Chris Brauckmuller, Chief Product Officer of Fundrise, real estate investment platform

In this episode George speaks with Chris Brauckmuller, Chief Product Officer and Creative Director of Fundrise. Chris is involved in all investor-facing aspects of the business, from new product development to the visual presentation of the platform. Prior to joining the Fundrise team, Chris ran his own independent interactive design studio for three years and spent two years as an interactive designer at a large digital agency, where he took design leadership on accounts for the Fortune 500, including Microsoft and BAE Systems.

Fundrise allows individuals to diversify their portfolios into private market real estate investments. Fundrise launched their first online opportunity seven years ago after working with the SEC through multiple filings and audits. The concept was largely made possible due to the JOBS Act of 2012. As a result, Fundrise has invested in nearly $2 billion worth of real estate across the country and has 500,000 members.

Transcript

Intro VO: 0:10

Work. Wealth. Wisdom. This is DC Entrepreneur. We're sharing stories, ideas, and lessons from businesses in the pursuit of innovation. And we're helping build a community of problem solvers and thought leaders in the Washington area. Here's your host George Mocharko.

George: 0:35

This is George Mocharko. Here on WERA 96.7. Today I'm in the studio with Brauckmuller. He is the Chief Product Officer for Fundrise. Fundrise is a real estate investment startup located in the Washington DC area. Thanks so much for joining me today!

Chris B.: 0:54

Thanks for having me.

George: 0:56

So Chris, talk to me about the background of Fundrise, how it started, and what you all do.

Chris B.: 1:01

Sure thing. So Fundrise is an online real estate investment platform. Uh, starting in 2012. Ben Miller is the co-founder and CEO of Fundrise and he was, I would say the genesis for the, the um, the original idea I guess you'd say for the company, as we know it now. He and his brother Dan. So they're doing small real estate developments in DC 2009, 2010, 2011. They want to move into H street or other emerging neighborhoods... and the capital from their traditional capital partners just isn't there. The, traditional capital players, the private equity firms, or other institutions who are, um, who are basically the normal guys who help put money into real estate projects because the developers, very rarely are the only guys providing capital on a deal. They weren't really seeing the vision for the neighborhood. So they... Ben had this problem right where there he saw an opportunity to make good investments, but the capital wasn't there because the, um, the counterparty, the other, the guy, there were people who even normally partner with, just didn't see the vision for the neighborhood. So Fundrise was really born from this idea, basically that the people who live in cities, should ultimately be able to invest in cities too. And to hopefully, um, be able to earn a return or, you know, realize financial gain from what to us is, is a very strong, historically strong investment. And, and to basically participate in, I would say, economic value creation through, through development of property. And I'd say there's a, there's an urban flavor to that. Um, like a, a city based flavor. But there's, that's kind of, I think that that vision is expanded because now we're doing, we're, we're basically investing all over the country. We're investing in urban areas, we're investing in suburban areas. But the common thread being that we're investing where people want to be, it's ultimately a story about people. And it's about a story about knowing where, um, where people want to be and doing what they want to be in, in the sense of like the, the product, you know, um, whatever that may be for sale housing or apartments or retail or what have you. But it's ultimately about where people are going and where they want to be. Um, and, and investing ahead of that and allowing anybody to participate. Allowing anyone who's, um, who basically is interested and is willing to invest some money. But with a low minimum to be able to participate.

George: 3:26

So let's talk about that for a second because I think traditionally this type of real estate investment was mostly open to accredited investors. So now it's open to just anyone that wants to invest in urban real estate.

Chris B.: 3:37

Um, yes. So you do not have to be an accredited investor to invest on the Fundrise platform. Um, and that's actually a consequence of the JOBS Act, which Obama passed I believe in 2012. Um, and then I believe it was promulgated. So it basically came into effect in 2013. But before that, if I didn't know you and I wanted to raise money to invest in a deal with me, you would have to be what the SEC calls— Securities Exchange Commission calls— an accredited investor, which is a person who has some minimum requirements on income or net worth. Um, and so the jobs act allowed us to basically, um, move beyond that limitation and to accept investment from anyone. Um, who had, in our case originally$1,000 in now$500 is u s resident and otherwise, um, the only restriction being that they can't contribute more than 10% of their, their income or net worth in a year. So it was a huge, basically opening up of the access to that type of capital, that smaller, investors as well as smaller capital raisers could connect in that way. It was completely just a game changer for the way we were able to grow our business.

George: 4:56

Yeah. What's interesting about that to me is that it also happened around the same time that you saw this explosion of crowdfunding for a lot of startups and for a lot of projects and, um, even, you know, creative projects like films and things. Like on Kickstarter. So is there a parallel there?

Chris B.: 5:12

I think there's a parallel in the sense that the internet has created this just crazy multiplying factor on, um, on everything. So it connects people, um, people is capital in ways that were previously impossible. I mean, even with, uh, even with the regulatory changes that the jobs act brought about, I mean, doing that business right with paper would be ridiculous. Trying to manage that in a traditional way, not online, it just doesn't make any sense. Um, so in that way I would say there's a parallel to the extent that there's that increased connectivity that the Internet has brought about. Um, you know, the, the, they kind of go, mmm, they go alongside one another in that way. So talk to me about the investment approach. Like, what are you investing in? Are these like mixed use developments or like urban

Speaker 4: 5:58

centers or are they just buildings themselves? Like what, what exactly does that look like?

Speaker 3: 6:02

So we have quite a diversified portfolio of different types of investments we're making. Um, I t the, the common thread. Um, and actually I'll, I'll, I could list off a few of the different types of deals we're doing, but to, uh, to take a few examples. So, um, we're looking at, uh, in the southeast United States, we will go in and directly, you know, in purchase a, um, uh, kind of like a garden apartment style community, um, where this move's been around for a little longer. Uh, maybe not, uh, the apartments inside or a little bit out of date, but the building's really solid and we'll go in and do value add, do renovations. Um, and that'll allow basically us to drive, drive the value of the property through basically making it more competitive and being able to charge more competitive rents. Right? So that's one. Um, all the way through to, um, something like the Louisiana 14 on, uh, on, um, 14th street in DC, which is like your classic example of like a, an urban mixed use sort of retail investment. Um, in La in particular Los Angeles, we see a tremendous amount of opportunity just with the unique, uh, demographic factors in that city at play. But, um, a few different things we're doing there. Um, working with folks who are entitling land to basically up zone it for higher density usage. So we'll actually go and invest in projects like that where you're taking what maybe once was like two or three parcels of land, which each are like, I have a single family home, just a one story home combining those three parcels together and then subdividing it to build like 18 or 20 new homes there.

Speaker 4: 7:35

So multiunit dwellings basically for a lot of these[inaudible] these projects. Yeah.

Speaker 3: 7:39

So I mean I would say that uh, housing is probably the, as far as the product type is the most common thread. But I think the real, the real thing is basically is around potential and around value add. So it's around places where we can go in and through either through physical work, like renovations or through, um, through legal work like entitlement or, um, or basically through letting the market basically act on our behalf around us that, um, we're, that there's basically an opportunity for a lot of value add that we can see. Um, and where we can basically to the extent that we can make smart investment decisions and work hard, um, can affect that value add.

Speaker 4: 8:16

Are you seeing that the trend of urbanization is happening nationwide still at this point? Cause it seems like there's been this wave of redevelopment for a lot of cities. Um, but has it cooled off? Cause I'm starting to see that it looks like there's, you know, there's almost peak construction. Like you're not seeing as many cranes up anymore, but you're not seeing kind of the same types of projects anymore. Has everything cooled off or is the market still kind of moving in that direction?

Speaker 3: 8:41

So I think there's, um, like anything, there's, there's nuance there. But certainly in, um, in, you know, in New York for example, um, or even I think DC, there's still quite a lot of construction going on, but to us, um, pricing has gotten really high. Um, it's really difficult to invest in some of the, like, top five major metro markets now to come into where we are at this phase in the market. And, um, and basically target what we think is an attractive risk adjusted return because there's asset prices are just through the roof. Um, construction costs are high, land costs are high, and there are people who are willing basically to take, um, what we think is basically a lower, you know, lower return than they should be willing to take. And so we're basically not, um, we're not really feeling like it's, uh, we're competing that, uh, we're, we don't want to compete, um, in that type of situation. Okay. So are you going to like mid market cities now? To some extent, yes. Um, so, so la obviously being the exception there because La is just to us a unique animal and there's so many cool things going on in La. Um, it's just, it's so big. Um, and in the housing supply there is just so constrained. They don't have the density, they don't have the density vast and kind of sprawled out. Right? It covers the whole valley and it's this like, you know, basically a lot of single family homes, but, um, even where there is a little bit higher density, it's lower than you would see like in d c for example. Um, and they're just, it's just so big. Um, but yes, to answer your earlier question, basically we, we are going into, um, what you might call secondary markets, right? So we've done a lot of investing in Florida for example, um, which has growing the population growth in Florida is just, it's crazy. I mean, it's growing so quickly. Um, and you can see that thread throughout the, I mean the sunbelt basically, if you will. Um, it's sort of with La being the, the West anchor of that and sort of the Georgia, South Carolina, those coastal areas. Um, Savannah, we recently had a, a rather large portfolio acquisition there too. Um, and so I think the theme to some extent, um, more recently as people leaving the north, um, and, and, and migrating south, um, and, and you can see that in the, um, manifest basically in the population, um, changes year over year from, you know, who are the biggest gainers and who are the biggest losers. Um, in terms of population. I mean like the Midwest, it's just not growing right. And you don't see us doing a lot of investing there. Um, for that reason because again, going back to my earlier point, um, we want to be where people are going. Um, and, and those, if you're paying attention to those trends, um, it's, it's pretty clear where basically where people are moving and where we think there'll be going over the next five, 10, 15 years. Yeah. I think what's also interesting too is that you're giving a chance for really a generation to invest in real estate that has been kind of locked out of that, that hasn't been able to afford their own properties. In essence, a lot of times they rent in an apartment, but they're able to reinvest in some of these, these areas by having kind of like a piece of the action. Right. I mean, ultimately we, um, if you wanted to try to sum it all up, I mean, we want to make it so that every individual, um, can basically access the highest quality real estate investments in, in the self-directed manner. They can, they can basically act on their own behalf, um, come to us and, and we can serve, um, basically serve as their, um, their location for where they're going, you know, their platform, um, for where they can invest in, um, real estate and specifically real estate, um, via the private market as opposed to investing in like a public rate for example. Um, so it, it, to us that's, it's a much closer parallel to owning your own property, to having your name on the title, um, without obviously the, the active, the Ma, the active management required there. Um, but it has some, some of the same benefits. You wouldn't necessarily have to have somebody that, you know, is a property manager in essence, right? Correct. Yeah. I mean, we're doing, we're, we're completely vertically integrated. I mean, you're, the whole idea is that it's a, it's a completely passive investment for you. Um, and we're doing all the active work on your behalf and we're keeping all that active worker as much of it as we can, is economically feasible for us under one roof. So we have as much control over the process, basically from the time that the money leaves your bank account until it goes into the property and comes back out. That's all be to the extent that we can keep as much of that under our, under our purview. Um, we think that, um, that's ultimately going to be a superior model. So, Chris, what's fun rises at Bessman approach. So, um, I think I spoke a little bit about, um, earlier how we think about, um, basically investing in real estate and looking for opportunities to, to add value and to control that value add. Um, but there's also just this, um, what I'd say is like a structural difference, right? Between investing in a real estate via the private market as opposed to, uh, in, in public rates are really that matter for public stocks or bonds. Um, and, and to us, um, that in our thesis, which are, you know, over over a period of time, that thesis will ultimately be proven to hold water and not to hold water, but we think is a, uh, a strong one, um, is basically that there, um, in the, in the public markets, right? Um, the information is perfect. So you have, um, there's a school of thought basically that's very popular right now when it comes to investing that you should basically be indexing because there's no way to outperform the market. Right? So that's sort of this, um, that's where ETFs are, your next funds were born out of. Um, and that's why you see guys like, I mean, I see the ads on TV all the time. It's like, you know, Schwab and vanguard and Ameritrade, they're all basically erased to the bottom. There's this, I'd say prevailing school of thought that there's no way to outperform the market, so you should just invest in the market. Um, and so, um, to, to s to some extent we agree with that. We think that's true when you're talking about the, the nuance areas that we're talking about the public market, right? So, so the thesis is basically that, um, they're in the public market information is perfect right there. That the, the advent of the Internet, um, and basically the mass communications we have available to us along with all the crazy trading tools and everything. I mean, everyone basically has information parody. Um, it's so efficient that it is in fact very difficult to outperform, um, the public market when you're investing in publicly traded stocks and bonds. Um, it's, and you know, you there, there are probably people who would still to some extent disagree with that, but that's the sort of the prevailing school of thought, um, as it comes to investing today. And if you look at really, uh, even the roboadvisor kind of the advent of those guys where they're, um, they're, you know, if you, if you go sign up with one of them, they're basically putting you into a pool of ETFs and they're not, they're not really claiming, um, or, or trying to sell you on the value proposition of them having some kind of like special, um, basically special like investment philosophy that's going to outperform the market through like them actively picking investments effectively. They're, they're indexing. Um, they're indexing according to some risk parameters you give them and their value add is basically doing the stuff that, um, is a little bit maybe hard for you to do as an individual. Like the tax loss harvesting for example, um, in rebalancing. Like they kind of take care of that stuff for you and then they do that for really low fee. Um, but nowhere in there really is their message about like, we actually think we can get alpha. Right. Um, on the contrary, from what we see in the private market, information is extremely inefficient. Pricing is not in real time. Trades are not happening, you know, millions of times a day or you know, intimidation or even, you know, down to the micro, people are worried about the microsecond, their latency from the high frequency trading. I mean, that's sort of being taken to, it's logical, like the flash boys kind of got stuff. Exactly. Yeah. So, so actually on the contrary though is like in the private market information, um, asymmetries really, really common and it's, it's the norm. Um, so you actually can with, or we believe you can with the right Intel basically, um, to do, you can get alpha. Um, and you can do that by, by knowing markets intimately, by knowing people intimately, um, people being the, both the demographic, uh, you know, the people in your city, but also the, the sponsors and the real estate people you're working with. So let's talk about that for a second. So what is the difference between the public and private real estate market? So, um, when you're investing in a public rate, for example, right. Um, and I think that, um, using, using the, um, the framework of time is actually probably the best way to think about this. So when you're investing in, in a public rate, you're investing in what are very like late stage real estate assets is one way to think about it. So, um, you're investing in a finished product where a lot of the, like basically a lot of the risk to some extent, but, but not really. It's a different kind of risk because there's a lot of, it depends on the, the like prevailing interest rate conditions, but a lot of the uncertainty or, but also you could see a lot of the potential has been, um, his basically been baked out of the project. You're investing in the finished thing. So if you go look at like, I don't know, um, Starwood or one of the big rates, um, and one of the big office ones, for example, they're, you know, they're, they're the kind of prime office buildings or retail centers or whatever, um, and their, their big shiny buildings downtown and they're done. They're completed buildings, they're leased up. Um, and they're basically in technical real estate terms, they're sort of stabilized, um, deals, right buildings. Um, and so the difference between that sort of model that, that being the primary type of asset you're investing in and what we're doing is we're investing a, or when you're investing with IC, you have the opportunity to invest in Mo, I would say more early stage real estate assets. So this is like pre-leasing period. This is like, could be like, it's an empty piece of land that we're entitling to build new homes on. It could be, like I talked about earlier, the apartment building that needs renovation, right? It's, um, we're buying it and we're going to put work into it, um, to, to basically make it more competitive. It could be construction to ground up, like basically building a brand new, um, a set of condos or apartments. But you're, you're basically investing earlier in the business cycle. Um, a, we're in the business plan where there's more of a potential to add value. Um, and more of a, I would say more of'em. I'd say you as a, um, as a, the person deploying the money, you have the ability to, um, to basically have agency over the performance of your investments, either through, um, buying correctly, which is a lot of it, but also through the hard work that you put in yourself or selecting a really good partner who's gonna put in that hard work to make those improvements or renovations to the property. Um, that's ultimately where the, where the, the, the Alpha we think comes from th the outsize return. One of the thing I want to ask too is like, do you have a certain amount of reserve capital for a project when something could happen? You know, we're like the real estate conditions or market turns and go south. The, the short answer is yes. Um, and, and, but ultimately that's going to depend on the project structure. So a lot of times with, um, where we're doing a development basically where we're, um, either lending to construction or basically financing, um, construction or, or, or some other early stage value creation. We're, um, we're basically acting as the bank, so to speak. In a lot of cases we're providing, um, for providing a loan. So we're, um, we're committing a fixed amount of capital, which, um, which is basically entitled to a fixed rate of return. The same way that when you buy a house, um, your borrowing from, you know, Bank of America, Wells Fargo at three or 4%. Um, in our case hereby barring from us at what could be, you know, eight or 10% because of the nature of the project. One of the things that's an interesting thing about the product is that you can get exposure to private real estate for a pretty low amount. W what does that look like for the typical investor? That is a diversified portfolio of real estate assets. That's nationwide, that's managed directly by us. And that fits, um, our, our investment parameters for, um, kind of that, that opportunistic, um, value add opera, um, creation, you know, value creation that we, um, that we look for when we, when we make investments. So is that like class a stock, like in a project? I'm, how does that work? Like what does it look like whenever you, you purchase$500 say or upwards of that. Sure. So, um, if you want to get into like the nuts and bolts of it, you're actually investing in a portfolio of funds, those funds, it's like a fund to funds. Sure. So, um, when you invest, whether it's$500, whether it's$5,000 or$500,000, um, ultimately you are investing in directly into, on average I would say between four and six, uh, funds that fund dries managers and those funds. Um, so basically you're purchasing common stock, common shares in those funds, and those funds are actually, uh, what are going out and making the real estate investments. Let's talk about the, uh, investment in fund rise itself. So you're a tech startup, you're based out of Washington, D C You've had to raise capital as a startup. I've had, uh, Casey Berman from Camber Creek who was an investor in fund rise on the show. Can you just talk to me about the approach that Fundrise's gone to create investment? It's an in it's own company. As I spoke before, the, the jobs act really did open up the opportunity basically for capital formation. Um, and so we've, uh, we've always really admired vanguard, um, and they're sort of investor owned model. So our longterm philosophy has always been, um, if you can basically make your investor, um, and when I say investor, I mean our platform investor or retail investor. If you can make them your owner to, um, then you don't have to serve two masters, you can ultimately always act on behalf of the individual investor and what's in their best interests. So once, uh, basically we saw that we had, uh, both the regulatory means but also the, the product market fit, right? We, um, we saw a tremendous amount of growth. Uh, once we launched the non-accredited, basically we opened it up to nonaccredited investors. Uh, once we saw that we had the product market fit and, and the, the regulatory means we, um, to us it just made perfect sense that we would, uh, basically finance our growth of the company from those who are also investing in, um, in our platform. Who are customers of the platform, if, if the, the, just the distinction between investor and, and, uh, being a little, you know, if that's not clear. So are you still investing in DC or is it now just other cities at this point? Um, we have, we have done some investments in d c recently. Um, we have a, um, a loan on a new construction project in Shaw, um, over by basically the, the, the entrance of the Shah u street metro. I think it said about 19 you down there. Um, and we have been doing some single family home investments in d c Too. So I'm both purchasing single family homes and renovating them as well as, um, as well as, uh, doing condo conversions. We have a few of those as well. Um, but, uh, not quite to the volume of where we maybe were a few years ago. Talk to me about the tech behind fund rise. Like how does that work? We've built everything in house. It's all proprietary. Um, from everything from our iPhone app, which we launched in April, all the way to like the, the automated investment processing that runs in the background, um, every, every few hours basically to, um, to look at the orders. Um, the, the accounting software that moves money basically from, from folks accounts into the funds that handles everything from like the dividend distributions to figuring out what you owe on your taxes. We basically, we bring all that in house. Um, and it's this incredibly sophisticated, um, robust set of both front and back, uh, basically back of house systems, um, that allow us to operate a really, really lean, um, you know, uh, model on the side of the, on the investment management side of things. I mean, like to take one example, our, you know, we tact, we generate all of our 10 99, so tax documents, um, in house every year. We have a team of people who does that and the amount of, of just like insane, complex execution of bringing together the accounting team and the, um, the engineers to like, to literally generate like tens of thousands of this year, it'll probably be more than a hundred thousand, 10, 99 documents and to get them done right and to get them done on time. Um, it's both like something we could have only done in house, um, because working with any like third party, we would just either be insanely expensive or, um, or maybe they just told us that couldn't be done. Um, but, but ultimately, I mean, I just think it adds this, um, it adds an insane amount of value to the business. That's a Chris Burke Miller. He is the chief product officer from fun rise. Chris, thanks so much. Thank you so much for having me.

Speaker 1: 25:52

Took it to the next time here on DC. Entrepreneur.