At first glance, Fundrise is one of a few leading online platforms seeking to disrupt the clubby world of real estate finance. However, as we spent more time getting to know the Washington D.C. based company, we discovered there’s a lot more to its story. Like its peers, Fundrise is seeking to shake up business as usual by bringing more transparency and technology to the industry. But we also came to understand that Fundrise is fully focused on providing individual investors with private market opportunities usually not available to them. It also has developed a sharply defined thesis on how rapidly changing societal trends are poised to transform the industry ─ whether the old guard likes it or not. The principal architect of the company’s strategy and its eDirect-powered offerings, including eREITs and eFunds, is CEO and co-founder Ben Miller. Recently, The FR’s Gregg Schoenberg caught up with Miller in Fundrise’s dog-friendly office to learn more about the company’s bold plans and his perspectives on publicly traded REITs, Millennial homeownership, why Amazon’s purchase of Whole Foods made sense and the future of commercial real estate.

The Financial Revolutionist:

Ben, it’s great to see you. I’d like to understand your motivation for starting Fundrise. Why did you decide to create a start-up rather than continue your career as a developer?

Ben Miller: One of the good things about the financial crisis is that it forced many people to reevaluate how they were doing business. At that time, we had a bunch of large-scale projects under development with major capital partners. Most of our capital partners fell apart, which led me to question the whole system.

FR: What specifically didn’t you like about the real estate system?

BM: I've built large-scale real estate projects and know how “go” decisions get made. Those decisions are often driven by an institutional bias towards what’s safe and easily sellable, not necessarily what’s right for the location or consumer.

FR: Is that also true for smaller-scale projects?

BM: Yes. I started doing small-scale real estate and learned there was no money for it. All the money in real estate was institutional money, where it's easier to write a $50 million check than a $1 million check. So I discovered that there was a hole in the capital markets. One day, I was walking my dog thinking about it ─ because that’s how I make real estate deals ─ and it dawned on me to use the internet to address that gap.

FR: Seven years later, you’ve built Fundrise into one of the more successful online real estate platforms out there. What distinguishes Fundrise from others?

BM: If you look at the history of Goldman Sachs, which is basically the history of Wall Street, you’ll see that it figured out that the institutional block buyer was how it could make the most money. The retail buyer was an afterthought. For us, the ordinary investor has been core to our mission since the beginning. Then the JOBS Act came along, which made it possible for us to scale our mission to all 50 states.

FR: Right, Fundrise stands with the individual investor, but so do other platforms. Is part of Fundrise’s edge its sourcing advantage, thanks to your relationships and historical knowledge?

BM: Actually, I think that the sourcing side of our story is overrated. In fact, I’m reminded of a quote I read in a McKinsey white paper ─ even though I’m usually not a fan of consulting white papers. The author said something like, “An investment firm can no longer outperform if it’s comprised of two guys and a Rolodex.” I’ll acknowledge that there’s a credibility hurdle you need to clear, but you’re not going to beat a private equity fund on the basis of your contacts.

FR: How, then, are you sourcing compelling deals for your investors?

BM: By understanding longer-term trends and getting in front of them before others do; to know what really works and to call out the BS when you see it.

Private-public divide

FR: Let’s drill down on an issue close to your heart. You’ve raised eyebrows by arguing against liquidity provided through publicly-traded REITs, which represent one set of Fundrise’s competitors. Can you elaborate?

BM: Too many investors think about the public market like an antiseptic computer screen, where they click a button and then something happens. As a result, it feels like there’s some pure technology at work protecting their interests, but it’s not the case. Investors are not realizing that all assets come from some place and that they're being priced through a buying-and-selling auction dynamic.

FR: You’ve called that market similar to a Turkish Bazaar...

BM: Yes. The problem is that there are different structural dynamics at play between stocks and bonds on one hand and real estate on the other.

FR: How so?

BM: Because stocks and bonds are basically like fruit in the bazaar. Everything is standardized, easily transacted and heavily competed on. But in real estate, a normal buy-and-sell exchange happens once every five years or so.

FR: So you’re saying that in a public REIT, there’s a lot of “middleman margin” and inefficiency buried into the price of the stock. It may feel great to investors that they can get out at any time, but that luxury doesn’t come cheap.

BM: Yes. Average investors are buying REITs for years, not weeks or days. So why overpay for the underlying real estate assets to secure liquidity that isn’t needed? You don't actually hear anybody talking about the pricing spread between public and private markets, because there's not a lot of data out there. But I see it when I look at deals done by public REITs that we’ve passed on.

Keep in mind, too, that the smart institutional money understands the value of investing privately in long-term, illiquid assets. Look at Yale, CalPERS and others. Over the long term, private investments outperform ones in the public market by several hundred basis points per year, which adds up to a huge amount. Yet, many individual investors don’t even know about private market opportunities in real estate.

FR: I get your point, but to play devil's advocate, one could say, “If I buy a big public REIT, I may be overpaying for the underlying assets, but the chance of widespread malfeasance is low because of all the SEC filings, analyst research and general attention paid to them.”

BM: Sure, public markets have robust transparency and regulatory oversight. But what about all those hedge fund managers and high-frequency traders who are also playing in the same stocks? Do you think those wonderful people are looking out for the small investor?

FR: No, that’s not their focus.

BM: Plus, all of our products ─ the eREITs, the eFunds, everything we offer ─ are qualified, cleared and reviewed by the SEC, so you have a standard of disclosure that is pretty darn close to a public company’s. We also adhere to semi-annual reporting and provide audited financials. Add it up and our transparency is akin to the standards of public disclosure we had in the 90s, before the government chose to kill flies with sledgehammers.

FR: What do you mean?

BM: I think there’s been an overkill in public market oversight.

eREITS

FR: Let’s turn to Fundrise’s offerings. How many eREITs do you have right now?

BM: We have five at the moment, all containing assets originated by and invested in by our team, each with a different geographic or thematic focus.

FR: That specific structure, the eREIT, took a ton of time for you to get approved by the regulators. I take it you believe that the new structure was worth the effort?

BM: Absolutely, and as we discussed, they were created so that the individual investor could gain access to real estate assets at private pricing. We think those structures have achieved their goal, enabling investors to own assets at prices 20 to 30 percent cheaper than they would have been able to obtain elsewhere publicly.

FR: In terms of Fundrise’s overall investment performance, you’ve posted annual returns in excess of 12%, with the exception of 2016, when total returns were 8.76%. What accounted for that dip?

BM: We decided to pare back our risk. We also made more equity investments. Normally, when you put equity into deals as compared to debt, returns are lower in the first year.

FR: Do you regret taking those measures, given that the real estate market has continued to boom?

BM: Not at all. Effectively managing risk and not trying to reach for every last bit of yield is important to being a good long-term steward of capital.

eFunds

FR: On that note, you’ve recently launched an eFund product, which adds a new set of risk/reward components to your menu of offerings. Can you provide the thesis that led to this rollout?

BM: We became very interested in housing; however, REITs, which are well suited for certain kinds of commercial and industrial properties, are not ideally suited for housing, because you can’t take income from for-sale housing in a REIT structure. In addition, the REIT structure doesn’t reflect the underlying changes we see happening throughout the industry. As real estate moves more into a services-oriented model, much of the income generated through services won’t be REIT-eligible income.

FR: Why are you so hot on gaining more exposure to housing, given the Fed’s desire to tighten and the longstanding price appreciation we’ve seen in many markets?

BM: We see a huge growth in demand from the Millennial generation for housing in cities. That demand is driven by a couple of megatrends. Number one, the biggest generation in history is entering the age where many will want to go from renting to buying. Second, there’s a vast preference for living in the cities. In previous times, we saw white flight, which basically fueled the suburbs and the mall industry ─

FR: ─ And lots of cul de sacs.

BM: Yes, that too. But today, there’s the same effect in reverse. And yet, if you look at the homebuilding industry, nobody is talking about this. You’re still seeing homes built in the far-out suburbs with builders saying, “Millennials are not ready to buy homes, but when they are, they'll buy in distant suburbs because that's how it's done.”

FR: Really? Are they that detached from the urbanization trend?

BM: Yes, most developers don’t see that white flight was an aberration. Historically speaking, over the last 2,000 years, people lived in cities, and people have remained in cities. I’ve made this point to my peers in the traditional real estate industry, especially to those involved in apartment REITs. When I first said to them, “We’re going to build homes for Millennials in cities,“ they said, "No, no. Millennials don't want to own. They want to rent."

FR: And you think they’re wrong.

BM: They are absolutely wrong. The problem is that there’s not enough supply in the cities. As a result, the cost of housing in most major metropolitan markets is far in excess of what a normal person in their 20s or 30s can afford. That’s why there’s an incredible opportunity for us through our eFund products.

FR: Part of the eFund pitch speaks to the issue of zoning. Can you elaborate?

BM: There’s a huge disconnect between what gets built, those seeking to create the supply and the end consumer. Just look at developers. They have lower approval ratings than members of Congress. So there’s a need for a new voice in the zoning process, and we are going to help mobilize the people who invest in our eFunds to push for zoning changes. Keep in mind that this new voice won’t be coming from a typical developer who’s basically trying to get rich by building some homes.

FR: You almost sound more like a community activist than a real estate guy.

BM: Actually, If you look at the typical group opposing development in a neighborhood, it’s often the progressives who believe that it’s “liberal” to stop the developers. But what they are doing is creating an economic breakdown for a generation.

FR: Because of dated narratives around gentrification?

BM: Right. From a pure economic point of view, it's actually progressive to build, because providing more housing lowers the price of housing.

FR: In looking at the offering circular for your first eFund in Los Angeles, it seems as though you haven’t yet worked out the specifics on how an investor could purchase the home he or she is helping to finance.

BM: Yes, because it’s first and foremost an investment.

FR: But there is some language about providing an ownership opportunity.

BM: Yes, we hope to provide that opportunity. Think of it this way: there are lots of middlemen in the housing business. And when we look at new home construction in a city, we see that eight to ten percent of the total price goes to brokers and marketing. So there's a lot of cost that can be removed if you have the buyer in hand. You could save $100,000 on a $1 million home.

FR: So you’re seeking to offer eFund investors the chance to buy a unit without those added costs. That’s interesting, but you’re still looking at units that will sell for $700,000 to $1 million. That might be cheaper than comparable homes, but it’s still very high for many Millennials.

BM: If you could buy a home for $700,000 in L.A. or D.C., you would be happy. Actually, The New York Times recently published an article about a family who was trying to buy a home in D.C. for $700,000 and couldn't do it.

FR: Would you say, then, that Fundrise’s mission is create a spark on the supply side?

BM: We're not going to single-handedly change the market, but we are attempting to compress the value chain and bring a new voice into the zoning process. If we do that, we believe that we can make a lot more homes and still make money. Somebody said to me recently that one of the most uncorrelated ways to make money is to unlock regulatory barriers to housing supply in cities. You have an asset in Los Angeles or New York or Boston, and if you can get that rezoned for more density, it's worth more, period.

FR: Let’s take the L.A. market, where 40 percent of Millennials live at home and many others are actors from all over. Some might say, “Great idea, Ben, but I don’t know anything about zoning, and I have to go on auditions and don’t have time to attend community board meetings.” Is Fundrise going to play a hands-on role to push for zoning changes?

BM: Yes, that's what we're going to try to do. I've been in front of communities as a developer. I've stood in front of neighborhoods. So I have a good sense of what it means and the political process around how to make change.

FR: How much of the effort will involve getting people to show up to meetings where zoning is discussed?

BM: That’s absolutely part of it. I’ve been involved in community board meetings where people stand up and say the craziest things. Often, they carry the day because nobody else showed up.

FR: Why don’t others show up?

BM: It's very hard to mobilize people to care about something that's not on Prada toast, right? Getting people activated isn’t easy, but I think we can if you’re talking about the most important purchase of their lives.

FR: Speaking of important purchases, I’d like to ask you about Amazon’s purchase of Whole Foods. You played a big role in getting a Whole Foods built in a dangerous section of Chicago, so you must have some views about the company. What’s your take on why Amazon did this?

BM: When I heard the chatter, I was like, “Oh my God, they absolutely should.” It’s not just that Amazon is going to deliver groceries through the Whole Foods local infrastructure. It’s the thing that comes after the groceries.

FR: What’s that?

BM: To me, the obvious thing is taking aim at CVS, Walgreens and all the pharmacies. Amazon will enter the healthcare business through the Whole Foods acquisition, which is one of the fattest margin consumer businesses around. After all, if you walk around many neighborhoods, the only tenants left are restaurants, fitness centers and pharmacies, and those pharmacies are the most ripe.

FR: Regarding commercial real estate more broadly, do you see any silver linings on the horizon?

BM: There are lots of opportunities, but you have to go to the next thing, not the past. For example, there's very little retail built for people with kids in cities today. Your kids are basically confined to public spaces. But to make retail work in a bricks-and-mortar context requires that you provide service and experience. You can't just provide product. So I think you could provide some sort of experience for kids, or kids and families, and you could do some interesting things. There are other concepts like that out there where you could literally charge at the gate.

FR: I like that concept, but getting from here to those opportunities is going to be painful, right?

BM: Yes, because real estate professionals do not want to be in the services business. Most of them feel like it should be enough to own the real estate. And if you look at a city like L.A. and say, "Why is that block such a mess?" Well, it's been owned for 50 years by the same person, and that owner hasn’t changed the space. But today, that's becoming less true. You have to be in the services business to capture the premium of the location.

FR: As opposed to just owning a block of air.

BM: Yes. If you're just selling the commodity, the internet will crush you.

FR: I’ve heard you describe the real estate market as full of “old white dudes.” And in speaking to you at length, it’s pretty apparent that you express provocative viewpoints freely. Do you get much flak? Perhaps an investor who says, “Maybe you should tamp down the language so as not to offend partners or investors”?

BM: (Laughs) Our marketing team has reminded me that pretty soon, I’m going to be an old white guy too.

FR: But you’ve chosen to be blunt even if somebody gets offended?

BM: Well, look at your reader base, Gregg. At times we've said anti-Wall Street things, just like you have. And yet, a lot of our investors are from the finance industry. You can’t make categorical descriptions of finance professionals these days. Besides, I think they can take it.

FR: Authenticity.

BM: Yes, we're just brutally candid about things, and I think a lot of people like that deep down.

FR: Well I’ve enjoyed reading your candid Twitter feed. Recently, you said that it's important that people read books that are not about business. What's the best non-business book you’ve read recently?

BM: I’d say American Caesar, written by William Manchester, about the life and career of Douglas MacArthur.

FR: You have good taste in books, but I’m not so sure about movies. I read another tweet asserting that L.A. Story was a better movie about Los Angeles than La La Land.

BM: Oh yes, by a long shot.

FR: Really? I thought La La Land had an incredible ending.

BM: La La Land had great music, but that was about it in my view. L.A. Story captured the essence of Los Angeles and has one of my all time favorite lines:  Steve Martin is giving a tour of the city and says, “Some of these buildings are over 20 years old.”

FR: That was a funny line, and I can see the appeal of it to you, especially in light of your plans for L.A. Best of luck, Ben, and thanks for your time.

BM: Thank you, Gregg.

This interview has been edited for content, length and clarity.