No investment category is more prized, or exclusive, than what’s known as “private real estate.” These funds, typically managed by private equity giants like Starwood Capital, Blackstone, or the Carlyle Group, provide entrée to pools of apartment complexes, single-family rental homes, and data centers—usually getting in on the ground floor, so to speak, while the properties are under construction or renovation, in their early, fastest-ramping, highest-return stages. It’s not unlike the way venture funds catch shooting stars during their pre-IPO liftoffs.
Over the past twenty years, private equity real estate funds have notched annual returns of 9%, according to the National Council of Real Estate Investment Fiduciaries (NCRIEF) beating stocks by two points—the edge from getting the jump on the trends. They’ve also, historically, been recession-resistant, with only half the volatility of the careening course of equities.
Still, private real estate has long stood behind the trimmed hedges, reserving its grounds mainly for the well-to-do—and very distinctly excluding younger investors with more modest means. That’s what makes the firm called Fundrise stand out as a maverick. Founded by Ben Miller, a 45-year-old real estate lifer, Fundrise is opening the gates to this most privileged of enclaves, marshaling a business model that melds PE-like funds and fintech to help people buy real estate stakes with investments as low as $10.
Fundrise claims to be the first platform ever that enables people to invest in privately held real estate directly over the internet, and the regular folk are rushing in. Indeed, its user-friendly model makes Fundrise the private equity real estate industry’s fastest-growing company, as measured by the increase in assets under management and the inflow of new investors.
Fundrise says it now boasts around 350,000 active investors in its offerings, mostly millennials aged 25 to 40, and its pied piper appeal is adding roughly 1,000 a day. Since the start of 2021, the equity portion of its portfolio has more than doubled from $1.5 billion to well over $3 billion––total dollar holdings, including project debt, stand at around $6 billion. It’s now attracting investors’ dollars into its funds at a rate of $1.3 billion to $1.5 billion a year. According to Miller, that dollar pace puts Fundrise among the world’s top 20 private equity real estate firms. “We wouldn’t have made the top 100 three years ago,” he tells Fortune.
Since 2017, Fundrise has delivered average annualized returns of 12%, hitting 23% in 2021. Its funds gained a little less than 2% in the second quarter of 2022, handily clocking the S&P 500, which posted loss of 16.1%; for the first half of the year, Fundrise has delivered roughly 5.5%, compared to the broader market’s 20% decline.
Of course, given these rocky times, it takes a certain amount of daring to consider getting into real estate at all. Nationwide, we’ve witnessed a huge jump of over 30% in single-family home prices since the onset of the pandemic. In a recent post, the Dallas Fed warned that the ratio of prices to rents signaled housing bubble conditions in many roaring metros. And it’s only natural for folks watching mortgage rates soar—they reached 6.02% in June, double the average rate in August of 2021—to fear that a downturn is near. The non-stop talk that America is headed for a recession only deepens investors’ worries.
That’s where the private-equity model, and Fundrise’s, offers a ray of hope. Rental real estate, specifically communities of apartments and single-family homes-for-lease, has traditionally been a strong performer in times of economic stress. In fact, rents and home values tend to move in opposite directions. From 2008 to 2011, as prices of houses and condos cratered big time, rents actually increased by around 3.2% a year, according to Corelogic. And residential private equity real estate funds that launched in depths of the Great Recession notched annual returns in the 15% range in the ensuing years, according to research by a team including University of Florida professor Thomas R. Arnold. “The 2008 and 2009 vintage funds provided some of the best returns of the last 20 years,” Arnold told Fortune.
There are many reasons rental properties tend to thrive in a downturn: Families can cut back on vacations and restaurant meals in tough times, but they still need a place to live. They’re more likely to delay plans to buy, opting to rent a home or apartment or renew a lease instead.
It’s precisely the trend that Fundrise hopes to capitalize on. Fundrise doesn’t buy or build houses to sell. It’s centered on the residential rental business. With rates rising and the economy shaky, Miller says, people moving to fast-growing regions who can no longer cover the monthly nut it would take to buy a ranch or colonial. “So they’ll rent instead, because they still want the space to work from home,” say Miller. Fundrise now owns around 17,500 apartment units and 3,500 single-family rental homes, with a combined equity value of over $2.5 billion.
Other institutional investors have focused on residential rentals, but Fundrise is pioneering a new business: Assembling portfolios of newly built single-family homes that cater to millennials with young families who seek more room to work and roam. In May 2021, the new initiative got a big boost when Goldman Sachs extended Fundrise a $300 million credit facility for construction of single-family rental homes.
The looming downturn, says Miller, could hand Fundrise an opening to purchase big packages of new houses at steep discounts. “We’ve accumulated over $450 million in cash to make opportunistic purchases,” he says. He also notes that real estate developers are increasingly eager to forge deals where Fundrise agrees in advance to acquire new homes in bulk. “The homes are already in the pipeline,” says Miller. “The developers don’t know if demand will grind to a halt at 7% mortgage rates. They want us to buy the newly-built houses to offload a lot of their risk.”
The big question is how private equity real estate will perform in the current period of heavy inflation, which could well be joined by a sharp economic contraction to cause stagflation. But Miller is betting that in a downturn, more people than ever will rent because leasing is lighter on their budgets. The dearth of rival new construction and still strong demand should send rents rising at least as fast as consumer prices, if not faster. “If you buy right, inflation drives returns for you,” says Miller. “We’ll see less home buying and more [lease] renewals. Plus, the people moving into our regions will rent more and buy less. Those factors will keep driving rents higher even if home prices decline.”
For Miller, it’s America’s southern tier that offers both the safest plays and highest returns in residential real estate. Since well before the pandemic struck, Fundrise has been investing pretty much exclusively in such markets as Orlando, Tampa, Charlotte, Nashville, and Houston. “Real estate is all about affordability, and those cities are offering the best deals, and attracting people freed to live anywhere in the remote-work economy,” says Miller.
The pandemic migration has sent rents leaping in Fundrise’s core Sunbelt markets. According to Zillow, the average monthly rents for the first four months of this year versus 2019 rose 25% in Raleigh, 32% in Atlanta, and 42% in Tampa, and they’re still waxing at 10%+ rates on an annualized basis in all of those markets. Hence, even with CPI at a lofty 8%, rental growth is beating inflation by 2 points. “It’s clear that rental properties, especially in the Sunbelt, are an excellent inflation hedge,” says Fundrise’s COO, Brandon Jenkins.
Even without the more widespread economic anxiety, one might think that the Fundrise model sounds scary, given its extreme novelty in a hidebound business. But Miller’s approach is highly conservative. For example, Fundrise’s “leverage”––the share of the dollars invested in its homes or apartments backed by mortgage or other loans rather than by investor dollars––is around 50%, modest by industry standards. In financing construction projects, it uses only investors’ equity; it doesn’t borrow from banks at all. “The key to real estate success is to avoid rolling the dice in flush periods,” says Miller. “That’s how you deliver the best returns in a downturn.”
Miller’s conviction that navigating tumultuous periods is the key to real estate success arises from hard-won experience. As a teenager, he says he watched his developer-father “get ulcers” in the 1991 downturn, and he later helped rescue the family business when its lenders collapsed in the Great Financial Crisis. Over four hours of interviews from his home in Washington, D.C.––he rents his abode, by the way––Miller discussed how the banking collapse of 2009 inspired him to build a business with a stable, low-cost-to-investors model that he believes could grant middle-class investors the kinds of gains usually reserved for bluebloods.
Traditional private equity players cater primarily to pension funds, endowments, and other institutions, as well as to “qualified” individuals who often are required to harbor a net worth in the millions. Their minimum investments are typically set at several hundred thousand dollars or more. By contrast, the average Fundrise member is staking just $10,000. And newcomers can get started by putting as little as $10 in the Flagship Real Estate Fund.
That fund, which launched in January 2021, now holds almost $1 billion in investor capital and owns 55 properties ranging from a new 384-unit apartment development near Tampa (purchased for $84 million), to a $50 million data center in Maryland, to a construction project for 78 single-family homes near Houston’s George Bush Intercontinental Airport. Flagship posted a 4.6% gain in first quarter and 1.1% in Q2, or 5.9% year to date.
Fundrise is also leveling among the lowest fees ever witnessed in the industry. PE firms have long charged a king’s ransom for accessing this highly lucrative corner of the investment world. Customers typically buy into PE funds through broker-dealers that take up-front sales commissions of as much as 5%. Giants such as Blackstone and Starwood collect around 2% a year in combined servicing and management fees. When the fund sells properties, the sponsors get anywhere from 12% to 20% of the capital gain in “carried interest,” after meeting a base hurdle rate. All of those charges, and particularly carried interest, lower returns to investors.
By contrast, Fundrise takes no sales commissions, and pockets annual servicing plus management fees of 1%. It exacts zero carried interest. Miller sharply criticizes that toll, which is de rigueur in the business. “For the funds, carried means ‘tails I win, heads you lose,’” he says. “The PE players get this huge upside in a great market that has nothing to do with their skills. But when returns are negative in a bad market, they pay nothing back. Carried interest also encourages funds to take excessive risks because the potential winnings are so great.” He notes that last year, Fundrise pocketed $30 million in fees on its roughly $3 billion in assets under management. “But we also made our investors $400 million in capital gains,” he says. “If we’d put a 20% ‘toll’ on that, it would have cost our investors another $80 million.”
Fundrise’s offerings fall into three main categories: fixed income, growth, and “balanced” funds that blend those strategies. Its original portfolios comprise nineteen “eREITs” or private real estate investment trusts. The “income” eREITs aim at paying high and rising dividends. On April 1, Fundrise merged its six fixed income eREITS into a single pool, the Fundrise Income Real Estate Fund, which now holds around $500 million in investor capital.
For fixed income, the staple offerings are short-term loans to developers for acquiring land and bankrolling them through permitting, building and renovating apartment complexes and single-family rental projects. Those loans command premium fixed rates, usually in the high single-digits. “Those loans are a lot riskier than the kind of long-term lending institutions do on finished apartment complexes or commercial buildings,” explains Miller. A construction loan on a 340-unit high-rise apartment project in Tampa, for example, on Fundrise’s books from December 2019 to March 2021, provided an annualized return of 9.2%.
The growth eREITs are portfolios of properties that are either owned and already fully rented and “stabilized,” or more adventurous, “value-added” and “opportunistic” ventures that are under construction or renovation. They’re geared around price appreciation: Their main appeal is capturing a share in properties that rise rapidly in value, though they also pay dividends. The Flagship fund isn’t structured like a REIT, but it shares many of its 55 investments with the stable, fully leased properties in the eREIT growth funds. The menu also includes a group of seven “balanced” portfolios that seek returns more or less split between capital gains and dividends.
It’s the growth eREITs that have been garnering the biggest gains, especially during the pandemic as housing prices soared. From 2017 through the first quarter of 2022, the fixed income funds consistently generated yearly dividends of roughly 8%. Until the start of last year, the growth eREITs were returning roughly 11% a year. But in 2021, growth hit a moonshot: The growth funds gained more than 30% overall, with the lion’s share of the bounty flowing from capital appreciation as the value of its homes and apartments exploded. Newly launched Flagship rose over 29.4%.
As impressive as 2021 was, 2022 so far this year is suggesting that Fundrise can fulfill Miller’s goal of beating competing asset classes in hard times. Last year, despite notching 22% returns across all its funds, Fundrise underperformed both the S&P 500 and publicly traded REITs that largely track the stock market. But this year, Fundrise has waxed the public markets by double digits.
Investors can sign into one of five tiers, beginning with “Starter” at the $10 minimum and rising to “Premium” at $100,000 and up. New investors answer a questionnaire that gauges their appetite for risk, and their preference for capital gains versus dividends. An algorithm then recommends a portfolio consisting of allocations to different funds that best suits their goals. “The vast majority of investors go with the portfolios we suggest,” says Miller.
Most private equity real estate funds operate on fixed timetables. Investors’ money is locked up for the entire period (say, seven years); they receive dividends along the way, and the capital gains come as the fund sells assets––minus the carried interest charge, of course. But the Fundrise funds don’t operate on a schedule. In just over six years, Fundrise has sold less than five apartment buildings. “We would only sell if we had a major change in strategy where we shifted to different classes of assets,” says Miller. “And I don’t see that happening, at least for years.”
New money can flow freely into each fund, giving Fundrise added firepower for purchasing or funding properties. Newcomers can buy in at any time on the web. So far, the funds are highly liquid, but that might not always be the case: In March of 2020, Fundrise briefly suspended redemptions when financial conditions tightened with the start of the pandemic. For now, so many new dollars are entering that investors can easily find purchasers for their shares. Those that issue sell orders must wait till the quarter’s close to get paid out.
When investors sell, they receive capital gains that reflect how much the properties have appreciated while they’ve been shareholders (as endorsed by independently audited appraisals of market value). In the eREITs, Fundrise imposes a 1% penalty on those who cash out in less than five years. “We don’t keep that money,” says Miller. “It goes back to the investors who remain.” But for the two largest funds, Flagship and Income, investors can exit at the end of any quarter, sans charge.
Sundry shareholders in Fundrise’s funds are also shareholders in the parent company, officially called Rise Companies Corp. Miller has raised no money from bankers, nothing from Silicon Valley, and only small amounts from institutions. Fundrise operations are mostly funded by dollars provided by the investors. “It’s really a continuous private IPO,” he says. To purchase shares in the parent, members need to have been an investor in the funds for at least eight months. After that waiting period, they can spend up to the equivalent of 50% of their dollars in the funds to buy shares in the Fundrise parent. “We pay our salaries for 300 employees and for operations with that money,” says Miller. The shareholder base includes 35,000 fundholders who have collectively plowed in around $150 million for a one-third stake in the enterprise.
Although Miller is sacrificing current income by charging low fees and no carried interest, he’s still aiming to create a valuable enterprise that pays off for himself, his lieutenants, and those 35,000 mainly small shareholders. The idea is that the Fundrise model is so singular that its user base will mushroom, multiplying assets under management. “The goal is to grow to a scale where we do a tech IPO, a rare one that’s not backed by venture capital firms,” says Miller.
Miller’s rollercoaster pre-Fundrise career taught him that in real estate, you need a strategy built to surmount hard times. As a student at the University of Pennsylvania in the late 1990s, Miller worked as an analyst for renowned Philadelphia property investor Ira Lubert. After graduating, Miller told Lubert he’d decided to join a glamorous bricks-and-clicks tech startup. “Ira told me, ‘I wish upon you a great failure, you’ll learn a lot more from that from anything else,” says Miller.
Ira’s wish was granted: The venture failed, and Miller got a PhD course in how not to operate. “The startup had about seven former CEOs and COOs who thought applying the pattern that made them successful in the past would make them successful in the future,” Miller recalls. Those former stars had the mindset of blaming the venture’s failures not on their flawed strategy, but the market. “I learned that you have to stare reality in the face,” says Miller. “The optimistic, ‘this will work out’ view is not as helpful as facing the ugly, unattractive stuff.”
There was more ugly stuff to come, in the form of the Great Recession. After his dotcom experience, Miller joined Western Development, the Washington, D.C., construction enterprise founded and run by his father, Herbert Miller. When the whirlwind struck in 2008 and 2009, the company had $500 million in mixed-use apartments and stores under construction, chiefly in the inner cities. “Our biggest lender, GMAC, went bankrupt, and B of A and other banks stopped funding construction loans,” says Miller. “The problem wasn’t that demand for the apartments and stores fell, it was that the financial system shut down. The strength of the very big financial institutions turned out to be an illusion.” The credit meltdown drove Western projects to three-year halt.
“It was such a loss of innocence for me,” says Miller. “I noticed that the bankers kept coining and repeating new expressions. They’d talk about how they wanted to avoid ‘catching a falling knife’ because of a double-dip might be coming.” Another shifty one he abhorred: “I don’t disagree with you.”The waffling language convinced Miller he could never depend on Wall Street’s help in a crisis. Eventually, the Millers repurchased the debt at a steep discount to regain control of the developments, and completed them to reap good returns. And the experience inspired Miller to build a real estate investment business that didn’t rely on the bank funding that he feared could vanish once again.
Miller’s first challenge was regulatory. The Securities and Exchange Commission lacked a framework that would allow ordinary investors to buy into private equity investments via the internet, the way they could buy mutual funds or stocks. Big-name law firms showed little interest in helping Miller solve this problem. Miller recalls visiting a top Manhattan firm in 2011: “We explained our plan about selling to small investors over the web, and the head of the securities practice says, ‘Why bother with the little guy?’” A few blocks away, Miller notes, the Occupy Wall Street demonstrations were raging—an expression of the growing populist outrage among those little guys.
The breakthrough came when Miller and his brother and co-founder, Dan Miller, stumbled on a different kind of lawyer: the SEC’s former general counsel Marty Dunn, “this big boisterous guy in jeans who grew up on the mean streets of Prince Georges County,” as Ben Miller describes him. Dunn told Miller that he’d drafted a never-used rule called “Regulation A” years before that could cover direct private real estate investments via the internet. Miller was trying to raise funds for his first project, a dilapidated office building, a few blocks from SEC headquarters. “The SEC people knew the building,” Miller recalls. “That took the project from the abstract to the familiar for them. Plus, they were looking for ways to encourage capital formation.” In 2012, Miller and Dunn secured the regulatory approvals that enabled Fundrise’s precursor to become the first platform ever to raise private equity dollars over the internet.
The initial offering wasn’t a PE fund, however: It was one of the first crowdfunding campaigns in real estate history, and it wasn’t for shares in a pool of properties but a single building. “We were trying to raise $325,000 at $100 a share to rehab the building,” says Miller. “We launch the product, and nobody shows up. We had 23 investors in the first month. It took us two years to raise the full amount.”
But two years later, Fundrise got a gigantic boost out of nowhere. “I get a Linkedin request from Joseph Chen, head of Renren,” says Miller—an investor and a company he’d never heard of. Once the Facebook of China, Renren had by them morphed into an investment company.
A meeting in China sealed the deal. “Joseph said he’d interviewed every startup in the real estate private equity space,” says Miller, “and he chose us because we had ‘the biggest vision.’” Renren invested $23 million in Fundrise’s parent, the Rise Companies, and provided an additional $10 million for investment in its real estate projects. (Renren remains a large investor in the parent company.) At the time, Fundrise also raised small amounts from other real estate investors, including the family office of World Trade Center developer Larry Silverstein. But the dollars raised in that period represent the only institutional funds Fundrise has ever sought or secured.
Around the same time, aided by Silverstein, Fundrise got an opportunity to be a small investor in the then-most famous real estate project on the planet, construction of the new World Trade Center. That experience soured Miller further on Wall Street capital: “The investment bankers running the deal were promising their clients exclusive access,” he recalls. “They kept trying to kick us out, and Silverstein kept putting us back in.”
Until 2015, Fundrise remained a crowdfunding operation, with investors buying into individual loans or properties only. Most of its investments comprised loans to developers renovating apartment complexes in emerging neighborhoods, notably in Brooklyn and Washington. But Miller saw that urban housing was becoming less and less affordable, and in 2015 he made a quick shift to the Sunbelt, where populations were expanding much faster, but rents remained far lower. The following year, Fundrise introduced its earliest funds, and channeled a much higher share of its investments into owning, as opposed to mostly financing, rental properties.
Around 2018, the Fundrise staff saw that renters increasingly sought larger apartments that resembled mini-homes. “Traditionally, the hardest apartments to rent were on the ground floor,” says Jenkins, the COO. “But suddenly, people wanted garden apartments with yards, where they could cook out or let the dog run free.” To catch the wave, Fundrise started buying and building thousands of larger, bungalow-style apartments. It also expanded into single-family homes, generally using the old formula of renovating older homes one at a time, then leasing them to families.
When COVID arrived, says Jenkins, “We saw that the outbreak would be an accelerant for single-family rentals.” In the late spring of 2020, Fundrise adopted a totally fresh strategy. Miller decided that Fundrise could grow the franchise much faster if it could acquire huge numbers of new homes in single, big packages. Those abodes would be fresher and more appealing to families, require less maintenance, and command higher rents. The trick to making the strategy work: Acquiring the new homes at prices low enough to command strong returns on investment.
With that aim, Fundrise’s is pursuing two separate strategies. The first is purchasing those big batches of houses in a single stroke. A milestone in the campaign came in February 2021, when Fundrise paid $35 million for an entire 120-home, fully built community called The Woodlands, in Conroe, Texas, north of Houston. Built by national homebuilding giant D.R. Horton, the homes feature three to four bedrooms, and cover between 1,300 and 1,400 square feet. They’re renting for roughly between $1,800 and $1,900 a month. The package was almost fully leased when Fundrise made the buy, and it is now 100% occupied. “Rents are growing in double digits there,” says Jenkins. “We’re seeing waiting lists of families that want to live there.”
Since the Woodlands purchase, Fundrise has acquired no fewer than five more finished, mainly pre-leased single-family rental projects from DR Horton: in Pensacola and Palm Bay, Florida; Myrtle Beach, S.C.; Ocean Springs, Miss.; and Foley, Ala. All told, it has acquired over 600 homes from Horton, at a total equity investment of almost $140 million.
Fundrise bought The Woodlands at an auction that likely included several of its biggest private equity rivals. As single-family rentals take off, there’s a danger that such contestants could push prices to levels that, at least at first, result in low yields for investors. Hence, to avoid overpaying, Miller has developed a second blueprint for buying single family rental homes: Partnering with developers to finance some of those homes—and buying them before they ever go to auction.
“The concept is that a developer is building 500 lots, and they want to reduce their risk by contracting in advance for us to buy, say, 150 of those finished houses at a fixed price,” says Miller. That formula substantially lowers the builders’ risk, and Fundrise will often provide further comfort by agreeing to cover 50% of any rise in building costs during the project, over a certain baseline. The upshot, says Miller, is that so far Fundrise is buying homes at a discount of 6% to 10% to the price all-comers pay once the model homes are finished and the flyers start flapping at the grand opening. And that discount means more upside for Fundrise’s millennial investors.
It’s another nimble strategic move by a company that has come up with plenty of them. Chalk up another “first” for Ben Miller.
CORRECTION: A caption in an earlier version of this story misstated the location where Ben Miller was photographed.
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