Fundrise’s newest fund is larger, more liquid, and will be more volatile than the real estate crowdfunding platform’s earlier fund offerings. Here’s what you need to know before investing in the Fundrise Real Estate Interval Fund.
ARTICLE TABLE OF CONTENTS (Skip to Section)
In December 2020, Fundrise launched a new fund that differs from its earlier investment offerings. The new fund is the Fundrise Real Estate Interval Fund.
Fundrise’s First Registered Fund
The Fundrise Real Estate Interval Fund is Fundrise’s first fund registered under the Investment Company Act of 1940—the same act that mutual funds and ETFs register.
Fundrise’s previous funds have not been registered and, as a result, were only available to qualified purchasers. These qualified purchasers had to either be accredited investors or they had to limit their purchase in the funds to less than 10% of their annual income or net worth.
The Fundrise Real Estate Interval Fund will be open to all investors.
Because the Fundrise Interval Fund is registered, it has a prospectus that contains all of the fund’s details, including risks and fees.
Non-registered funds have an offering memorandum or circular instead of a prospectus.
What Is An Interval Fund?
Fundrise Real Estate Interval Fund is registered as a non-diversified, closed-end management company that will operate as an “interval fund.”
An interval fund is a fund that is not listed on an exchange, so there is no secondary market for buying and selling shares like there is for open-end mutual funds or ETFs.
Instead, the interval fund’s sponsor sells shares directly to investors and agrees to repurchase a certain number of shares each quarter.
The Fundrise Real Estate Interval Fund will offer to repurchase between 5% and 25% of the fund’s outstanding shares each quarter at the fund’s net asset value.
The net asset value or NAV is calculated by taking the value of a fund’s assets, including cash, subtracting the liabilities or debts the fund might have, and dividing by the number of shares outstanding.
This repurchase amount is much higher than Fundrise’s earlier fund offerings that limited repurchases in some cases to 1.25% of shares outstanding and charged a penalty if the shareholder redeemed shares within the first few years of investing.
In addition, Fundrise could suspend all share repurchases, like it did in the second quarter of 2020 when there was a great deal of uncertainty regarding the coronavirus pandemic’s impact.
With the Fundrise Real Estate Interval Fund, there will be no penalty for selling shares back to Fundrise and the fund will purchase at least 5% of the outstanding shares each quarter.
Fundrise’s Largest Fund To Date
Another significant difference between the Fundrise Real Estate Interval Fund and the platform’s earlier offerings is the Interval Fund will be ongoing. There is no termination date at which the fund will liquidate its holdings and return capital to shareholders.
The interval fund will also be much larger than Fundrise’s other funds. The Interval Fund will offer up to $1 billion worth of shares to the public.
The Fundrise Real Estate Interval Fund will have a minimum investment of $1,000 and will be treated as a real estate investment trust or REIT for tax purposes.
Funds taxed as REITs don’t pay taxes at the fund level as long as they meet certain criteria, such as distributing at least 90% of taxable income to shareholders.
Because REITs don’t pay taxes at the fund level, they generally have higher distribution yields or dividend yields than funds that are not treated as REITs for tax purposes.
Fundrise Real Estate Interval Fund’s Investments
The objective of the Fundrise Real Estate Interval Fund is to generate current income. Its secondary objective is to seek long-term capital appreciation with low to moderate volatility.
The Interval Fund will invest at least 80% of its net assets “in a diversified portfolio of private real estate and publicly traded real estate–related investments.”
These real estate investments include equity in which Fundrise purchases all, or a portion, of an income–producing real estate property. The fund does not anticipate investing more than 50% of its assets where it owns the entire property.
The Interval can also purchase real estate–related debt as well as real estate–related private equity funds.
A real estate private equity fund is a fund that invests in real estate properties or companies involved in the real estate business.
The Fundrise Real Estate Interval Fund could invest up to 40% of its assets in publicly-traded real estate investments including public REITs; a much higher level than Fundrise’s earlier fund offerings.
The Interval Fund needs a higher allocation to publicly traded securities so that it has more liquid assets that could be sold to meet redemption requests by shareholders.
The Fundrise Interval Fund can borrow up to 33.3% of its assets in an attempt to generate higher returns.
This fund-level debt is separate from property-level debt in which the underlying holdings may have mortgage debt that is secured by the property.
Fundrise’s earlier funds only had debt at the property level.
Fundrise Real Estate Interval Fund Expenses
The Fundrise Real Estate Interval Fund’s annual management fee is 0.85% of the average daily net assets. This fee is similar to the management fee for Fundrise’s earlier offerings and is low compared to many private real estate funds.
The Interval Fund also does not receive a percentage of the profits, known as carry, like many private real estate funds do.
The Fundrise Real Estate Interval Fund differs from Fundrise’s earlier offerings in handling other fund-related expenses, including costs incurred to launch and market the fund.
These organizational expenses, including the management fee, are capped at 2% per year. There is no fund expense cap for Fundrise’s earlier funds.
Some expenses are excluded from the Interval Fund’s 2% operating expense limit including interest expense, property management, and other expenses related to purchasing, servicing, and selling the fund’s portfolio holdings.
Consequently, the overall expenses for the Interval Fund will be higher than 2%.
Fundrise Real Estate Interval Fund Risk
The Fundrise Real Estate Interval Fund prospectus contains a long list of risks related to the fund.
The primary risk is that the fund performs poorly or even loses money because of sub-par investment selections.
Given the diversity of income-generating assets the fund intends to hold, it is unlikely the fund will lose money if held for seven to ten years.
Another risk is the lack of liquidity. Even though the Interval Fund will repurchase more shares on a quarterly basis than earlier fund offerings, investors will still be limited in their ability to exit the fund.
If the risk is measured by volatility, then the Interval Fund will appear riskier than earlier fund offerings because it will hold more publicly traded REIT investments.
Private real estate values don’t fluctuate daily like public REITs because there is a liquid secondary market for trading REITs.
Private real estate prices are adjusted based on appraisals or if there is a sale of the property.
Consequently, private real estate appears to be less volatile than REITs because the private real estate prices aren’t adjusted daily.
Fundrise Real Estate Interval Fund Performance
The Fundrise Real Estate Interval Fund is new, so there is not a performance track record.
This is also a new fund structure that includes a meaningful allocation to public real estate, so public real estate investment returns will heavily influence performance.
Fortunately, Fundrise has been operating funds and investing in real estate for five years, so there is a performance track record for earlier funds that can give us some confidence in the Fundrise management’s teams’ ability to invest in private real estate equity and debt holdings.
The oldest funds offered by Fundrise are the Fundrise Growth eREIT and the Fundrise Income eREIT.
A $10,000 investment in the Growth eREIT made in February 2016 would have grown to over $18,000 by the end of January 2021. That equates to close to a 13% annualized return.
Fundrise Real Estate Interval Fund vs Growth eREIT
- 2021 inception date
- Registered 1940 Act Fund
- Private closed-end interval fund
- 5% quarterly liquidity
- No redemption fee
- No purchase restrictions
- Taxed as REIT
- Up to $1 billion in size
- Unknown portfolio holdings
- 60% to 90% private real estate
- Not more than 50% in whole interests
- $1,000 minimum
- 33.3% entity-level leverage
- 0.85% management fee
- 2.0% operating expenses
- No performance
- 2016 inception date
- Not registered as 40 Act Fund
- Private fund for qualified purchasers
- 1.25% quarterly liquidity
- Up to 3% early redemption penalty
- Expected liquidation 2021-2023
- No more than 10% of annual income or net worth
- Taxed as REIT
- $102 million in equity capital
- 12 known apartment projects
- 100% private real estate
- 83% equity 17% debt
- $1,000 minimum
- 50% to 85% leverage
- 0.85% management fee
- General and offering expenses
- Five-year performance record
A $10,000 investment in the Income eREIT made in December 2015 would have grown to over $15,000 by the end of January 2021. That equates to an 8.5% annualized return.
How to Invest the Fundrise Real Estate Interval Fund
Unfortunately, FundRise no longer allows investors to invest in individual funds without first selecting an investment plan such as Long-Term Growth, Balanced Investing, or Supplemental Income.
Once an investor selects an investment plan, Fundrise will allocate the invested funds across over a dozen of Fundrise’s fund offerings.
Only after this initial investment are investors able to invest directly in a specific fund like the Fundrise Real Estate Interval Fund.
David Stein is the founder of Money For the Rest of Us. Since 2014, he has produced and hosted the Money For the Rest of Us investing podcast. The podcast reaches tens of thousands of listeners per episode and has been nominated for six Plutus Awards. David also leads Money for the Rest of Us Plus, a premium investment education platform that provides professional-grade portfolio tools and training to help individual investors manage their own investment portfolios. He is the author of Money for the Rest of Us: 10 Questions to Master Successful Investing, which was published by McGraw-Hill. Previously, David spent over a decade as an institutional investment advisor and portfolio manager. He was a managing partner at FEG Investment Advisors, a $15 billion investment advisory firm. At FEG, David served as Chief Investment Strategist and Chief Portfolio Strategist.