If you’re a Thomas Friedman fan like me, you’ve likely read about the fact that we are living in a period where the rate of change brought on by technology far exceeds that by which a normal human can adapt. When I think about that point, I think about firms like Fundrise that are innovating the way by which we invest in such a transformational way that it’s hard to comprehend how it can boldly change the course of my personal financial life.
Within just a singular set of years, Ben Miller, Co-Founder & CEO of Fundrise and his team have been able to take the commercial real estate investment class previously reserved for multi-billion-dollar investment funds and literally opened the doors to anyone with a bank account and $500.
Think about it, we can now invest alongside multi-billion dollar funds that have some of the strongest investment return profiles of any investment companies out there. And to make matters even more hard to comprehend we can access these investments with lower fees than a traditional REIT.
It’s a whole new world to say the least and by all means may be hard to believe, but lets’ take a deeper dive under the hood and learn more about what Ben Miller and the Fundrise team are up to.
CL: Ben, you have a long career in real estate as an investor and were also co-founder of another real estate projects focused company before Fundrise. So what is it about real estate that you are drawn to and why build Fundrise now?
BM: Similar to many people, I got started in real estate kind of as a result of my situation rather than a passion that drove me here. What happened was my father started having some health complications and I stepped in to help him with his real estate business. What ended up intriguing me about real estate developing was that I like to solve problems. Growing up I always liked puzzles, or winning Zelda.
Being a developer is like a puzzle where you are trying to put together all the pieces of the equation from the consumers, to the architects, to the building themselves. All the problems and challenges that come with developing are ultimately what brought me to Fundrise. I was thinking about a problem in the financial sector and felt that the internet was a solution.
CL: For those that don’t know can you define Fundrise as a business?
BM: Fundamentally, Fundrise allows everyone to invest directly into real estate. Our belief is that when you invest directly into real estate with very low fees, you are generally adding one of the most attractive asset classes to your portfolio because real estate has a long-term permanence that no other investments has. As an example, one of the investors in Fundrise, Mr. Silverstein also happens to be the owner of the World Trade Center. He bought those buildings in Manhattan a hundred years ago, and likely those buildings will be there a hundred years from now.
I can’t think of another asset like that. I mean Yahoo wasn’t here 20 years ago and it won’t be here 20 years from now. That kind of permanence makes real estate one of the best risk adjusted returns out there for people to put their money into.
CL: Can you provide more specifics on how a traditional REIT differs from the Fundrise eREIT, and what benefit that provides investors?
BM: To give you a colorful metaphor, a public REIT is liked canned fruit and we are like fresh fruit. Both may be fruit, but by no means are they the same thing. The issue with public REITs is that they are matured forms of real estate, such as nursing homes.
When real estate is in a dynamic state, and under development during periods of rapid change due to gentrification or growth of a particular market, REITs can’t touch that stuff. Since REITs are supposed to be long term passive holdings the IRS stipulates that they can’t do a lot of construction.
Between the IRS and Wall Street demanding for REITs to be really safe, core real estate assets, what you end up with is assets in the middle of mature markets such as 14th St. in Washington DC or the Art District in LA, or the hot spots of Brooklyn. Those neighborhoods 10 years ago wouldn’t even be touched by REITs because they were too emergent. By the point REITs get in, most of the juice has been squeezed from the market, and you are late to the party.
CL: What are the greatest points of leverage you have as an organization to reduce cost of administration to investors compared to more traditional REITs?
BM: I like to think about what we are doing similar to the difference between farm-to-table and large scale industrial food processing. By cutting out all the middleman you improve the freshness of the product, while reducing the cost to get it consumers.
Most people are invested in these large-scale investment products that sit within the public markets, but what they don’t realize is that they tend to pay a high premium to have investments with in-the-moment liquidity. Do you think that liquidity is free? My research has led me to believe that there is a real material cost of 10-30% to having your money in the stock market.
Unfortunately, the liquidity premium is invisible, and most don’t realize. But our investment class helps to reduce those cost in a major way by providing a less liquid investment that has meaningful long-term upside.
CL: Fundrise is one of only a handful of companies that is focused on providing access to the real estate investment markets for non-accredited investors. What challenges and opportunities is this presenting?
BM: The opportunity that Fundrise creates is the opportunity to disperse real estate opportunities to a group of individuals who wouldn’t even get near these deals otherwise. To give you a sense of who typically gets access to the types of deals we put on Fundrise, I can tell you that when I was a real estate developer my partners were multibillion dollar funds that had a minimum of $20B in assets under management. Unless you have $100M or $1B you’re not even a player at the table.
The idea that an individual can invest in these types of deals where the other players are multibillion dollar organization is exciting. For instance, a few years ago we put The World Trade Center on the Fundrise platform, because the President of the project is on the Fundrise board.
Goldman Sachs had not wanted that deal to go through because in their world they prefer only for Qualified Institutional Buyers or QIBs to be involved in a deal of that magnitude. That’s someone with $100M of securities or more. Point being, for an ordinary investor to have access to this kind of deal at lower cost than a QIB would get is a pretty huge benefit. The material benefit is to the individual.
The biggest challenge we face is that we have to aggregate enough people to operate at scale. And if you think about the fundamental value and purpose of Wall Street, it’s to aggregate capital. That’s its core purpose. So as a punctuation point, my theory is the internet is a better aggregator than Wall Street. Better because of transparency, better incentives, and better cost.
CL: When sourcing deals for the platform what types of criteria are most important for you to see before approval will be provided?
BM: We are ultimately structured as a real estate PE fund. We have 20 people, maybe more who are operating inside of Fundrise and do what they are supposed to do by grinding up deals through a lot of blood, sweat and tears. It’s like butchery. Everyone likes bacon, sausage, and chicken breast but no one wants to be the butcher.
That is a very human, bloody, hard-nosed process. There is no magic to real estate deals. We have some technology that improves the process to be better and more efficient, but good deals are hard fought. Our average check is $5M. There are different kinds of marketplaces, the best marketplaces are where both sides of the market are anonymized and the process is tech enhanced.
CL: There is such a vast quantity of investment platforms arising out there these days, from companies like Groundfloor, to Roofstock, all of which do something a bit different. What do you look at as Fundrise’s key differentiator in the market?
BM: Our mission and focus is to take the best real estate and democratize it to everybody. No one else is about that. So many of the platforms are either accredited only, or focused on institutional money. Few platforms are purist like us that are focused on true democratized investing.
Our singular focus is to aggregate the best real estate deals, which in it of itself is incredibly hard, and then democratize that by pulling on our strengths as a tech player, security law experts and really great consumer facing UX designers.
CL: How did you decide to pursue a fund approach versus enabling investors to put their money into individual deals?
BM: The priority benefits of a fund structure is that the pool of investments we can provide is more diversified and ultimately it’s a more resilient investment product for our investors. The challenge with individual deals is that each investment on its own is more brittle. The pool generally helps to increase risk adjusted returns.
Fundrise core customer is a mass affluent individual that wants results but doesn’t want to have to pick deals. We can pick deals for you in a very specialized way and manage them to perform well instead of forcing our investors to pick the right deals. We believe that you get the best results for investors by having the most efficient, high quality investment product out there.
CL: Can you talk about your typical investor profile both from a socio-economic background as well as level of sophistication in terms of investing?
BM: Our customers are mass affluent individuals. Typically, they are much wealthier than you may expect and are sophisticated when it comes to investing. Be it tech, finance or real estate finance, they love the idea that the platform is about serving everyday people.
Though, our customer is not typically the little people but nonetheless there is a lot of them looking. They are typically sophisticated investors, predominantly male, and are looking for better investment results. It’s not uncommon for them to be million dollar investors that care about one thing and that is results. Giving access to the individual to be able to invest alongside billion dollar funds is something they really desire in their portfolio.
CL: What type of growth are you seeing in alternative lenders within the commercial real estate markets and how long do you think it will be before more mainstream investors will make up a significant portion of the capital in these markets?
BM: I believe that the next recession and financial crisis makes the business. The mainstream won’t believe it and maybe shouldn’t until they have seen you go through a financial crisis. That’s when we can prove what we are capable of.
The Minute Rundown with Ben Miller
CL: If you could provide one tip to someone considering starting up what would it be and why?
BM: My learning is one of those things you can tell people to do but it’s hard to learn by listening, you sort of just have to do it. With that I would say success is recognizing when things aren’t working.
Being able to recognize reality fast is a big part of being an entrepreneur. By all means to be an entrepreneur you need to have an ego, not in the colloquial sense of being a big shot but in believing that your sense is right and that’s critical. But this can lead to confusion and obscure reality. The best startups are the ones that can see reality and react to it fast. Wanting it to be true and what is actually true are very different things. Deciphering the difference between the two is important to success.
One of the most salient points I took away from speaking with Ben was that we pay big time for liquidity in holding assets that trade on the stock exchange. Having nearly limitless real-time access to your investments is a perk, and perks never come free. Don’t forget that. Start taking a closer look at the expense ratios you pay on your ETFs and your REITs.
Ben and his team at Fundrise are knocking down the doors to private commercial real estate deals previously reserved for billion dollar funds and giving us all a chance to get into the game with the opportunity for higher yields and lower expense ratios
Fundrise solves the problem of access to an asset class that is sure to improve your investment portfolio. I get energized by what Ben is doing and I see an insanely bright future for the Fundrise team. Be sure to invest in your future by investing in the future of commercial real estate alongside the tech and grit of the Fundrise team.
Thank you Ben for helping to democratize commercial real estate investing and for investing in truly Simple.Innovative.Change