Exclusive Q&A With Fundrise COO: eREITs, Explained
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Last week, for the third time in just as many tries, crowdfunding platform Fundrise sold out its "eREIT," this time in eight minutes, leaving hungry, waitlisted buyers unable to cop the hot investment.
Despite the crazy demand, it's still a bit unclear exactly what the eREIT is. We sat down with Fundrise COO Brandon Jenkins to get the ultimate breakdown on the new investment vehicle. Here's the eREIT, explained.
Bisnow: You guys sold out on your eREIT…again. There's no historical reference, no guarantees. Why are people loving this so much?
Brandon Jenkins: I think that people are loving it because, first and foremost, it's really access to investment that the vast majority of people don't have access to, a diversified real estate portfolio. If you look at the underlying assets, the cash flow streams of those assets are 10%, 12% maybe 14%—just looking at that, that’s just not something that the average person has access to, and certainly not at a $1k minimum. So they’re very easy and excited to take advantage of that.
Bisnow: Aren't people concerned about historical track records of the investment?
Brandon Jenkins: I agree people tend to look for a track record, and obviously we can’t say there are any historical returns because the eREIT is brand-new. But, I think the other thing that people appreciate is that we structure it in a way where we hold ourselves accountable to the investors. If people look at the deal, we’re not making any money on running this REIT for them unless they make money first. Our fees are minuscule, 1%, and we all get them if we’re making good returns. So I think investors are saying this is exciting, it's something new, I can do it on a low minimum, and the guys who are running it aren’t making any money unless we are so at least our interests are aligned.
Bisnow: Why are the investments only for $1M at a time? Why not $2M, $10M?
Brandon Jenkins: The short answer is we’re seeing it sell so rapidly with so many individuals that there’s just a logistical challenge of taking in that many people at one time. The last one was a few hundred people in eight minutes, and with each one we have to see that they’re real people who’ve given us real, accurate bank account info. There’s a lot of processing that has to go on. We have to make sure that the system and the team here doesn’t get overwhelmed.
The whole point is to keep it low-cost to the investors. In theory, you could have tons of overhead, charge more money, and take in all $50M on the first day, but that’s not the way to get these investors the returns they’re looking for. So keeping the overhead down and the fees low is crucial. Unfortunately with that level of demand, this is one of the side effects right now. $1M from a few hundred people in eight minutes, even that was something we couldn't have predicted when we launched this thing. I think there was a lot of pent-up demand from what we were providing. I think we’ll start taking more at a time, maybe more frequently as we’re seeing demand grow and try to meet it.
Bisnow: Why should an investor go for the eREIT over a standard NYSE-traded REIT?
Brandon Jenkins: There’s a couple different reasons. One is that publicly traded REITs tend to be heavily correlated to the stock market. The price of your REIT share goes up and down depending on the stock market. Meanwhile the underlying real estate assets are taking in the same rent. So all of a sudden you’re getting this sort of volatility in your real estate that doesn’t have anything to do with the real estate, just the winds of the stock market. You don't have that with the eREIT.
A second reason is basically that there is a liquidity premium that gets attributed to public-listed REITs. Because you can sell the stock at any time on the stock exchange, there’s a premium people will pay for that. If you look at most publicly listed big REITs, their dividends are around 4% to 6%. Our historical performance on the types of deal we’re doing was 13% last year. If you aren’t looking for an investment that you want to buy and sell the next day, but more of a long-term investment, by investing in the eREIT you’re getting the same access without having to pay the liquidity premium that comes with the publicly listed stock.
The third reason is that you’re buying directly from the REIT, whereas if you’re buying from the stock exchange you’re going through at least one middleman. And if you're going through a broker, you’re buying through multiple middlemen. The eREIT's a wholesale model; it’s buying direct, and like all wholesale, the lower cost gets passed on to the investor.
Bisnow: Speaking of liquidity and redemptions: Stocks have daily liquidity. You guys do quarterly, according to the website. How does this work in practice?
Brandon Jenkins: So we do quarterly redemptions, which means that if investors elect, they can choose to sell their shares back to the REIT, where the REIT is buying those shares back from the investor.
Bisnow: As a whole, where do you see this investment type going; is it a stand-alone product or could it trigger a brand-new industry within commercial real estate?
Brandon Jenkins: I think eREITs are kind of a model for how real estate will be financed, and they are a model for how the average individual will invest in real estate. A year from now, two years from now, and the word eREIT will be like the word ETF is now, it'll just be the way that the average person basically gets diversified exposure to real estate investments. Maybe you’ll have an eTrade portfolio and a bunch of Vanguard ETFs, and then you’ll have a bunch of eREITs, creating more diversification in the average person’s portfolio.