A pair of investing startups are in a public spat about the future of real-estate investing

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• Startups Wealthfront and Fundrise have opposing perspectives on how small investors should tap into the real estate markets.
• The public real-estate markets provide liquidity for investors, but that might come at a cost. 

Silicon Valley and Wall Street are crowded with startups promising small investors better returns and new ways to access markets like real-estate. 

Now, a disagreement between two of these companies has broken out into the open. The long and short of their squabble has to do with one question: when it comes to real-estate, are investors better off investing in the private markets or using public vehicles?

It all started when Andy Rachleff, the CEO of Wealthfront, a California-based roboadviser with $4.65 billion under management, went after the business model of Fundrise, a Washington DC-based real-estate crowdfunding company. In a September 7 blog post, Rachleff said professionals who run managed real-estate funds fare poorly compared with low-cost index-tracking ETFs, such as Vanguard REIT Index Fund. 

"If professional investors who spend all their time evaluating real-estate investments can’t outperform their relevant indexes, then why would amateur investors have better luck?" Rachleff wrote.Wealthfront

Fundrise's CEO Benjamin Miller says this is a misrepresentation of how Fundrise works. "Amateur investors" on the platform aren't picking individual projects, but rather strategies managed by the company.

"We operate like a Blackstone, but we democratize it and lower costs," Miller told Business Insider.

Still, ETFs do provide investors more diversified and liquid exposure to real-estate. Here's Rachleff (emphasis ours):

"Next, crowdfunded investments are not publicly traded and therefore illiquid, so units can only be redeemed at the end of each quarter versus daily for traditional REITs or index funds. This can help nudge an investor to take a long-term position, but it can also be a problem if she needs to access cash quickly for an emergency."

This ability to access cash quickly comes at a cost, however, according to Miller. In many cases, it can cut deep into returns. Investors who are in it for the long haul, as a result, are paying for something they don't need.

"This is why our product will outperform the public markets because you're not paying for the markup for liquidity," he said.

Here's Miller in a blog post on September 11, responding to Rachleff's argument (emphasis his):

Google"Less competitive, inefficient markets mean an investor can generally buy comparable assets at lower prices than efficient markets. With Shiller price-to-earnings (PE) ratios at all-time historic highs only seen in 1929 and 2001, more than ever investors need to find ways to invest at a reasonable cost basis."

Miller points to the recent initial public offering of Invitation Homes (INVH) to illustrate how expensive the public markets can be. INVH priced 215% higher in the public markets than in the private markets, according to data from Google Finance. 

"Obviously, an investor would have been better off buying in at the $6.36 per share private price than the $20 per share public price," Miller told Business Insider. 

Some Wall Streeters, including Tony James, the COO of Blackstone, the $368 billion private equity and asset management firm, agree that more private and alternative investment options, including private equity, should be opened up to regular investors.

"People are squeezed on ... student loans, healthcare costs, childcare costs, and other things," James said. "They can't save 10% or 20% of their income."

If people are unable to save as much as they used to, they're going to need to get better returns on their investments to make up for it.

"The only answer to that, particularly with the markets, where they are, is to move out of purely liquid markets into alternatives," James said. 

That could happen under the Trump administration, which has made financial deregulation a cornerstone of its agenda. The president has already started to unwind many of the key financial regulations of the Obama administration.

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