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We stumbled across a question “is Fundrise a ponzi scheme” recently and decided to explore further. Nothing injects fear into an investor’s heart like the risk of an investment being labeled as such.
So we decided to investigate. Specifically, we wanted to answer the question “is Fundrise safe, legit, and insured?”
To answer those questions, we first jump back in time to understand how real estate crowdfunding platforms, like Fundrise, came to exist in the first place.
How A Ponzi Scheme
Shattered Investor Confidence
For those who lived through the 2008 – 2009 Great Recession, a few events stand out.
The near bankruptcy of Bear Stearns in March 2008 and the actual bankruptcy of Lehman Brothers in September 2008 are two of the most prominent.
However, there is no individual who ignites deeper passions than Bernie Madoff – the former stockbroker who operated the largest Ponzi scheme in history.
Madoff’s scam didn’t contribute to the financial crisis. In fact, it was the financial crisis that exposed his fraud.
In December 2008, the news broke that Madoff’s “$65 billion hedge fund” – and its supposed returns – were entirely fabricated, creating massive losses within an already fragile economic ecosystem.
The experience made many investors deeply wary of “too-good-to-be-true” returns, but Madoff’s very public downfall did little to prevent new Ponzi schemes from swindling unsuspecting consumers.
In fact, in 2019 alone, state and federal authorities identified 60 Ponzi schemes in progress. Collectively, these schemes held $3.25 billion in client funds.
More investors are aware of the dangers posed by Ponzi schemes, but that doesn’t necessarily make it easier to avoid them.
Perpetrators are clever, and they possess extraordinary skill when it comes to instilling confidence and gaining investor trust.
With this in mind, it’s no wonder investors are questioning their own judgement in choosing investments. Such concerns are driving the question, is Fundrise a Ponzi scheme?
Is Fundrise A Ponzi Scheme?
Charles Ponzi became the face of Ponzi schemes when he was arrested in August of 1920.
For years, he convinced investors to give him their money in exchange for consistently high returns.
The problem with these promises – and Ponzi schemes as a whole – is that there was no actual investment.
Instead, con artists use funds from later investors to pay returns to earlier investors.
Ponzi schemes work as long as enough new investors pay in to cover returns owed to earlier investors.
Of course, that means more and more new “marks” are needed to support the weight of upper levels.
Often, earlier investors are key to bringing additional money into the scheme, because they received the returns they were promised and can vouch for the investment’s legitimacy.
They refer friends, family, and professional contacts, which keeps the cycle going.
The most common reason Ponzi schemes collapse is a run on principal withdrawals.
If too many investors want their principal and interest paid out, there isn’t enough left to support the remaining members.
That’s what happened with Bernie Madoff.
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How The Madoff Ponzi Scheme Collapsed
As the economy tanked, large investors decided to move their funds away from Bernie Madoff’s fund.
He saw that his scheme was unsustainable, and he confessed to his sons – and later to government officials – that his hedge fund was entirely fraudulent.
While Ponzi schemes are named for Charles Ponzi, he wasn’t the first to successfully scam investors.
Well before Ponzi got into the business of fraud, Sarah Howe had already persuaded a number of women to trust her with their savings.
She operated in Boston in 1879 through an organization she named Ladies’ Deposit, and was eventually caught and convicted.
Perhaps the most astonishing part of Howe’s story is that after serving three years in prison, she managed to create and conduct a nearly identical scheme for another two years.
In nearly every case, careful research by investors would have exposed the fraud. Since the promised returns are essentially impossible to deliver, examining the underlying strategy of any Ponzi scheme would expose gaping holes.
Unfortunately, investors tend not to do this sort of research, and those that do allow the con artist to explain away any anomalies. As a result, Ponzi schemes can still be found in abundance.
With that in mind, smart investors are more diligent about researching any fund or investment plan before they buy in. In this case, they want to know, is Fundrise a Ponzi scheme?
What is Fundrise?
Real estate investment is a critical component of building wealth, but that presents a problem for those who aren’t wealthy to begin with. You can’t realize returns from purchasing and managing properties if you don’t have the cash or credit to buy those assets in the first place.
Some investors start small, buying residential properties to rent, or purchasing distressed buildings, renovating them, and selling for a profit.
However, even that is out of reach for many – and those that can afford these types of investments are typically not generating the sorts of returns that larger projects produce.
Participation in the larger, more profitable real estate ventures is often limited to institutional investors, because they have the necessary capital.
Groups of smaller investors have come together in innovative ways to find creative methods of entering the larger real estate market. Real Estate Investment Trusts (REITs) are one example.
They work a bit like mutual funds in that they are publicly traded, but instead of pooling investors’ money to buy securities, they pool investors’ money to participate in the real estate market. They own, manage, and/or finance large projects like shopping malls, and profits are paid out to shareholders.
Fundrise was the first company to launch an eREIT or electronic Real Estate Investment Trust through crowdfunding.
It operates in a similar manner to REITs, but there are critical differences. Most importantly, a REIT investment is an investment in a corporation that subsequently invests in buying, managing, and/or financing real estate. Those who invest in an eREIT are investing directly in specific properties or projects.
That distinction is particularly important for investors asking is Fundrise legit or is Fundrise safe?
While quality REIT shares can generally be liquidated right away, it’s far different for eREIT investments. These funds are tied up in actual real estate, much as if you had purchased a home, and it is something of a process to pull cash out.
Some investors find that illiquidity alarming, causing them to wonder whether Fundrise is a scam.
How Does Fundrise Work?
Fundrise started off as an experiment, and it rapidly gained mainstream attention.
Since 2012, a company that started with virtually nothing has invested in $4.7 billion worth of real estate nationwide – a total of more than 200 properties.
Today, Fundrise boasts 130,000 individual investors who collectively own more than $1 billion in real estate equity.
Essentially, Fundrise works like this: investors pool their money to make real estate purchases.
Some of the properties purchased are small – for example, single-family homes – but there are opportunities to participate in larger projects. These include the sort that are typically only available to commercial investors, due to their size.
There are four levels of investment, depending on how involved you want to be in this eREIT:
- The Starter Portfolio – This option gets you involved in between five and ten smaller-scale real estate projects and requires a minimum $500 investment.
- Core Plan – This more robust option is intended to diversify your exposure by including you in 40 or more unique projects. The minimum investment is $1,000.
- Advanced Plan – You can participate in a much larger pool of projects, typically 80 or more, when you invest $10,000.
- Premium Plan – If you choose to invest $100,000 or more, your portfolio is far more diverse. You have access to a variety of projects ranging in size from very small to massive.
Fundrise uses in-house expertise to select properties that appear undervalued.
The company then works to bring the property in-line with the market to generate profits through rent or sale.
Part of the company’s strategy is to keep expenses down by handling the logistics of these transactions in-house.
That means more profit goes back to investors, rather than into the pockets of various intermediaries. Today, fees stand at about 1 percent.
What concerns some investors is the illiquidity of their funds. They can’t simply withdraw whenever they wish. That isn’t because the company is a scam nor a Ponzi scheme – it’s because buying and selling real estate takes time.
In other words, if you expect to need your principal in the near future, this sort of investment might not be right for you.
Conversely, if your goals are longer-term, this is an opportunity to gain exposure to the lucrative real estate market.
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Can You Make Money
Fundrise has already generated respectable returns for its investors, proving you can make money with Fundrise.
To date, averaged annualized returns look like this:
- 2014 – 12.25%
- 2015 – 12.42%
- 2016 – 8.76%
- 2017 – 11.44%
- 2018 – 9.11%
- 2019 – 9.47%
Of course, historical performance is no guarantee of future results.
The bottom line question for many investors is can Fundrise make you rich?
Unfortunately, there is no simple answer. Your returns depend on how much you put in, which projects you choose, and the success of those projects.
More importantly, how much you ultimately add to your own wealth through Fundrise depends on how long you leave your money in the program.
Real estate can be lucrative, but typically not overnight. Those that do get rich from real estate have patiently waited through years – even decades – of appreciation.
Can You Lose Money
Fundrise is up-front about the fact that any investment is at-risk, given the nature of speculating in the real estate market.
In its SEC filing, the language is clear:
|“Investing in our common shares is speculative and involves substantial risks. You should purchase these securities only if you can afford a complete loss of your investment.”
There are two specific risks to consider before you buy into Fundrise. First, the company pays a manager to choose and manage real estate investments.
Expenses related to hiring that manager are passed onto you, and that can impact your returns. That particular risk applies to most fund-style investments you make.
Second, Fundrise is a relatively new company exploring a new method of real estate investment.
While it is seeing positive returns, there is no guarantee of success for any period, short-term or long-term. Many investors like the Fundrise concept and have confidence that it will deliver profits, but they aren’t necessarily correct.
Before you put your own money in, examine Fundrise’s strategy and progress to decide for yourself whether the level of risk matches your comfort level. If not, step back and continue to monitor results before you move forward with your own investment.
Is Fundrise FDIC Insured?
Fundrise is not FDIC (Federal Deposit Insurance Corporation) insured, but that’s true of any investment.
FDIC insurance covers account holders in banks and savings institutions that are simply holding your funds and perhaps paying you interest – not investing on your behalf. Such accounts are insured by the FDIC against failure of the entire financial institution.
In other words, if your bank goes out of business, the FDIC will ensure you get your money back up to the insured amount.
Investment accounts are also insured against failure of the brokerage. This coverage comes from the SIPC (Securities Investor Protection Corporation).
While your investments are not protected against losses if the company you invest in fails, you are protected if the brokerage firm you invest with fails.
Any cash in your account will be returned to you if something goes wrong with the firm.
Is Fundrise Legit?
The bottom line is no, Fundrise is not a Ponzi scheme. Neither is it a scam from our research. If you’re wondering, is Fundrise legit? It certainly appears to be and has thousands of investors who agree.
“Is Fundrise safe” is another question. How your money is used, where your profits come from, and the cause of any losses is clearly explained and documented.
Remember, a Ponzi scheme uses cash from new investors to pay out profits to earlier investors. New investors are attracted through promises of guaranteed returns, and there are no actual investments.
Fundrise uses your investment to purchase real estate, and your returns are based on the performance of that real estate. Can you lose money with Fundrise? Yes.
No legitimate investment can guarantee returns. Does it take longer to cash out with Fundrise than it does with traditional stock? Yes. But that’s because Fundrise isn’t traditional stock. It is an eREIT.
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