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  • Writer's pictureZach

Fundrise: Real Estate Experiment #2

Diversification or Shiny Object Syndrome?

I ran into a psychological block in my investing this past year. When I checked my quarterly net-worth progress there were several quarters where I had saved WAY more than my net worth had increased. This was due to the market going down, which it is totally normal for it to do. But I felt discouraged. Why save this money if it's going to be eaten by the market? Now, I know, I know, investing is a long term venture, and the daily and quarterly fluctuations don't really mean much in the long run, but still, it got under my skin. I wanted to find an asset that I could invest in that wasn't directly connected to the stock market.

Even the REIT I had bought in my first Real Estate Experiment had dipped when the stock market did, so it wasn't helping. In fact, that REIT, NRO, which had been incredibly stable for years, with increasing dividends and very little value fluctuation, dropped 10% almost as soon as I bought it, then a couple months later, CUT its dividend, which it had not done in the previous 10 years. So that was frustrating as well. Don't get me wrong, it's still spitting out dividends every month. If I include this month's dividend that I'll get next week, I've gotten right around $500 in 6 months on a $10,000 investment. If that trend continues, I'm looking at a 10% return for the year, which isn't bad at all.

For me, that left two options: 1. Buying physical real estate. 2. Investing in a non-traded REIT like Fundrise.

I tried to buy physical real estate, I really did. Between the mortgage pay down, cash flow, and tax benefits, it can be a very productive way to build your net worth. I was primarily interested in buying turnkey single family homes and was put in touch with James Wachob of Memphis Investment Properties by an old friend who is a real estate agent in Memphis. If you don't know "turnkey", it just means that you're buying a refurbished property with a tenant already in place. You buy a property that shouldn't need a lot of work for several years and already have a property manager on the ground to help deal with any issues. For someone investing from overseas, it can be a very valuable investment if you find someone who isn't trying to scam you. James came highly recommended, and I can say that my interactions with him have been very positive.

The problem was getting financing for two reasons. I had enough cash to pay 20% down and for closing costs, but because I work overseas, I wasn't able to find a lender who could do that, because I also had another problem: I hate credit cards and don't use them. This made my credit report too complicated and I couldn't get a mortgage. I'm working on fixing it, but that is a long term solution and I just couldn't make buying the house work for me right now.

And Fundrise seems like a great solution for people who don't want to own physical real estate or be a landlord, but who still want some of the benefits of owning the asset class. Instead of a large chunk of your assets being in one place (a house), they're spread over dozens of properties. You get to invest in things like large apartment complexes that normal people don't usually have the cash to invest in. You don't have to worry about fixing a leaking roof. Nobody can sue you if they slip and fall on your property. There are definite upsides! If you want a good breakdown, Ryan Scribner's below will give you the good and bad.

What really caught my eye was that while the stock market bounced up and down like a yo-yo in 2018, the valuations of Fundrise accounts did not. It was much more stable.

This is one example, one the left, dividends reinvested, on the right, withdrawn

Another major reason I was drawn to real estate and Fundrise in particular is something called the Shiller CAPE Index. Basically, the Shiller CAPE Index is a number that shows how corporate earnings compare to their value on the stock market. When the value of the company gets really high, but the earnings aren't also high, the odds are that the market will not perform well in the next ten years because the value has outpaced the earnings. This is one big reason why Vanguard is only predicting 2-3% returns after inflation for index funds for the next 10 years. Will the market follow past trends? Who knows? Certainly not me! Will Fundrise crash and burn the next time the real estate market takes a dip? Who knows? It could!

Are there drawbacks of Fundrise? Yes, every investment has them. Fundrise is new, as is "crowdfunding" for real estate. This newness means you don't know how it will behave if the market goes way down. The dividends the fund pays will be taxed higher than if I had an actual property. I am reliant on the intelligence and market savvy of the people who work at Fundrise to find good deals and manage them well. I feel like my eyes are open though, and that the risks are worth the potential upside. You may calculate the odds differently.

My main concern is that I'm going away from my original investing philosophy. This could be because I have a bad case of "Shiny Object Syndrome" where investors get distracted. Or, it could be prudent diversification into a historically strong asset class. I put $15,000 into it, which isn't a small amount of money, but if it crashes, won't be a huge setback either. With a 10% return, I like to think that I just gave myself a growing $1,500 raise for this year. This was really justified in my mind by how much I saved in the last five months, way more than I planned on. I should still be able to invest $20,000 in my index funds this year even with this investment, if I stay disciplined with my savings and nothing goes crazily bad.

I'll update how this goes periodically. I'm optimistic, and I think it's the right move, but only time will tell.

If you liked this post, come join the discussion over at The Happiest Teacher Facebook Group! I would love to have your voice added to the discussion! Also, if you're into that Twitter life, come follow me!

Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.

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