As Business Insider reported yesterday, two fellow investing startups recently stepped into the ring to debate the merits of passive and active real estate investing compared to investing in public market securities such as Exchange Traded Funds. We watched the debate with interest, particularly for the false alternative it presented.
One side (robo-advisor Wealthfront) argues that:
Fund managers (in this case, Fundrise and RealtyMogul) do not beat the market over the long term, especially when fees are taken into account
Likewise, individuals can’t beat the market by picking their own investments (as with Roofstock or HomeUnion), even when the fund manager’s fee is taken out of the equation
Even if a fund like a REIT provides an attractive risk-adjusted return, one should watch out for the lack of liquidity (the ability to get your money back when you want it) and disadvantageous tax treatment
This is the classic argument for indexing. The other side (eREIT platform Fundrise) argues in response that:
Unlike public markets, private markets like real estate are inefficient
Fund managers who tap into private market opportunities therefore have an opportunity to earn above-market returns (and therefore justify their fees)
Public markets impose high costs (usually in the form of high valuations) in return for the liquidity they offer, and the extra cost isn’t worth it for most investors, most of the time
But what if these two startups are blinded by their own new status quo? Imagine instead that individual investors actually can have:
The cost efficiency of an ETF
And the ability to choose from and allocate capital across individual investment options that are vetted by professionals
Plus fine-grained control to diversify, balance risk/reward, and achieve liquidity as you see fit
Groundfloor offers this third path. Investors do not need to choose between the false dichotomy offered by Wealthfront vs Fundrise.
Nick and I started Groundfloor almost five years ago with a broad vision to “raise finance to the power of us” and join the young movement to open private market securities to public investing. We share Fundrise CEO Ben Miller’s thesis about private market securities and consider ourselves brothers-in-arms.
But we think more can be done than simply reproducing the old investing value chain in newly branded, if less expensive, clothing. We agree that investors shouldn’t be forced to pay a public market liquidity premium they don’t value. Beyond that though, we also think you shouldn’t be forced to pay fund management fees and expenses when you can build your own REIT, with better diversification, more control and less cost.
Compare, for example, Fundrise’s Income eREIT. For a $1,000 minimum investment, the fund offers a stake in its portfolio of seven properties. As a group, those investments currently pay 8% annualized interest. With our $10 minimum, a similar investment with Groundfloor could have been diversified into as many as 100 secured real estate loans, with a net annualized yield of 12% across the portfolio repaid on an average of 6.8 months. That’s if you just chose to put the same $10 into every loan, rather than choosing to take on more or less risk based on your preference.
Both CEOs of WealthFront and Fundrise are at least partially right in their criticisms about one another. There ought to be a way to diversify efficiently within each asset class, while also taking advantage of risk-adjusted returns uniquely available in private markets. Fortunately, there is. To paraphrase from when we introduced our concept over four years ago: Welcome to Groundfloor. The banks, eREITs and robo-advisors won’t like it. But you will.
1 Average yield and term assumes equal investment in 100 loans repaid before 7/31/2017 as detailed in our blog post “The Benefits of Diversification” available at http://blog.groundfloor.us/groundfloorblog/diversification