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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, www.crowdfunder.com.  With crowdfunder.com, 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, benefitting 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 www.Reitbid.com), 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!

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C. Osvaldo Gomez with Rich-Uncle, Howard Makler

My certificate!


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!


29 comments:

  1. Mr. Gomez - it is a year later following your latest post, and am wondering how you're feeling about the Nexegen REIT. Would you still recommend it?

    Thanks,

    Greg Fields

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    Replies
    1. ABSOLUTELY! Yes, Greg I would. I wholeheartedly trust Harold, Howard, and Ray.

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  2. It sounds like you are a paid employee peddling company propaganda.

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    1. If you're wondering Ryan, I'm not a paid employee of RU. I am, however, a consultant for which I am compensated in equity. And I'm also an investor so I have skin in the game alike anyone else investing.

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  3. Replies
    1. Now you're just being a hater. I'd delete your comment, but I wan't others to see an example of how Not to consider investments.

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    2. In fairness to your readers, the first line of this review should be the notice that you are financially tied to the company, and not just as an investor. This would give readers a full disclosure right up front instead of reading about it in the comments section.

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  4. This is a very earnest and pretty well-written article by Carlos Gomez about Rich Uncles. However, there's so many red flags about this company that almost (as Justin Ryan alluded to) makes it appear that Mr. Gomez is peddling company propaganda or at least has conflicted interest because why write such an extensive, concise analysis on a company you have only a menial $10K invested in? I only heard about this company only after their excessively annoying commercials from LaDona Harvey on AM 600. Red Flag #1. LaDona knows absolutely nothing about RichUncles other than the nebulously generic details (as provided in every scam), she's only promoting a little more incessantly than Mr. Gomez because of the 'dinero.' And it's annoying how often she mentions Chase Bank, Del Taco, etc. Red Flag #2. Spoken like every pyramid scheme scam, why would such established prominent companies like Chase Bank need rental properties...and better yet depend on some obscurely NEW third-party company like RichUncles to help lease the properties to them? But, that's usually what scam artists do, is to associate themselves with some prominence or establishment for credibility. Red Flag #3: Another NEW, pretentiously-sounding technical investment that simplifies everything for you. Does anybody even know how long they've been around? A full entire year...amazing. So, they do all the work and you sit back and collect the return. It's so complicated, it's simple! Red Flag #4: they are of course illiquid but then Mr. Gomez contradicts himself with their "share redemption program" which assures liquidity. Gray area. What happens if the program doesn't approve of my financial emergency? Then, am I stuck with the shares in the long haul? Investments are either liquid or illiquid, I don't believe in ambiguous circumstances that will feasibly serve as both...because then what obligation would investors in the longer duration? And if the share redemption program proved to be correct, it wouldn't make the investment "almost bullet proof", it would, indeed, make it bullet proof since bonds likewise are not FDIC-insured. And this whole article spends a great deal detracting people from investing in bonds, which I agree with but that doesn't make RichUncles a great alternative on that merit alone. Red Flag #5: the variability on the fixed interest rate is bothersome because there is NO minimum fixed rate, so in essence it could be anywhere from -100% to +7.5%. Mr. Gomez, you missed that in your growth prospect: the potential to lose your entire investment incurred from those variable expenses. Sure, it's highly unrealistic to lose your entire investment but the point is it's legally possible for them to come up with a euphemistic memorandum that entails how they've managed to lose all your money. Red Flag #6: what is the point of their stringent investment requirements? Exclusiveness is a more frequent red flag by shady pyramid schemers #bernie madoff. Okay, most Americans will not be able to invest in this because Americans are terrible at building wealth and the median income is only $50K. But, is a very risky investor who only inherited an abundant amount of wealth from their ancestors acceptable? How about somebody who has excellent credit but only makes $60K/yr with a net worth of $200K? Now, they, of course, aren't good enough because these arbitrary limits say so.

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    Replies
    1. I want to respond only to Nahom's comment "why would such established prominent companies like Chase Bank need rental properties". There are very few businesses that own their own real estate, in fact, many successful businesses who in past generations did like to own their real estate have taken those owned properties and have done what's called a "sale-leaseback". Think about it: as real estate values have skyrocketed, many retail businesses (grocery, fast food, etc.) have realized they are sitting on lots of built-up equity in the real estate they own. For example, if you are Chase Bank, why continue to own a property that might be worth $3.2 Million ($4.00 psf in rent x 3,000 sf x 12 = $144,000 annually. Capped value at 4.5% = $3.2 Million) when your core business is lending and holding money for depositors? It's VERY unusual for any retailer, whether mom and pop or national, to own their own real estate. The only exception is an owner-user who can get an SBA loan, lock in their occupancy cost for 20+ years, and intends to operate out of one location for a very long time. Otherwise best to sell the leased asset (Chase Bank = top notch credit = investors will accept a very low return in exchange for security; Walgreens is another example of a retailer that will command a very low return/cap rate because of their high credit). So, Nahom Michael, sorry to say that you are just flat out wrong with your "Red Flag #2". I'm not saying Rich Uncles is a good or bad investment, but I do know that Chase Bank, Del Taco, etc. all typically lease space from landlords, big and small. And if you're wondering if I'm a commercial real estate professional, I am. I've been a developer and investor in shopping centers for 20 years.

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  5. Finally, all that being said, I personally wouldn't invest in RichUncles but they appear to be a fairly low-risk investment and they are BBB-accredited (for now). The returns of 7-7.5% sound great in this volatile economy but they are simply uncorroborated numbers. The investment is illiquid but also liquid (Carlos can't make up his mind on that). But, take comfort in that "soon enough, the funds could go national" just like Santa Claus could try to fit his fatass down your chimney this Christmas. It's all hypothetical. Though, it does allow you to diversify your portfolio, but that would implies there are only limited sources of investing today. Yes, it's a real estate investment with little to no maintenance (but that's usually how scams operate, they do all the work and you just get worked.) Stil, I think Mr. Gomez made an earnest, knowledgable attempt at promoting RichUncles here, but why isn't he getting paid instead of LaDona (or maybe he is)...

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  6. Noham, thank you for your insights. I've heard the radio promos and they are enticing...too enticing. However, my first red flag was they are not publicly traded which creates a veil as well as illiquididy. You've added much more perspective and insight for me to steer away.

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  7. What a post this is one!How to take care our eye care at low cost that's tell here with a great solution. So this is post different from other site to me. Thanks. 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.Vestvox is a crowd sourced commercial real estate marketplace that helps brokers, investors and tenants discover, market, purchase and lease on a value driven platform. Commercial Real Estate Agent

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  8. Nahom ... thanks for your analysis. I agree that the illiquidity is a red flag for me. It's no surprise that the radio hosts emphasize to do your own due-diligence prior to investing.

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  9. Why not just invest in a publicly traded real estate stock? It's liquid and only costs about $7 to buy with Scottrade! And don't say that stocks are volatile. Non traded REITS can get clobbered if real estate tanks. You don't know what your shares are worth until the very end when the property sells. Just because non traded REITS don't get traded on the stock market is a false sense of security.

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    Replies
    1. I do both. Non-traded REITS offer diversification (assets outside of the stock marker category) for my portfolio. Thanks, Jimmy!

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  10. Thanks for sharing this information. I found it very informative as I have been researching a lot lately on practical matters such as you talk about Property Investment Company

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  11. Highly illiquid and written by someone who has a vested interest in the success of this fund. The fact that Mr. Gomez would invest in public traded funds along with RU is a sham. I have a rule in not following the investment advice of radio talking heads getting paid for it. How about all those ads on tv & radio ads when gold was $1,800. How are those people doing?

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  13. You mentioned that they require a net worth of at least $250K. What can be included in net worth as they define the term?

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  14. For the record, I have not been compensated by Rich Uncles in any way since December of 2015 when my service as a start-up consultant ended. The company is flourishing and I feel very proud to have been a part of the start-up process. Look out for greater things to come. RU is going national and demand for a solid alternative investment (and commercial real estate) is rising.

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  15. They filed bankruptcy in the last downturn. Be suspicious anytime you are promised 2 or 3 times a normal return. You radio and tv hosts peddling this scam should be ashamed.

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    Replies
    1. Mark, that's not the same company. This is another Rich Uncles founded by CBRE Chairman, Ray Wirta.

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  16. I was curious if you ever considered changing the layout of your site? Its very well written; I love what youve got to say. But maybe you could a little more in the way of content so people could connect with it better.You’ve got an awful lot of text for only having one or 2 pictures. Maybe you could space it out better?
    -----------------------------------
    Lagos holiday villas

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  17. I really enjoyed reading your article. I found this as an informative and interesting post, so I think it is very useful and knowledgeable. I would like to thank you for the effort you have made in writing this article.

    ReplyDelete
  18. This comment has been removed by a blog administrator.

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  19. It is imperative for a [startup like ours] to validate what we are doing and to build something that somebody wants to use," said Kurniawan. rental property agencies

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  20. I got the impression from the ads on Radio it was helping out people invest in a worthy cause like helping kids get into rental apartments. As it turns out its simply another REIT leasing out comercial real state. If ever there was risky propostion given that most of the Malls are getting hammered by Amazon. Add to this that it is impossible to get out of ones investemt , (no secondary market) I would say simply investing in the good quality blue chip companies with 3% Yields and buy LEAPS is far safer. Like I said they lie in the ads to hook you. Sounds like a CON. That is exactly what this is imho

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  21. Mr Trump says I don't use my own money to get rich , I borrow other peoples money. Then when I go bankrupt I can walk away with out any liability. Its a great business model if you are the conficdence trickster not if you are putting you money into a vehicle with no secondary market and no way of really valuing what your shares are worth except the hype of the managers who are constantlyt flogging this POS

    ReplyDelete