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

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.

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.

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.

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

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. 

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.

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.