The cornerstone of healthy finances is having a good spending plan, aka “budget.” But you can’t grow your wealth solely through smart spending and frugal habits. If you want to build a secure financial future, it’s crucial to invest.
That doesn’t necessarily mean playing the stock market or stockpiling gold, though. “Alternative” investment platforms can also provide steady growth. One such alternative option is the real estate investment trust or REIT. Created in 1960 by Congress, these trusts allow individuals to buy into diversified real estate portfolios.
Why buy a REIT? They’re less volatile than a typical stock, and REITs tend to pay large dividends. In fact, REITs are required to pay 90% of their taxable income out to the investors. No wonder they’re a big favorite among people who want a steady income stream.
Unfortunately, the typical REIT has been open only to “accredited” investors, i.e., those with a net worth of more than $1 million (minus home value) or income of at least $200,000 annually ($300,000 for couples). In other words, people who are willing – and able – to invest large sums without worry.
Times are changing, though. “Crowdfunded real estate investment sites” are a new type of REIT, one which accepts non-accredited investors. One such company is DiversyFund, which lets you invest like the 1% for as little as $500.
That’s the reason CEO Craig Cecilio started laying the groundwork for DiversyFund back in 2016. (The SEC qualified the company in 2018.) In an interview with Fred Leamnson of The Money Mix, he said he wanted to “democratize” the industry.
“I didn’t understand why wealth-building opportunities were exclusive to the already wealthy,” Cecilio said.
Does that mean a REIT is right for you? Let’s find out.
DiversyFund: How it Works
The DiversyFund Growth REIT focuses solely on multifamily apartment buildings. The company “invests” by buying up complexes that are inefficiently managed and/or need some refurbishing. But because the units are already rented, the trust is earning even as it’s spending to renovate.
Once the buildings are upgraded and management issues have been corrected, they are worth more (a concept known as “forced appreciation”). DiversyFund monitors the commercial real estate market and sells the buildings when their value is highest (“natural appreciation”).
The profits go back into the trust and are used to buy more apartment buildings, to build more value, to earn more profits. Call it “the great cycle of REIT.” After five years, the investors get their returns. Because there are no platform fees, ever, this means more cash back to you.
That is if the REIT performs as hoped. As with most forms of investing, there are no guarantees.
The Pros of Investing with DiversyFund
The key is accessibility: You don’t have to be one of the 1% to invest in a REIT.
Cecilio himself didn’t come from money: His father worked in retail, and his mother was a teacher. The founder grew up hearing his dad talk about opportunities that rich people had, but working-class people couldn’t get near.
In an interview with Your Money Geek, the founder said his goal for DiversyFund is to “make it easier to go up the wealth ladder.”
That means it’s particularly accessible to women and some minority investors, who tend to earn less than men. For example, women’s earnings are 82% of men’s, according to the U.S. Bureau of Labor Statistics, and black and Hispanic workers earn as much as 43% less than whites and Asians.
(Not-so-fun fact: Only 16% of financial advisors are female, and women make up only 23% of the certified financial planner profession. Latinxs and African-Americans comprise just 3.5% of the certified financial planner profession in this country.)
Financial service companies have tended to market to the easiest, lowest-cost demographic, Cecilio said: “A white male between 35 and 55.” Reaching out to women and minorities hasn’t been a priority, which he calls “a barrier to entry” for those groups when it comes to investing.
“We want to get the information out there to everyone,” he says.
In addition to the low initial buy-in, DiversyFund has another kind of accessibility: the anonymity of the Internet. You don’t have to make an appointment with an investment advisor or go into a bank and talk to a wealth-building expert. Some people are intimidated by that kind of interaction. But DiversyFund’s online-only setup has no preconceived notions about what a client should look like.
“Does the website ask you what race you are, what gender you are, what’s your net worth? It doesn’t. It’s not going to discriminate against you,” Cecilio said.
Other advantages of DiversyFund:
- It’s open to all U.S. residents aged 18 and over.
- You can invest online in as little as five minutes.
- No real-estate experience is needed.
- As a passive landlord, you’ll never have to call a plumber or run background checks on your tenants.
The Cons of Investing with DiversyFund
Your Money Geek is not trying to blow smoke here! DiversyFund is very cool, but it is by no means an instant income-producer that’s 100% guaranteed. Keep the following points in mind when determining whether it’s a good fit for you.
Your money is locked in. As noted above, the DiversyFund Growth REIT has a five-year term. If you put in $1,000 and then suddenly needed the money back, you wouldn’t be able to get it until the end of the term. (Quick aside: Never invest in anything to the point where you have no cash assets!)
Potential risk. Banks and credit unions are insured against loss. Like stocks and other investment options, DiversyFund is not guaranteed.
New model, no history. This kind of REIT is still young. No one knows how it might perform in the event of a serious real estate decline.
If you truly want to build wealth, you can’t do it without investing. Otherwise, the numbers simply aren’t there, given low-interest rates on savings accounts and CDs. Even though some online banks are disrupting things, we’re talking about current interest rates of under 2% – not exactly a quick road to riches.
Some people are disillusioned with stocks, or wary of getting into the market. Other investing options, such as private equity or tax lien certificates, require major expertise (and major moola). Typical real estate investing can be quite lucrative, but it takes a lot of work to be a landlord or a flipper.
No one’s suggesting you put your life savings into REITs (or stocks, or anything else). But when it comes to investing, you must be willing to assume some level of risk for the possibility of reward. Only you can determine how much risk is too much risk.
Some people don’t want any risk at all, which means their money remains in low-interest accounts. That’s their prerogative – but it also pretty much guarantees very low returns.
Thanks to sites like Vanguard, you can start investing in a relatively small way. And now, with DiversyFund, you can become part of a REIT without needing to hand over hundreds of thousands of dollars.
After all, investing doesn’t mean putting all your eggs in one basket. If you’d like to diversify your money plan, DiversyFund is a simple, inexpensive way to do that.
And if you haven’t started investing yet? Just $500 could get you started on building your financial future. That savings account is fine for your emergency fund and some liquid cash, but it will take more than that to ensure a comfortable financial future.
FundRise vs. DiversyFund
Both FundRise and DiversyFund are crowdfunded real estate funds. Crowdfunding provides a way for investors with smaller amounts of money to invest in things commonly only available to the wealthy. It's been a disruptive force in the investment and small business communities. It offers a method of fundraising that can bypass big banks with high rates and fees. In the end, the winners are we consumers. In crowdfunded real estate, non-accredited investors can play in the same playground as the big boys.
With that background, let me tell you about DiversyFund.
DiversyFund Fee Structure
What makes DiversyFund unique is its platform structure. Platform means the arrangement under which the fund raises money, purchases the assets, distributed profits, etc. Many private equity funds hire outside firms to do everything from researching and buying properties to raising money from investors. Every outside entity used for these things has a cost to it. The more outside resources a firm uses, the higher the costs.
DiversyFund is a vertically integrated platform. They do everything in-house. Their team looks for the properties, analyzes them for value, cash-flow, and growth. They buy properties that need upgrades. They handle upgrades as well. Once purchased, they manage the properties themselves. Investors don't pay brokerage or middle-man fees.
Their website says they are the only real estate fund with no platform fees. I haven't personally found another one making that claim. Though management and platform fees have dropped, most REITs still have fees. Fees add up and can reduce investor returns. Keeping them low is one of the keys to success.
DiversyFund has that covered.
Fundrise fee structure
Fundrise lists its platform fees (Fundrise eDirect) at 1% as follows:
Investment advisor fee – 0.15%
Asset management fee – 0.85%
Additional acquisition fees range from 0% – 2%.
Even at 3%, the Fundrise fees are far below what the traditional private equity fund fees opened to accredited investors charge. Though fees have been reduced from the two and twenty, fees of 1% of assets and 15% of profits are common. Many of these firms can get very creative with their fees.
Crowdfunded platforms like Fundrise and DiversyFund and others are far more transparent with their fees. As you can see, they are much lower than most accreditor investment funds on the market.
Like with publicly-traded REITs, private equity funds can invest in many different types of real estate. Some funds concentrate on commercial properties like small strip shopping centers. Others may focus on residential real estate from single-family homes to multi-unit family housing (apartments). Others invest in downtown commercial office space.
Before investing in anything, investors should always know what you're getting. That's especially important in real estate. Property location, the type of property, the lease structures, and many other things help determine the return investors receive.
Below I'll outline the investments Fundrise and DiversyFund make.
At DiversyFund, they keep things simple. The team believes (and historical returns confirm) that the safest and best performing commercial real estate investments are value-add multi-family units. According to Wikipedia, multi-family units are “multiple separate housing units for residential inhabitants are contained within one building or several buildings within one complex. Units can be next to each other (side-by-side units), or stacked on top of each other (top and bottom units).”
Let's break this down and see why this matters to investors.
Apartments, townhouses, and the like are more affordable housing than single-family homes in most areas. When the team at DiversyFund researches properties, they look for two important things.
First, the area has to be in an economically growing market. Second, the properties they purchase must be cash-flowing. In other words, they have to be already making money for the owners.
The third part of the decision is where the value-add strategy comes into play. They buy properties that need some improvement. I don't mean foreclosures or rebuilds. Maybe the units need to be modernized. Perhaps they need some exterior cosmetic enhancements. These improvements allow the fund to increase rents, which increases cash flow, and increases the potential for higher growth in the value of the properties.
The goal of the fund is simple – sell the properties at a highly appreciated price over what they paid for the property and any improvements made — having this as the only focus allows them to focus on the properties that meet these criteria.
They are not trying to be all things to all people. Investors in their fund should be looking for long term capital appreciation.
The Fundrise platform offers three core plans as follows:
The goal of the supplemental income fund, as the name suggests, is to produce income. The fund pays out quarterly dividends and invests in income-producing properties. The primary fund investments are in debt real estate assets (real estate loans).
The balanced fund's goal is to offer a blend of both income and growth. To do that, they invest in both debt and equity real estate assets.
Long term growth
Dividends and income are not a goal of the long term growth portfolio. Managers are looking for properties to appreciate during the holding period. They don't invest in debt assets. They only buy hard assets.
Here is a detailed comparison of the three strategies showing the mix of debt vs. equity and the expected returns of each.
What about liquidity?
Any investments in stocks are real estate should be for the long-term. You should not invest if you need your money in the next year or two. Unlike publicly-traded REITs, Fundrise and DiversyFund are private funds. Money invested in them is not liquid. In other words, if you want to get money out before properties get sold or the fund closes, there are restrictions.
Because of the long-term nature of their investments, DiversyFund does not offer liquidity to investors before they sell their properties. High-income and high net-worth investors build wealth by owning and selling properties at a profit. That's the DiversyFund strategy.
An investor who wants an income from their investments should not invest in DiverfyFund. That is not the goal. Investors in this fund need to understand the value of long-term growth on your investments.
Some investors may look at this as a disadvantage I do not. The folks at DiversyFund know who they are and what they want from their real estate. They are not trying to be all things to all people. I like that too. They know who they are and stay true to their strategy.
Fundrise investments state that their investment time frame for offerings is five years. They offer no guarantee that they will liquidate in the five years. Investors receive quarterly dividends. Invested capital and capital gains come with the sale of properties.
Investors can take dividends and capital gains in cash or reinvest them.
Like any investment, crowdfunded real estate has risks. No fund offers guarantees investors will get the results of the past or the expected returns going forward. Nor is there a guarantee investors won't lose money. There are economic risks in real estate investing. In a slowing economy and bad job market, tenants may not be able to pay their rents. The value of the properties may not appreciate as expected.
Every investor should take into consideration the risks of this or any other investment they make. A general investment principle is this – the higher the expected return of the investment, the higher its expected risk. In other words, risk and return are related.
Accredited investors tend to have higher amounts of money invested in real estate. Why? They can afford to take more risks.
Smaller investors should carefully consider how much they put into real estate, whether publicly-traded REITs or private equity funds like Fundrise and DiversyFund.
Reddit bills itself as the “front page of the internet.”
If you have spent any time on Reddit, you would think a more fitting moniker would be “the internets judge, jury, and executioner.”
Redditors often are being brutally honest and researching items ad nauseam. Anyone with a product to pitch hopes to do well on the site, however, it's not easy or for the faint of heart.
Reddit is where bad ideas get murdered, good ideas get pummeled, and even great ideas end up looking like they did a few rounds with Ivan Drago (Rocky IV)
To get the low down, on the showdown between these two crowdsourced REITs, I decided to put the internet's front-page super sleuths to the test to which fund is worthy of an investment.
DiversyFund Vs. Fundrise Reddit Showdown
Apollo Creed: Fundrise
Searching Reddit for Fundrise reviews, I was able to uncover several threads. Fundrise is the more widely known of the two. Considering Redditt's reputation for tearing data apart, the responses are generally positive. The reactions on Reddit ranged from a discussion of actual performance to alternatives such as investing in Vanguard. (Redditors love of Vanguard is cult-like)
When it comes to the analysis of return, you should remain extremely cautious, and most likely outright ignore them. It's a bad idea to trust strangers on the internet with unknown credentials or experience. Always do your due diligence, you don't want to end up like Rocky in Rocky V.
If you missed Rocky V, Paulie gave an accountant complete control over all of Rocky lost his wealth in lousy investment deals.
Back to Reddit
Digging around the Reddit responses, it seems that Fundrise is generally considered an investment for passive income. Reviewing their website, I see that they list three funds, one of which is a growth-oriented fund. However, even their growth offering still appears to be more of a blended portfolio.
There is nothing wrong with investing for income. However, as a business owner and someone actively saving for retirement, it's hard to get excited about income-producing investments.
Considering the level of risk, the disclosed fees, taxes, and expected ROI of the properties, Fundrise has listed on their site; I can't help but think if one has a modest amount to save, they might find a better and safer ROI someplace else.
Fundrise has a minimum investment of just $500, and I question if you would be better spending (investing) that $500 on reducing your expenses, improving your career earning potential, or even launching a side hustle.
It's a decision only you can answer for yourself.
Since I am a serial side-hustler and have a passive income stream with my solar PV system, the prospects of Fundrise do not excite me.
But that's just me. Everyone has to decide for themselves what works best.
Between the two funds, DiversyFund has some similarities with Rocky in the first movie; both are up and coming stars looking for a chance to prove themselves.
DiversyFund is a newer fund, and are making private placements available to the working class and those who have historically been ignored by investment firms.
Since they just recently launched their offering with a $500 minimum investment, a Reddit search turns up little in the way of results. One of those results is from a fellow contributor at The Money Mix as news circulates about the new offering, we can expect a more detailed analysis from Redditors.
Review the online literature about DiversyFund; it is clear they are a more growth-focused fund. They do not pay out dividends to investors. Instead, they reinvest them back into the REIT.
Additionally, they do not charge a yearly asset fee like Fundrise. Instead, they get paid from the gains (if any) of the real estate when it sells.
If like me, you're looking for a more growth-focused opportunity, DiversyFund appears to be a better solution. However, as a new entrant into space, they do not have the historical returns to showcase.
Just like our favorite movie franchise (ok, my favorite), Rocky, neither DiversyFund nor Fundrise emerges as a clear winner. Each fund has compelling advantages; Fundrise has an income-focused approach with historical returns to hang their hat on while DiversyFund is a growth-focused up and coming fund.
There is room for both in a diversified investment strategy. Each uses different tactics and approaches despite some of their overlaps.
What Would I Do?
The reality is personal finance is personal for a reason.
We all have different ways of investing and separate emotional responses to risks and returns. The items that keep me awake at night may seem silly to someone, and vice versa.
I'm at the Rocky V stage in my financial life, I've been knocked on my backside a few times, and I cringe when I see the right hook coming at me. I'm at the point where I question if the juice is worth the squeeze. So, at the risk of losing my blogging “street cred,” I think valuations matter.
You can show me all the charts and statistics you have that say timing and valuations don't matter over a long enough period. I won't agree with that. I'm heading towards an eventual retirement and looking in my rearview mirror.
I see historical graphs showing unprecedented economic growth and monetary expansion over the last 70 plus years. I feel precariously poised at the summit of historically high valuations, low yields, and without enough time or inclination to start back at step one.
I'm just old enough to be straddling the wrong side of “time is on your side,” where an unfortunate sequence of returns could send me back to go without collecting $200. So, it forces me to ask myself;
- Do I feel can I rely on the historical averages to justify passively indexing?
- Do I feel the expected return from passive indexing justifies the risk?
To both questions, my gut tells me – No!
I'm at the point I'm looking to glide into retirement in a nerf covered Volvo station wagon. I may seem silly, arriving at the retirement party in my flame-resistant safety suit and Swimmies, but I'll arrive on time! And that's all that matters.
Ignoring valuations and fundamentals in hopes of achieving long-term historical returns is not something I'm prepared to do. I'm perfectly content to horde my cash and site on the sidelines until I get adequately compensated for risking my capital.
The opportunity cost of missing out on a few percentage points in returns won't cause me anywhere near as much emotional stress as the prospects of staring down a life's sentence of work.
To that end, DiversyFund offers a compelling investment opportunity. Unlike traditional low-cost investments that have become all the rage of late. DiversyFund is returning to the fundamentals.
They see properties that represent a value, fix them up, adding additional value, rent them out for a few years, and then sell them for a profit.
Risks are lower because they are actively looking for properties that are a good investment and adding value by fixing them up. The result is an equity-like expected rate of return. And another added benefit is that real estate assets do not correlate with the stock market. In other words, they don't move in the same direction at the same time. Historically it has been much more stable.
It's not to say that the asset has no risk or even low risk. However, an investor gets compensated for their risk given the expected rate of returns. As part of a diversified portfolio, I could take a small portion of my money and invest in DiversyFund to boost my overall returns without losing sleep at night.
Comparably, I do not feel the same way about Fundrise. Keep in mind I said Feel because I don't know which of the two will perform better. However, given the fees at fundrise, and the expected ROI they list on individual property holdings, my gut tells me I'm not getting compensated for my risk.
Final Thoughts – You Do You
You should choose the option that you feel the most comfortable with and best fit with your financial goals. However, I would not put money in either choice or any investment for that matter that I couldn't afford to lose.