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You want to invest in real estate. That’s how many of the world’s richest investors have made real money. The trouble is, you don’t have the big bucks that the world’s richest have. Also, you’d like to start modestly – test the water before you approach the deep end. It’s a reasonable approach.
For starters, over the long term, real estate has outperformed the S&P 500. According to Investopedia, average 20-year returns on the S&P 500 are 8.6%. On residential real estate, it is 10.6%. Thanks to compound interest, over 20 years this difference in average annual returns makes a huge impact on your wealth:
- Over 20 years, an investment in the S&P 500 growing at an average of 8.6% and compounded would result in a fund value of $260,356
- Over 20 years, an investment in residential real estate growing at an average of 10.6% and compounded would result in a fund value of $375,036
Now REITs – they do even better than this. According to Investopedia, the average return on a REIT is 11.8%. Compounded over 20 years, that performance would grow your initial $50,000 to more than $465,000!
Sounds impressive. But is it really? Usually, the higher the potential return the higher the risk. In this post, you’ll learn what a REIT is, and we examine one of the newer REITs in this Rich Uncles review.
What Is a REIT?
A Real Estate Investment Trust (or REIT) is a company that owns income-producing real estate. You can invest in its portfolio of real estate assets and earn dividend-based income and total returns. According to data from Nareit, around 87 million Americans own REIT stocks.
If you want high-paying real estate stocks, REITs could be for you. They must pay out at least 90% of their taxable income to their shareholders – so dividend payments tend to be high.
There are different types of REITs, including equity REITs (which are publicly traded on the stock exchange), public non-listed REITs (which are listed with the SEC but don’t trade on the stock exchange), and private REITs (not SEC registered and do not trade on the stock exchange).
What Is Rich Uncles?
Rich Uncles was founded in 2012 by Ray Wirta and Harold Hofer. As a former chairman of CBRE Group, the world’s largest real estate services and investment firm, Wirta knows a thing or two about real estate. So does Hofer, who has participated in real estate transactions valued in excess of $2 billion as both a principal and a broker in his 35-year real estate career.
The pair wanted to bring real estate investing to the general public and founded Rich Uncles to do so. Instead of being listed on the stock exchange, Real Uncles is a private company marketing directly to the public.
Rich Uncles allows you to invest in its real estate portfolios with an investment as little as $5 through its own online platform.
Because it trades privately, Rich Uncles does not suffer the fees that publicly traded companies must pay. That’s a plus point, though lack of liquidity is a disadvantage for shareholders.
What Does RU Invest In?
Rich Uncles offers two funds: The National REIT and The Student Housing REIT.
The National REIT
The focus in this REIT is to acquire and hold commercial properties located in primary, secondary and certain tertiary markets. They are leased to tenants with strong finances, and on a ‘triple net’ basis – the tenant is responsible for paying taxes, insurance and maintenance. Leases are long term with defined rental increases. Minimum investment is $500.
The Student Housing REIT
The Student Housing REIT focuses on properties that have been built as student accommodation. All are within one mile of an NCAA Division 1 university that has at least 15,000 students enrolled. They have at least 150 beds and a 90% occupancy rate.
Advantages and Disadvantages of Rich Uncles
Before deciding to invest, it’s wise to understand the advantages and disadvantages of investing in Rich Uncles.
Low minimum investment – The minimum investment of just $5 makes Rich Uncles accessible to all.
No traditional REIT expenses – Rich Uncles does not suffer from the fees typically paid by traditional REITs.
Monthly dividend – Rich Uncles pays its dividends monthly, and you choose whether to receive those dividends or reinvest to benefit from the power of compounding returns.
Rich Uncles only makes money if you make money – One of our favorite features. Only if the company makes enough money to pay investors does it make money.
A passive real estate investment – Rich Uncles makes all the business decisions and does all the work, while you sit back and bag your dividends.
Risk reduced by equity – In The National REIT, properties are acquired with 50% equity, providing a cushion against a falling real estate market.
Liquidity – With no secondary market for trading, you are reliant on the company agreeing to a share purchase request. That could be tricky if many investors want to withdraw at the same time.
Monthly dividends are not guaranteed – If tenants don’t pay their rent, there will be no income to distribute.
The payment structure of Rich Uncles – It’s great that Rich Uncles doesn’t make money unless investors make money, but the payment structure after this gives Rich Uncles a big chunk of the potential payout – a massive 40% of the first 6.5% of profits.
Lack of diversification – Although you are investing in a portfolio that is diversified in its class, you suffer from lack of diversification in two ways:
- You are restricted to real estate of one type (e.g. commercial property or student housing)
- You are investing in a single company, with all the risks of doing so – if it goes bust, you lose all your money
Alternatives to Rich Uncles
There are several other private companies that are direct competitors to Rich Uncles. These include:
- RealtyMogul – A crowdfunding platform enabling investors to invest in its private REITs. Minimum investment is $1,000, and it only accepts accredited investors – you must be a sophisticated investor with a net worth of at least $1 million or an annual income of at least $200,000.
- Patch of Land – With a minimum investment of $1,000, Patch of Land allows investors to improve their security of investment by investing in short-term debt instruments. Should a company go bust, you’ll be first in line for any payout. Patch of Land takes between 1% and 2% of any distributions made to its investors. As with RealtyMogul, you will need to be an accredited investor to invest.
Rich Uncles Review – Our Conclusion
There are many advantages of investing in Rich Uncles – a low financial commitment in a passive investing structure that offers the potential for high returns is an attractive proposition. The fact that the company makes no money unless you are making money is a philosophy with which we agree.
However, before investing in Rich Uncles, you must weigh up the risks of doing so. We think that these tip the scales against investing in Rich Uncles:
- You will be investing in a single company, with all the associated risks of doing so
- You will be investing in a single real estate sector
- Rich Uncles does not have a long history of successful trading (even though its founders do have)
- The lack of liquidity means you may not be able to liquidate your investment when needed
One of the primary keys to successful investment is to maintain a diversified portfolio. If you wish to invest in real estate via REITs, a better way to do so would be to invest in a REIT ETF. This will provide greater diversification (because it invests in many REITs within a real estate sector) and better liquidity because it is tradable on the stock market.
For the greatest diversification in this risk category, you should consider investing in a fund that provides full exposure to the stock market – such as an S&P 500 ETF (which also includes some REIT stocks) – and includes other asset classes like bonds and cash in your portfolio.
There are many platforms that can help you get started in investing in a diversified portfolio that considers your financial goals and risk tolerance, such as Personal Capital, which uses ETFs to maximize your investment potential while minimizing your risk by steering clear of risky, single stock investing.