Rich Uncles: Don’t Ignore the Red Flags [2019 Review]

Rich Uncles REITs

How Do REITs Work?

Real estate investment trusts (REITs) are a way for investors to get cash flow from investing in real estate properties like apartment buildings, self-storage facilities, student housing.

In exchange for buying REIT shares, investors get a percentage of the rent collected from the properties the REIT owns.

Non-Traded REITs

We mentioned that Rich Uncles is a public, non-traded REIT. The REITs are public which means they must submit audited financials to the SEC, which you can pull up here.

Don't invest with cash you need anytime soon

The shares are non-traded which means you can’t sell them on a stock exchange. Instead, you’ll have to wait until the fund winds down to get your principal back, something that typically takes years (FINRA estimates often for periods of eight years or more).

Rich Uncles leaves the termination date open-ended, saying only that their intention is to bring a liquidity event in no more than 10 years.

The typical exit strategies for non-traded REITs are:

  • Selling all of their properties

  • Listing on a public stock exchange

  • Merger or acquisition

    • We presently intend to create a liquidity event for our shareholders no later than the 10th anniversary date of the Termination Date.
      REIT I's Eight Year Holding Period

      For reference, Rich Uncles' oldest REIT, appropriately named REIT I, will take approximately 8 years to complete its lifecycle.

      Rich Uncles announced January 2019 that they hired an advisor to help them find buyers/acquirers for the properties of their first REIT, appropriately named REIT I. Since REIT I was formed in 2012, assuming all the properties are sold by 2020, that is an 8 year investment cycle.

      Saving up to buy a car or house in the next few years? Don’t park that cash in a non-traded REIT.

      Stock Repurchase

      Rich Uncles does offer a stock repurchase program, however, this is subject to how much cash they have on hand. They also note that they can suspend this program at any time.

      In fact, they suspended share redemptions for REIT I after the the NAV declined from from $10.66 to $10.57 a share.

      According to the CEO, the drop in NAV is due to having to use their cash to buy back shares from investors.

      "While the Company's real estate portfolio value remained comparable to the prior year, a decrease in our cash balances resulted in a $(0.09), or approximately 1% decrease in the NAV," said CEO Aaron Halfacre. "The cash decrease was primarily due to funding our share repurchase program and other cash needs."

      If you own the shares for less than three years, you’ll be subject to a 1-3% fee.

      Rich Uncles REITs

      RW Holdings NNN REIT
      Started Incorporated on May 14, 2015
      Portfolio Single tenant corporate real estate. Current tenants include Dollar General, Williams Sonoma, and 24 Hour Fitness
      Price Per Share $10
      Minimum Investment $500
      Accredited Investors Only Yes
      Dividend as of January 2019 7% (subject to change at any time)
      BRIX REIT
      Started
      Started April 2018
      Portfolio BRIX was originally meant to focus on student housing. However, according to the December 2018 update they filed with the SEC, the student housing market has gotten more expensive, and the returns less enticing
      Minimum Investment $5
      Accredited Investors Only No
      Dividend 6% (subject to change at any time)

      Rich Uncles: Cutting Out the Middleman

      They say that their differentiating factor is that they cut out the middleman: the broker.

      Traditional REITs pay broker-dealers a hefty commission (typically 6-10% of whatever amount is raised) to drum up investor interest. That means for every $1000 you invest in a REIT, $60-$100 immediately goes out the window.

      That's where a new class of eREITs like Rich Uncles and Fundrise come in. They purport to lower costs by forsaking brokers and passing those savings to investors.

      Rich Uncles Fees

      While they widely tout their 0% brokerage fees, there are plenty of other fees baked into Rich Uncles' fund.

      Marketing/Offering Fee: 3%

      Since they don’t go through a broker, Rich Uncles needs to spend money on marketing and legal fees to drum up interest.

      In fact, you might have first heard of Rich Uncles through one of their ubiquitous radio ads. That kind of ad placement isn’t free.

      In both the RW Holdings REIT and the BRIX REIT Offering Circulars, they disclose that they charge investors a 3% fee for expenses related to radio advertisements, legal and accounting services.

      Advisor Acquisition Fee: 3%

      Everytime the REIT purchases property, it will pay an acquisition fee to its advisor, which is another LLC that’s completely owned by Rich Uncles.

      Asset Management Fee: .1% (Monthly)

      Financing Coordination Fee: 1%

      Property Management Fees: 1.5% of rent

      Subordinated Participation Fees

      This fee is similar to a carried interest fee where the advisors get a share of any profits above a certain profit threshold (above 6.5% returns).

      With Rich Uncles, the advisor takes a whopping 30% cut when it crosses the 6.5% profit threshold.

      For comparison, the Blackstone Real Estate Income Trust charges 12.5% carried interest.

      Leasing Commission Fees: 6% of rent for each lease it negotiates

      Track Record and Financials

      NNN REIT

      The Company invested in 22 operating properties as of September 30, 2018. The buildings are fully leased with an 100% occupancy rate.

      Starting in January 2017, Rich Uncles paid monthly dividends at an annualized rate between 5.6% - 6.2%.

      On January 11, 2019, the estimated per share NAV of the Company’s common stock was set to $10.16. This valuation was completed by Cushman & Wakefield.

      BRIX

      The Brix REIT has paid out monthly totally annualized 6% dividend since December 2018.

      No Guarantees

      Note that you aren’t guaranteed to continue receiving a certain dividend. It is possible that the properties don’t generate enough cash to pay shareholders a dividend.

      The Brix Circular Offering clearly states, "We have not established a minimum distribution or distribution level, and our charter does not require that we make distributions or distributions to our stockholders other than as necessary to meet IRS REIT qualification standards."

      Rich Uncles: A Scam?

      Going through investor reviews online, it seems there’s some controversy about where the dividend is coming from. Some investors allege that their dividend was actually a return of capital, similar to a Ponzi scheme.

      We reviewed their SEC filings to get to the bottom of this. First, the dividends are not just a straight return of principal. The company addresses this explicitly, writing: "We will not use the proceeds from sales of our common stock or borrowed money to pay distributions."

      Rich Uncles defers sponsor/advisor costs if their properties aren’t producing enough rental income to cover the dividend. For example, if the REIT owes Rich Uncles $500,000 in advisor fees, they will “defer” this cost and use that $500,000 to pay investors their dividend. After the properties start to cash flow, they will pay the $500k.

      Rich Uncles has Two Problems

      There are two more red flags to be aware of.

      The SEC charged Rich Uncles’ previous auditor Anton & Chia for ignoring the fraudulent financial reporting of three of their clients.

      The SEC charged Rich Uncles’ previous auditor Anton & Chia for ignoring the fraudulent financial reporting of three of their clients. Rich Uncles wasn't one of the implicated clients and they actually used a different auditor for their Brix REIT. However, there is an interesting Wall Street Journal article which raises the possibility that Rich Uncles inflates its revenue.

      Our Verdict

      Despite some negative reviews online, there’s little evidence that Rich Uncles is a scam. They’ve successfully paid out a dividend since the inception of their REITs. However, their marketing around their fees is definitely misleading.

      The big risk with non-traded REITs (other than the risk of high, hidden fees) is that there’s very little transparency around the NAV. There are horror stories of investors who think their fund is doing well for years, until the fund liquidates and they find out the portfolios is worth half what they thought it would be.

      Since Rich Uncles is currently trying to sell off REIT I’s portfolio, we recommend waiting until the sale is finished to invest with them. That way, we'll have a more complete picture of their IRR before committing to a multi-year relationship.