Fintech Interviews: A New Generation of REITs

Many investors don’t invest in real estate because they don’t understand it. Fundrise, an online real estate investment platform, is hoping to change that. We spoke with Brandon Jenkins, Fundrise COO, about how his company is making real estate investing approachable and accessible for everyday investors.

This interview has been condensed for clarity. If you work at or own a fintech startup and are interested in contributing, tweet us @ValuePenguin.

Tell me about coming from a traditional real estate background to helping create Fundrise.

Brandon Jenkins - COO of Fundrise

Being in the real estate investment world, I was seeing people buying buildings, being very successful and making a lot of money. It also gave me a clear understanding that if you’re buying and selling buildings that are (worth) tens of millions of dollars, the number of people who can afford to make that type of investment is extremely low. Initially, I was trying to think, “How can I become more involved in this? How would I get started investing in deals myself?” And then from there, “Why can’t more people invest in real estate deals? Why isn’t there a way to do this?”

At Fundrise, we view ourselves as taking this large, and traditionally very profitable investment asset, and trying to make it accessible to the average individual in a way that is simple and efficient, but also digestible and understandable to someone who isn’t a real estate or finance professional and doesn’t necessarily have a professional investor’s knowledge.

How are Fundrise eREITs different from other REITs (Real Estate Investment Trusts)?

There are three key differences. First, we are different from publicly-traded REITs… those REITs tend to be heavily correlated with the broader stock market. As the market goes up and down -- based on the millions of different factors that make the stock market fluctuate on a daily basis -- (the) value (of your investment) and the share of the REIT are going to fluctuate with it. That is true regardless of whether or not the underlying real estate assets that the REIT owns actually change in value.

What is the second difference?

Our fee model. Because we’re not publicly traded, we’re much closer to what is traditionally thought of as a non-traded REIT. Your traditional non-traded REIT is going to have anywhere from a 12-20% fee load. If you’re an investor and you invest $100, only maybe $85 are actually going into the assets; the other $15 are basically going into the pockets of the brokers and the managers who are transacting that. At Fundrise, there are no up-front sales fees or commissions of any kind, and the ongoing asset management fee is 1%.

And the third difference?

This is the one that can be the most difficult for people to understand: that if you invest in a Fundrise eREIT you are buying it directly from the issuer. You aren’t going to a middleman to facilitate that transaction. If you go on E*TRADE and buy shares of a REIT that is traded on the New York Stock Exchange, you’re going to a broker and you’re paying him to purchase that for you from an exchange. If you go to Fundrise and invest in an eREIT, you’re going direct. You, as the investor, are directly transacting with the eREIT itself. That’s a core difference in how we do business and how we raise money. That efficiency is, by and large, one of the ways we’re able to dramatically reduce the amount of fees we’re charging investors.

Since Fundrise acts as a non-traded or private REIT, are there different risks than those associated with a publicly-traded REIT?

Yes, the big difference is that with a publicly-traded REIT you have constant liquidity. You can sell your shares back to the market at any point in time, and that’s one of the big benefits of a publicly-traded REIT. But that liquidity generally carries a premium. Because you can sell it back to the market at any time, people will accept a lower return. Fundrise eREITs are not publicly traded, so they’re long-term investments. The benefit of that is you’re not going to see the same premium, so the returns may be higher. The risk, or downside to that, is that it does become a long-term investment, and your liquidity is tied more to the liquidity of the actual assets in the eREIT itself or the eREIT as a whole. You may have to be invested for as long as the REIT is invested in the assets. If you’re someone who wants constant access to liquidity and are willing to accept a lower return, then a publicly-traded REIT is going to be a better option than investing in an eREIT through Fundrise.

Editor’s note: Non-traded REITs are less liquid than publicly-traded REITs. If many investors decide to sell their shares back to the REIT and the REIT does not have enough cash on hand, the REIT will sell assets to pay the investors, similar to a mutual fund. This can take a significant amount of time, especially in real estate.

What are some factors that make a quality real estate investment for Fundrise?

Real estate is first and foremost a long-term growth investment. If you’re going to invest in a market, whether you buy an apartment in D.C. or an office building in Seattle, there has to be a reason why you believe there will be growth in that marketplace and in the demand for that asset. We look for areas where there is real job growth and other positive demographic indicators. The other thing we focus on is value. If you buy or develop an asset, you don’t want to be the one who paid the most for it, because if prices go down, the person who’s going to be hit the worst is probably the one who paid the most. We want to buy things for less than it cost to build them or below where other people buy them, because that gives us some buffer.

The other biggest focus of ours is that, in all the deals we do, we partner with the top real estate companies. We’re in the business of building, operating and managing real estate, so we work with people who have significant experience doing that and work with the top groups in the country. They’ve built, owned and managed real estate for decades. They’ve been through downturns. They’ve seen deals go bad, and they’ve shown over that time period that they’re great operators. Good operators are what make the difference when things don’t go according to plan. If you add up all those things -- these are some of the primary ways we take the measure of what’s a good investment.

How many investors do you have? What are they like?

We have around 7,000 investors. One of the most interesting things about our investor base is the variety. It shows the power of the internet and opening up this platform to everyone. We have young millennials who are tech-savvy. We also have individuals in their 70s and 80s who are retirees. We have investors from all 50 states, age ranges, ranges in net worth and income and careers.

With that said, a typical investor is probably a professional in their 30s -- doctors, lawyers, accountants, software engineers -- who is at the point in their life where they have a pretty good portfolio of stocks and bonds, they’re looking to diversify into another asset and they’re looking for more cash flow. Most of our investors are people who are thinking about it as a long-term investment. They’re thinking about whether this something they’re going to do for five, 10 or more years. It’s a good addition to the other investments that they already own.

How has the real estate market changed since Fundrise started, and how do you see it changing in the near future?

When we started Fundrise, the real estate markets were starting to come back from the collapse of 2008. People were tentative and nervous about making large purchases of new real estate deals. But people were also waking up to the re-urbanization trend that was sweeping across many major cities. That was something that we picked up on very early, and it drove a lot of the strong investments that we made in 2012 and 2013. Over the last 12 months, we’ve seen the market go from being in a strong rebound to starting to get very hot, for lack of a better term. Prices are now starting to exceed where they were pre-recession. You have assets that are changing hands in less than 12 months, and you’re seeing huge profits being taken by people.

We are definitely cautious at this point. There are plenty of good investments to be had, but we see the markets today as being near their peak in terms of pricing. It means we have to be that much more diligent and patient with finding quality opportunities and looking for value, where you have the right fundamentals in the deal. Investments with strong demand in the market that indicate there’s going to be growth, assets with cash flow, being bought for below-replacement costs or things like that -- all of the marks of a good real estate investment -- those haven’t really changed; they’re just harder to find in today’s market.

Are you worried about another housing bubble bursting anytime soon or in the next few years?

We’re seeing that as prices grow, there are people who are making investments that we don’t believe are going to pan out the way they think. From our perspective, it makes it more challenging to find good investments. There are fewer good investments that we’re able to acquire than we have demand for. That’s a downside for us: we have a lot more people who want to be investing (with us) than we find quality investments or have the ability to service at the moment, which means there is pent-up demand in our investor base. If we are fearful of anything, it’s that if there is a slow-down in the market, you’ll see a lot of people and groups losing money. That kind of sentiment can trickle down throughout the entire industry. For us, we’re focused on being diligent, disciplined and making sure that we’re looking for the right things. We are looking to protect our investors’ money -- that’s first and foremost.

Madison is a former Research Analyst at ValuePenguin who focused on student loans and personal loans. She graduated from the University of Rochester with a B.A. in Financial Economics with a double minor in Business and Psychology.