- Review: Rich Uncles
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Using a crowdfunding platform to raise capital is a popular new concept in real estate investing, including Real Estate Investment Trusts (REITs).
Crowdfunding makes property funding easier and faster than going through the traditional routes of finding bank financing or investors with large amounts of capital who are interested in specific opportunities. It also opens up real estate investing to people who have only small amounts of money to invest.
Rich Uncles’ business model allows everyone the opportunity to own commercial real estate through an investment in their NNN REIT.
What Is Rich Uncles?
Rich Uncles provides an online platform for investors to buy shares of their single-tenant commercial property REIT, called the Rich Uncles NNN REIT. The REIT is invested in property leased by retail businesses, such as gas stations, drugstores and grocery stores, that pay monthly rent. The collected rent is distributed to shareholders monthly as dividend income.
Rich Uncles’ platform provides photos and details about the properties in the REIT. While you don’t pick specific properties to invest in — there’s one REIT that holds these properties and you invest in the REIT itself — you can get a good feel for the portfolio holdings by reviewing the details of the individual properties online.
Rich Uncles acquires and holds commercial properties that meet specific criteria to reduce risk and provide reliable rental income. Specifically, they seek single-tenant properties:
- located in primary, secondary and certain tertiary markets;
- where construction is substantially complete to reduce risk associated with new construction;
- leased on a “triple net” basis where the tenant is responsible for the payment of taxes, insurance and maintenance;
- leased to tenants with strong financial statements including investment-grade credit quality; and
- subject to long-term leases with defined rental rate increases.
According to co-founder Howard Makler, Rich Uncles gives small investors the opportunity to “invest alongside the chairman of the world’s largest commercial real estate company and a handpicked team of experts that know the world of real estate inside and out.”
Rich Uncles’ founding investor is Raymond Wirta, former chairman of CBRE (NYSE:CBG), a global real estate services firm. Rounding out the management team is CEO Harold Hofer, a lawyer who has participated in real estate transactions, as a principal and as a broker, valued in excess of $2 billion in his 30-year real estate.
To understand Rich Uncles’ product offering, it’s important to understand the difference between a traded REIT and a public non-traded REIT, Rich Uncles being a public non-traded REIT.
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A Real Estate Investment Trust, or REIT, is a corporation that takes capital from many different investors and uses it to buy income-producing real estate. In general, a REIT is an entity that:
- combines the capital of many investors to acquire or provide financing for real estate investments;
- allows individual investors to invest in a professionally managed, large-scale diversified portfolio of real estate;
- pays distributions to investors of at least 90% of its annual REIT taxable income; and
- avoids the “double taxation” treatment of investment income, because a REIT is not generally subject to federal corporate income taxes on the portion of income distributed to its stockholders.
Shares in public REITs are available to any investor through the stock market, can be purchased from any registered investment broker and are considered to be liquid — the shares trade on the stock market exchanges, and therefore can be bought and sold quickly. There are hundreds of public REITs on Vanguard, Fidelity, Schwab and other brokerage houses from which you can choose.
Rich Uncles’ offering, NNN REIT, Inc., is classified as a public non-traded REIT. The distinction is they are “public” to the extent they are registered with the SEC, so the public can view their offering, but they do not trade on the open market as do the public REIT shares you purchase from an investment broker.
Typically, the sponsor of a public non-traded REIT has an in-house dealer-manager that is responsible for marketing shares to FINRA-licensed broker-dealers and SEC-regulated investment advisors, which results in substantial fees. These fees typically include:
- 5% to 7% sales commissions paid to the broker-dealer for soliciting the investment,
- 2% to 3% commission paid to the dealer managing the sales effort, and
- 1% to 2% paid to the broker-dealer for costs associated with a due diligence review of the offering.
All these commissions and reimbursements mean approximately 8%–12% of the cost of the typical non-traded REIT is spent on broker-dealer and dealer-manager costs, leaving only 88%–92% of investment dollars being placed into actual real estate.
Rich Uncles, LLC, was founded for “a single purpose — to make real estate investment easier and less expensive for the small investor.”
Instead of using the typical broker-dealer distribution channel and paying advisory intermediaries, Rich Uncles uses crowdfunding and the internet to market their REIT directly to investors.
Rich Uncles believes that with the ease and transparency of the internet, the company can deliver a real estate product that has roughly 10% more of the investment amount actually being invested in real estate rather than being paid to others in the form of commissions and reimbursements.
Rich Uncles Features
Return — Historically, Rich Uncles has distributed a 7.0% annualized dividend on a monthly basis. This is an increase from the 6.5% annualized dividend they offered when their NNN REIT first launched in July 2016. The hypothetical earnings found on their website assume you reinvest your dividends over five years.
Liquidity — Rich Uncles’ REIT provides a share redemption program that can be accessed through your shareholder dashboard. You have the option of selling back your shares to Rich Uncles. This aspect of their offering was developed in order to meet the market’s demand for a real estate investment product that did not follow the ebb and flow of the traditional stock market, but still provided a level of liquidity traditional commercial real estate can’t match. In this sense, Rich Uncles’ model adds liquidity to a previously illiquid product.
Long-term investment — When you invest, you are committing to being part owner of many commercial real estate properties. Real estate is a long-term investment. When the fund reaches its cap of investor capital — typically 4–7 years — a fund liquidation event takes place and investment proceeds are distributed. You get your value back — what your shares are worth at the time, plus profits from the proceeds of the sale of all the buildings owned by the fund.
Rich Uncles is considered an “open-ended” fund, meaning there is no set liquidation date. It is up to the principals of Rich Uncles to determine the appropriate time and circumstances for portfolio liquidation.
Rich Uncles has their shares revalued by an independent third party appraisal firm on an annual basis, which allows their investors the chance to benefit from increases in property value over time.
50% cash equity ownership in all owned properties — Rich Uncles limits their mortgage debt by buying properties with 50% cash down payments, which means they carry 50% cash equity ownership in their entire real estate portfolio.
Dividend reinvestment option — You can choose to have your monthly dividends automatically reinvested and compound your ownership.
No broker commissions; No investor fees — Because Rich Uncles doesn’t use brokers, they do not pay commissions, instead choosing to use crowdfunding to find investors, which reduces their overhead and increases the percentage of returns they can distribute to their members.
“Triple-net leases” — Rich Uncles buys commercial properties where tenants are responsible for paying all property-related expenses, including taxes, insurance and maintenance.
Availability — Rich Uncles NNN REIT is currently available to residents of: CA, CO, CT, FL, GA, HI, ID, IL, IN, KY, LA, MT, NH, NV, NY, SD, TX, UT, VT, WI, WY.
- No REIT expenses — Typically, public-traded REITs pay subordinated performance fees equal to 15% of the amounts by which asset sale proceeds exceed the amounts paid to purchase shares, and a return of their invested capital plus a 6% cumulative, non-compounded annual return on invested capital. Rich Uncles charges none of these customary fees. They completely skip the middleman — and his commissions — by marketing directly to investors through their crowdfunding platform.
- You make money or Rich Uncles doesn’t get paid — Unlike your typical portfolio manager or broker who collects his monthly management fee or commissions whether he makes money for you or not, Rich Uncles’ business model is performance based. The first 6.5% of profits is paid out to shareholders — Rich Uncles makes money only if the investments deliver — and their share is 40% of profits once the investment exceeds the 6.5% hurdle.
- Truly passive real estate alternative — Rich Uncles REIT is a truly passive real estate investment. You invest in the REIT and Rich Uncles does all the legwork and paperwork associated with owning, leasing and managing commercial properties, paying you cash dividends on a monthly basis.
- No need to be accredited — You don’t need to be an accredited investor. Rich Uncles asks only that you have a combined family income of $75K or a net worth of at least $250K. Suitability standards differ slightly from state to state, but richuncles.com walks investors through the requirements of their state of residence.
- High-quality tenants — Rich Uncles invests only in single-tenant commercial properties with existing long-term leases. They don’t buy vacant buildings and find tenants. They don’t invest in distressed properties and rehab them. They acquire only three types of properties — office, retail and industrial — which are already leased to high quality tenants.
- 50% equity reduces real estate mortgage risk — Rich Uncles only acquires properties with 50% equity. That would be like you putting a 50% down payment when you buy your home.
- Geographical diversification reduces real estate exposure risk — Rich Uncles’ strategy is to acquire properties across the country, thereby reducing the risks of any one market by diversifying their holdings geographically.
- Low minimum investment — The minimum investment of $500 opens it up to many more people than most commercial real estate crowdfunding platforms.
- Monthly dividends — Like a dividend-paying stock, Rich Uncles REIT provides steady monthly dividend income (under normal circumstances). You can choose to receive your dividends in cash or reinvest them.
- Investment Liquidity — Once you make an investment, you are pretty much committed to the investment for the term. There is currently no secondary market to sell your investment to others.
- Long-Term investment — While some investors have turned to non-traded REITs to sidestep stock market risk, it’s important to understand you give up some liquidity at the same time. Real estate is longer-term investment. You don’t really know what your shares are worth until the very end when the property sells, or Rich Uncles conducts its annual asset appraisal and adjusts share value accordingly.
- Monthly dividends are not guaranteed — This can be said of any dividend, really. There are no guarantees when it comes to investing, and that includes the monthly payouts from Rich Uncles. Rich Uncles’ 50% equity model greatly diminishes the chance of foreclosure on any of their holdings, and their tenant screening process ensures credit worthiness, but there is still a chance tenants will fail to pay their rent, which would mean there is no rental income to distribute.
- Their website requires an account even to “Learn More” — When you click on their links of “Learn More” or “How it Works,” you are given the option to create a login. If you don’t want to create a login, you don’t get to see more about the company.
Rich Uncles’ REIT investing strategy is to buy commercial real estate with at least 50% cash down, rent the spaces to reliable companies with long-term leases and pay out the rental income to their REIT shareholders via monthly dividends.
Similar to Fundrise, which we reviewed a few months ago, Rich Uncles REITs give investors access to real estate deals without the high dollar commitment typically needed, without being an accredited investor and without paying the high front-end load fees typically charged by REITs.
Rich Uncles’ business model is an investor’s dream in the sense that, unlike brokers who get paid commission whether they make you money or not, Rich Uncles is incentivized to make money for you. The company is entitled to profits only after the REIT delivers a return of 7.0% to shareholders.
Purchasing shares of Rich Uncles NNN REIT, Inc. involves some risk, including the fact that Rich Uncles is a new company with a limited track record. As with any investment, you should carefully read the prospectus prior to making your investment decision.