Wednesday, March 26, 2014

Investing with Rich-Uncles

This month I invested with Rich-Uncles.  Rich Uncles is the brand name for the Nexregen Real Estate Investment Trust (REIT) I fund.  Nexregen runs out of Newport Beach, CA.  How I came across the Rich-Uncles brand was through Facebook, believe it or not.  I saw their ad and decided to comment.  This put me in contact with Uncle-Howie, Howard Makler, a co-founder of the company.  To make a long story short, after doing my due diligence on the company, investigating what type of returns I'd get on my money, reading the prospectus (includes risks and growth prospects), and talking at length with Howie, I decided to invest.  I used my Roth IRA to invest and put in $10K.  This bought me 1,000 shares of this public, non-listed REIT.

Why I like the investment and the company:

First, you will earn anywhere from 7% - 7.5% on your money (annual return).  You can certainly try to earn more in the stock market, but...the stock market is currently overvalued.  In "Learning to Live With a Stock Bubble," Boston based money manager, founder, and strategist at GMO, Jeremy Grantham, states that stocks are 65% overpriced.  He says that stocks could run up another 30% but by this point we'd be at a true bubble.  (Source: Barron's magazine, March 17th edition).  I don't want to be around in the market when we've reached this point.  Do you?  I hope not.  So, a 6%-7.25% return on my money looks good in comparison to what I could make in an ominous stock market.  Nexregen REIT I is not coupled to the stock market!  It is a public, but not exchange traded, REIT.

Second, it allows me to diversify my portfolio.  I own rental properties, equities (stocks), and now...shares of a non-listed REIT!  With the rental properties I own, I have to hire a property management company to take care of collecting the rents, evicting, and attending to the needy tenants.  Not to mention, if something breaks, I have to authorize expenses to fix the problem, (no hot water, air conditioning goes down, etc.).  Sure, these are all tax deductible expenses, but not until the end of the year!  With Nexregen, you are in essence a minority owner of multiple commercial real estate properties.  Yet, you are not a landlord.  The company takes care of any necessary upkeep for you, they collect the rents, lease the properties, etc.  You sit back and collect the quarterly dividends (and can reinvest them, i.e., use to purchase more shares), as if you owned a rental property, but never have the headaches related with being a landlord.

Third, as a REIT, Nexregen has to, by government regulations, disburse 90% or more of the profits it makes to all investors, i.e., share holders.  I expect Nexregen, a crowd funding entity, to continue to grow.  I like its growth prospects and I'm not just saying that because I'm an investor.  Right now, Nexregen is stocked with 22 properties, leased to the Del Taco franchise, in California.  The fund, because of current regulations, that I suspect will end soon thanks to the Jobs Act, is prohibited from doing business with non-California residents.  Again, to me this is an ephemeral situation.  Soon enough, the fund could go national!  And then....just think....more investors = more properties = more in profits = more in the form of dividends to shareholders.  Also, I don't think the fund is anywhere near being saturated in California.  It is in its infancy within its growth cycle.  So, investors now are on the ground floor.

Fourth, in my estimation, the real estate market is on the rise again.  It has already experienced its bust in the cycle, and as you know, this bust was one of epic proportions.  Really, can real estate fall back to those 2008-09 levels?  I think the odds of that are very slim.  What does this mean?  It means that properties, including those held by the Nexregen fund, will appreciate!  When and if the company decides to sell a property, the value of the building should be worth more (I don't want to assume, but I would expect they would only sell in cases where they would turn a profit on the building) and the proceeds from this sale must be disbursed to shareholders.  I'm not a commercial real estate expert, but if residential properties stand to increase in value, I would suspect that the commercial real estate market is right behind.

Fifth, ease of entry.  The fund only asks that you have a family income (combined) of $75K OR a net worth of at least $250K.  This opens it up to many, many, people (in California).  The minimum investment is only $5K!  I looked at other crowd funding platforms, in particular,  With, you have to be an accredited investor!  Also, you have to select the deal you want to help fund. And, there is no guarantee that the deal will even fund.  You end up waiting for the deal to go through, in other words.  With Rich Uncles, you'll be immediately in their books once you buy the shares, benefiting from any upside, and with each passing day, you are that much closer to getting your dividend disbursement.  Also, you don't have to worry about whether or not you funded the right company/deal with your decision because the current structure is that of the multiple Del Taco properties.

I've share three Pros and now I'm going to share the Cons:

First, the shares are relatively illiquid.  Although you can sell your shares (a platform to do so would be, there is no open market for them, unlike shares of publicly traded companies.  So, if you're buying into the fund, most likely you want to accumulate shares via the dividend reinvestment option, though you could opt for steady, long-term income, with a reasonable return.  Think real estate investor, not stock market investor.  You're not going to make a trade, buy low, sell high, in less than 1-year.  You are committing to being part owner of many commercial real estate properties, so you should be in it for the long haul (until the fund closes, 4-7 years from now).  I don't think this is that bad of a Con, but it needs to be stated.  When the fund closes, that is, reaches its cap of investor capital, a liquidation event will take place.  This is when you'll get your value back, what your shares are worth at the time, plus profits from the proceeds of the sale of all of those buildings!

Howard Makler states: "It's going to be closer to five years.  We will look to be at the top of the commercial real estate market (when we sell everything) to squeeze out the most upside we can for our shareholders."

***New Update: 5/15/14: The Nexregen REIT has implemented a share redemption program.  In the event of a crisis or emergency (whatever you deem to be as the investor) you will now have the option of selling back you shares to the company at full value!  This is a game changer for me and it adds two things in my mind: 1) reassurance that I can cash out when I need to and 2) liquidity.  I intend on staying invested for the duration but it is good to know that investors could, under hardships, sell back their shares and attend to their financial needs.  This makes this investment now almost bullet proof!

Second, you're not going to get a fixed interest rate on your money.  Unlike a bond that returns 6-8%, the interest rate from the Nexregen REIT will be variable.  7-7.5% annual rate is a true descriptor of the variability.  Why isn't a fixed rate?  Well, because with real estate, you will have variable expenses each quarter.  If nothing goes wrong, every building runs smoothly, every Franchisee pays the rent on time, and all is wonderful, then yes, you should expect a premium return as a shareholder.  But, alas, there are always little things that happen, and this hits the gross proceeds (top line) of the fund.  You may be thinking right now that a bond is a better option.  It is not!  Especially not right now (2014).  Bonds are a terrible investment right now.  You have to consider that the Fed (Federal Reserve) is going to raise rates.  Rising interest rates mean lower bond prices.  Sure, just consider a $10K investment in a bond today, yielding 6%.  Say a month from now the Fed raises rates and an investor can get the same bond with a 6.5% yield.

In order to attract more investors, the price of the bond you paid $10K for, will need to adjust to $9,500 or something like this (I'm not a bond expert) so that others will be enticed to buy the bond.  Bonds have inherent risks as well, e.g., default, when the entity you bought the bond from can't meet its obligations.  You could get a bond with a shorter maturity, 2 years, for example to avoid the pitfall of rising interest rates, but...there is no appreciation (like real estate) and they are overpriced right now.  Mr. Grantham states: "They look absolutely, nerve-rackingly overpriced, and in a crisis, who knows what will happen to those securities?  They could make stocks look like a safe haven if the the next bust occurs at the federal levels of the large countries.  Bonds, including government bonds, are a lot more dangerous than people imagine."  Nexregen is superior to a bond in my view, if you can live with the slight variability in the rate of return.  (**Update: the fund has returned 7.5% for 6 quarters straight now as of August, 2014).

These are all of the cons I could think of.  I fully endorse Nexregen REIT fund, better known as Rich-Uncles, and cannot wait to begin collecting my steady quarterly dividends!

C. Osvaldo Gomez with Rich-Uncle, Howard Makler

August, 2015 update: The company is now called, Rich Uncles Real Estate Investment Trust I.  The website platform has made investing completely automated.  In addition, the portfolio now includes a Chase bank, and 3 Chevron service stations!

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