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Would You Invest In a Product Called "Rich Uncles"?

We have been talking a lot about deceptive advertising recently, and I keep hearing an advertisement for a company called Rich Uncles.  In the add they say they are a REIT, which stand for Real Estate Investment Trust.  We don’t have anything against REIT’s, they are a popular investment vehicle for owning real estate, and they tend to pay higher dividends than many other investments. 

A couple of things made me pay attention to this investment, including the silly name. The first was how many times I have come across the ad.  I have heard it everywhere, seen advertisements for it on the internet, and just generally get the feeling that these guys are paying a ton of money for advertising. 

The second is that they don’t exactly guarantee a return, but they more or less promise you around 7+% return in a less than 1% interest rate environment. This is where the warning flags really start going off.  How can they promise that?  Well, I did some digging, and this is what I found out. 

Rich Uncles is a Newport Beach based company, and is also listed as Nexregen Real Estate Company.  From their website, I learned that they buy commercial properties and charge rent to the tenants under triple net leases. They then say they will pay 90% of the income from those properties to their investors. That is all consistent with the way a REIT is supposed to work. The “Rich Uncles” are actually Ray Wirta, who is listed as the Chairman of CBRE Group, Inc., which is a huge commercial real estate brokerage firm. The other Uncle is Harold Hofer, a lawyer with real estate transaction experience. The president is named Howard Makler, and he is listed as a successful entrepreneur, which is pretty vague.

It turns out that you can invest in Rich Uncles with as little as $500, but you have to have a net worth of $250,000. When you click on the “how it works” section of their website, you have to give them your information to create a login. This is another red flag. Why on earth can’t you find out how the investment works without giving them your phone number?

A little more digging found out that Rich Uncles is accredited with the Better Business Bureau, and has an A rating.  They also claim to be public, but are they? They have a public filing with the SEC which can be found here. The answer to this is actually no, because Rich Uncles is actually a privately traded REIT. Privately traded REIT’s are something of a fad these days, and they do not have a great track record. The problems with them are that your investment isn’t very liquid, and your principal may not be available to you when you want it back. Another problem can be the payout. Is that 7% dividend actually a dividend, or is it a return of capital? A quick google search showed me plenty of message board complaints that much of their dividend was actually a return of capital, which people were not happy about. 

If you need more information on why not to invest in this, just check out this recent facebook post where the Uncles explain how a 7% dividend and a 2% annual price appreciation on the properties can lead to a 12% return.  I was never taught that kind of math in school, were you?