, and lower turnover costs. While the commercial real estate market is often limited to accredited investors, commercial REITs are available to investors of all levels.

Concreit is a real estate investing app that sells shares for as little as $1, making it easy to access a  diversified commercial real estate investment portfolio.

concreit
Concreit

4.7

Real Estate

Putting the 'more' in 'mortgage'

In addition to property itself, REITs can also provide financing for income-producing real estate through mortgage REITs, or mREITs. These trusts allow investors to fund mortgages and earn money through appreciation and dividends on their investments. 

The FTSE Nareit U.S. Real Estate Indexes list over 30 mREITs in which individuals can invest directly, with a 10.39% dividend yield and a 15.64% return in 2021.

eREIT vs REIT: What's the difference?

eREIT is the proprietary name for a REIT owned and managed by Fundrise. Fundrise is a real estate investing app that uses smart technology to manage all aspects of their funds and properties. Their platform gives investors at all levels access to institutional quality portfolios for a low minimum investment. 

Fundrise is a private platform, so their eREITs are not traded on major stock exchanges. Fundrise claims this removes the premium associated with being a public asset, which would benefit you as an investor. It also means that eREITs are less correlated to the stock market than publicly traded REITs, so they're a better way to hedge against stocks.

Because eREITs are non-traded, there's no public market where you can sell your eREIT shares. Instead, you can redeem your shares with Fundrise once per quarter. It may be possible to sell sooner, but there are no guarantees and may require paying added fees.

To e or not to e

To e or not to e

Are eREITs right for you?

But what about returns? 

Most public REITs have a heavy correlation to the stock market, so they tend to do well when the market does well and perform terribly during years when the market does poorly.

While Fundrise can’t escape the grip of the economy because their funds aren't listed on stock exchanges and don’t trade daily, so they tend to follow their own path. Fundrise's eREITs have managed to beat public REITs almost every year since 2017. They’ve had positive returns consistently, whereas public REITs have had ups and downs.

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Annual returns of Fundrise's client accounts compared to public REITs and stocks, 2017-2022

Source: fundrise.com

Even though Fundrise's eREITs underperformed public REITs in 2019 and 2021, they've done well in other years and are off to a good start in 2022 so far. With a target internal rate of return of 9-12%, a long-term investment in a Fundrise eREIT could help you build wealth over time. 

And Fundrise is accessible to all levels of investors. While some platforms are only open to accredited investors, you can start investing through a Fundrise account for as little as $10. But don't worry if you're looking to invest more—Fundrise will take your money. They offer five different levels of investments, with minimums ranging from $1,000 to $100,000.

Advantages over REITs

Returns on eREIT investments don't consistently outperform those of public REITs, but there are some advantages to investing through Fundrise rather than opting for a traditional publicly traded REIT. 

Goal-based diversification

Fundrise allows investors to put their money into a diversified portfolio based on their investment goals. These include fixed income, value-added, and opportunistic portfolios, each of which can contain nearly 100 different residential and commercial properties. Fundrise manages your investment and can reinvest your dividends based on your goals, whether that puts your money into an income eREIT, a growth eREIT, or a variety pack of real estate investments.

Carefully selected properties 

Fundrise purchases investment-grade real estate with consistent demand and invests in properties that its experts believe will increase in value through focused asset management. Fewer than 1% of the professionally scouted and underwritten deals that Fundrise reviews are accepted, so you can be sure that the experts have given some thought to where your investment ends up. You can finally have a nerd to do your homework for you without having to be a jock. 

Low correlation to the stock market

Nothing is safe when a market sell-off begins, but Fundrise eREITs are different. Because eREITs aren’t listed on the public stock market and don’t trade daily, they aren’t prone to panic selling and radical fluctuations. 

Drawbacks of eREITs

The upsides of eREITs might seem promising, but there are drawbacks to consider, as well. Let's take a look at some of the potential concerns of investing in them. 

Limited liquidity

While it’s great that your eREIT isn't impacted as much by market slumps, the flipside is that you can’t just sell it whenever you want. There's no public market for buying and selling shares in an eREIT, so be sure that you’re only investing money you won’t need for a while (Really, that's just good investing advice.).

Higher fees

Fundrise actively manages all of its properties in-house to add value to those properties over time. But this comes with fees, and those fees are higher on average than those of comparable public REITs. Fundrise charges a flat annual management fee of 0.85% and 0.15% in annual advisory fees, making for a total fee of 1% per year. On the other hand, Charles Schwab's U.S. REIT ETF (SCHH) has an expense ratio of 0.07%.

Underperformance

It’s easy to cherry-pick information to make anything look better or worse than it really is. There’s no getting around the fact that, since its inception in 2012, Fundrise has lagged significantly behind the S&P 500's total returns. And when compared to some of the largest public REITs on the market, it's also fallen short most years.

How to choose between eREIT and REIT

If you're looking to diversify your portfolio and get into real estate investing without purchasing a property of your own, you've got options. Whether you choose a REIT or eREIT depends on your investment goals and needs.

Short-term vs. long-term

Publicly traded REITs are more liquid than non-traded eREITs because it's easier to sell public REIT shares through your brokerage. Private REITs and Fundrise's eREITs offer limited opportunities to exchange your shares. If you choose to invest in an eREIT, be prepared to keep your money in it for several years—Fundrise advises users to look at eREITs as long-term investments. 

Diversified vs. focused

Fundrise's eREITs take a lot of the work off your plate when it comes to investing in real estate. You won't have to research properties and evaluate their potential. The variety of properties in each of Fundrise's portfolios allows for effortless diversification. This means that if you're interested in a specific type of property, then a more focused REIT will be a better fit for your portfolio than one of Fundrise's eREITs. 

Public vs. private

Private investments are usually unavailable to the public and often carry more risk as well as potentially higher rewards. While Fundrise is technically private, many of their funds are available to anyone with $10 and a dream. Since there isn’t special real estate that only private funds can invest in, the underlying assets in those funds are also similar to those found in a public REIT. 

While Fundrise uses the private status of their eREITs to elicit visions of scoring big returns—like those that come from investing in private startups—this marketing doesn't guarantee a bigger payout. At least with a publicly traded REIT, you can easily sell your shares when you want out of the investment.