Rich Uncles Review Real Estate Crowdfunding
|Value of Deals Done:||USD $345 Million Raised for 42 projects|
|Investment Time Period:||open-ended – 4-10 years|
|Property Types:||REIT – commercial and residential|
|Debt / Equity Deals:||equity|
|Accredited Status Required:||no|
About the Company
Co-founders Harold Hofer, a real estate lawyer, and Raymond Wirta, chairman of real estate firm CBRE, set up Rich Uncles in 2012. The Costa Mesa, California-based firm now runs three separate REITs, with a strong focus on the small investor.
The idea of the public, but untraded, REITs is that because there are no middlemen involved, 10% more of an investor’s money actually goes into real estate investments rather than being swallowed up by fees paid to brokers or salespeople. Though they are not traded, the REITs are registered with the SEC and file audited accounts.
Rich Uncles now manages 42 properties – 22 worth $145m in the NNN REIT and 21 worth $147m in Rich Uncles Real Investment REIT I (only available in California, and now closed to new investment).
The Student REIT made its first investment in April 2018, purchasing Iowa State University’s Stadium View Suites, a 518-bed property, for $5.9m.
Types of deals
The NNN REIT invests in commercial single-tenant properties that are already let on long term leases to tenants with good credit ratings (BBB or above). They are let on a ‘triple net’ basis, with the tenant being responsible for all taxes, insurance, and maintenance.
The Student REIT invests in purpose-built student accommodations, looking for properties with more than 150 beds and, again, with existing high occupancy rates.
The minimum investment for the NNN REIT is a very affordable $500. The student housing REIT can be invested in for as little as $5.
Rich Uncles charges no account fees and no broker commissions. There is a repurchase fee for investors who sell their shares in the REIT; this is 3% in the first year and declines by 1% a year to reach zero after four years.
Investment Time Frame
Since the REITs are not traded, with the exception of the repurchase scheme, investors will need to wait for the fund to be liquidated and capital distributed at the end of the investment period. According to the prospectus, a liquidity event is foreseen within ten years at the latest, and will occur when management consider the conditions are right, possibly within 4-7 years of the initial investment.
Following concern over the lack of liquidity, a share redemption plan has been set up that provides a monthly opportunity for investors who need to sell. However, the company does not guarantee that it will buy back all shares it is offered. It will repurchase at net asset value (less the fee mentioned above), but since property values are only ascertained once a year, the price offered could lag the actual value of the shares.
Do you need to be an accredited investor?
Rich Uncles was set up specifically to enable small investors to access the commercial property market, and that means non-accredited investors. However, for the NNN REIT investors need to meet suitability standards, which differ slightly by state but are markedly less onerous – generally around $75,000 income (against $200,000 for accredited investors) or $250,000 in net worth (against $1m).
The NNN REIT invests in office, industrial, and retail properties, putting down 50% equity. Most deals appear to be valued between $10m and $30m; though Rich Uncles displays details of properties’ addresses, tenants, and floor space, it doesn’t include financials on the summary pages. The tenants are mainly recognizable major names such as Fujifilm, 3M, Chevron, and Northrop Grumman.
A 107,419-square foot office building on Florida’s Space Coast is leased to Northrop Grumman, which has spent $5m in tenant improvements and is likely to renew its lease in 2021. The building checks a number of boxes for Rich Uncles – it is in a prime business area, it has a strong tenant, and it has recently received an update.
A 45,246-square foot R&D and office facility in Carlsbad, California, is leased to L-3 Communications Photonics, a $4bn corporation. Carlsbad is a very affluent San Diego sub-market, and the tenant has a 16-year history at the property, which was renovated in 2016.
The Student Housing REIT is willing to take a higher level of gearing with deals up to 75% debt funded. It looks for purpose-built student housing with at least 150 beds and within a one milk walk of an NCAA division 1 university with over 15,000 students enrolled, and with occupancy over 90%,
Returns on the REIT do not appear stellar. Rich Uncles’ web site suggests that investors should expect a 7% annual dividend with a 2% annual increase in property value. Total returns for all REITs averaged 9.27% in 2017, according to Nareit, with a long-term average of 9.72%, despite the fact that most REITs have higher costs (https://www.reit.com/news/blog/market-commentary/2018-return-expectations-reits).
How does it work?
It is extremely easy to sign up (in fact, it is necessary to sign up to see most of the information on the site), and easy to make a purchase. However, finding some of the detail regarding the investments is not so easy. Generally, the platform seems a little dated and skimpy compared to some of the leading real estate crowdfunding platforms.
The REITs available are public non-traded REITs, registered with the SEC and distributing 90% of their taxable income to shareholders. They can be purchased online and there is also a dividend reinvestment option for investors who don’t require the monthly income.
Since the REITs aren’t sold through FINRA licensed brokers or SEC registered investment advisors, there are no sales commissions or other marketing fees that can add up to 7-12% of the amount invested.
- It is very easy to get started with Rich Uncles; investors don’t need to be accredited and the minimum investment is very low.
- Income from the REITs is paid monthly.
- The platform is very simple to use, though expert investors who want to do their own due diligence may find there’s not enough information for their taste.
- Unusually, the REITs are available to non-resident investors.
- REITs are tax efficient since about one third of dividends will be shielded from tax due to property depreciation deductions.
- A dividend reinvestment scheme makes the site great for passive investors.
- Since the REITs are SEC registered they have to provide audited statements, giving better transparency than private REITs and funds.
- Rich Uncles doesn’t provide a great choice of investments. The REITs focus on monthly income and have a conservative investment approach which may not suit the more aggressive investor.
- Despite the share redemption plan, the REITs are not liquid investments, and investors’ money could be tied up for more than ten years.
- Because the fund has to be wound up to enable investors to exit, liquidation costs need to be taken into account, which isn’t the case with traded REITs.
- There are possible conflicts of interest, since the REITs’ advisors and sponsors are involved in other real estate businesses.
- The NNN REIT is only available in 21 states. The Student Housing REIT is available nationwide.
Early criticisms of the company centered on the rather tasteless name (suggestive of Sugar Daddies) and adverts (deemed to be excessive). However, there are more valid reasons to criticize the company.
In May 2017 the SEC launched an investigation into Rich Uncles’ advertising and sale of securities. The SEC stressed that it was a fact-finding inquiry and did not amount to an allegation of wrongdoing; however, the company has not made any public statement, which seems a little surprising. Further, the company’s auditor Anton & Chia has been charged with auditing fraud (though to be fair, the charges relate to other clients).
Investors should also note that there may be conflicts of interest between the REITs and other Rich Uncle affiliates; this is specifically spelled out in the prospectuses. In this connection, it’s interesting that early criticisms of the first REIT focused on what was considered over-investment in Del Taco outlets. In April 2015 the REIT announced that it was selling the Del Taco outlets; the listing broker was CBRE (http://www.ocbj.com/news/2015/apr/30/22-del-taco-sites-sell/). This relationship could contribute to the performance of the fund; on the other hand, it could play against shareholders’ interests if the fund is either stuffed with property CBRE can’t otherwise sell or if CBRE charges high fees to a captive client.
Does the platform offer pre-funding?
Since the fund doesn’t offer direct investments, pre-funding isn’t relevant.
What are all the fees for a deal?
Looking under the ‘no fees’ promise, it should be noted that 3% of the value of a REIT investment is taken up by administration costs. This is still low for a REIT, and there are no additional fees to purchase shares, as there would be with a broker.
Does the site take a loss if investors lose?
While Rich Uncles doesn’t get penalized for losses as such, it does suffer if the performance of the REITs is pedestrian. Rich Uncles doesn’t get a penny of the first 6.5% return. Once past this hurdle, the company gets 40% of profits.
Is the company VC backed?
Rich Uncles is not VC backed. Most of its $7.7m funding has come from Pacific Mercantile Bank and from Justin Mateen, co-founder of Tinder.
Does the site do direct investments?
The site offers only the REITs; there are no direct investments.
Is there any bankruptcy protection?
Investors hold shares in the REITs directly.