Rich Uncles is among a growing crop of investment crowdfunding platforms offering a “public, non-listed REIT” (PNLR) leveraging various parts of the 2012 JOBS Act, including Reg A+. Founded in 2006 as a more traditional REIT, they rebranded in 2016 as “Rich Uncles” as part of a strategy to offer REITs via direct marketing to smaller investors (ie, crowdfunding).
Like the other major platforms offering Reg A+ REITs, Rich Uncles features low minimums, and an easy way for non-accredited investors in particular to get broad exposure to commercial real estate, with both regular cash distributions and the potential for long-term equity appreciation.
Types of investments Rich Uncles offers
The REIT you invest in via Rich Uncles invests in income-producing commercial real estate nationwide. The number of properties owned by the REIT will grow as more investors provide capital, and at the time of this writing their website lists 36 properties in the portfolio. The targeted mix is described in their prospectus:
Our investment strategy is to acquire single-tenant retail, office, and industrial real estate leased to creditworthy tenants on long-term leases. Our ideal portfolio is comprised of 40% office, 40% industrial, and 20% retail, with greater than 50% of our real estate leased to investment grade tenants as determined by one of the big three credit rating agencies (Standard & Poor’s, Moody’s or Fitch Group).
What do you get when investing with Rich Uncles?
Investors in a REIT offered by Rich Uncles receive common stock (priced at $10/share, with a minimum investment of 50 shares, or $500). The actual properties may be owned directly by the REIT, or via wholly-owned subsidiary partnerships. Investors are entitled to receive dividend distributions, and unlike many of the real estate investment crowdfunding investment choices, also receive voting rights (one vote per share) along with their investment.
How does Rich Uncles make money?
Part of the Rich Uncles value proposition is that they’re sidestepping many of the typical fees associated with REITs, in particular sales commissions paid to brokers (Rich Uncles intends to primarily use direct marketing rather than sell via brokers). The REIT you invest in pays 3% of the money raised to Rich Uncles as compensation for those sales and marketing activities, which is indeed quite a bit less than typical sales commissions and related fees for REITs.
That said, there are also a range of other fees outside of that 3% that prospective investors should be sure to understand in order to be clear on how Rich Uncles in particular (and its affiliates) are compensated. For example, the REIT will pay its “Advisor” (which itself is a separate LLC, wholly owned by Rich Uncles) an Acquisition Fee of 3% of the price of a property when it purchases a new property. There is also a 0.1% monthly Asset Management Fee, as well as possible Financing Coordination Fees, Property Management Fees, Disposition Fees, Leasing Commission Fees, and Other Operating Expense Reimbursements.
These fees may well be reasonable and appropriate, but as Rich Uncles points out in its prospectus, “Investment in our shares still involves substantial fees which may exceed fees paid by other REITs for the same services.” (And while there are limits imposed on some of those fees, in most cases the REIT’s board of directors can waive those limits.)
Potential returns and cashflow
Investors receive monthly distributions, as authorized by the REIT’s board of directors. Also, all REITs are required to distribute 90% of their taxable income annually to retain the favorable tax treatment REITs receive from the IRS (in short, they don’t pay income taxes as long as they distribute at least 90% of their annual income back out to shareholders). Rich Uncles advertises a “7%+ annual dividend”, though actual distributions and performance will of course vary with the income and performance of the underlying properties owned by the REIT.
Breadth of offerings on Rich Uncles
As of this writing, Rich Uncles offers one REIT option (“Rich Uncles NNN REIT”), with another student-housing oriented REIT listed as “coming soon”. The Rich Uncles website lists 36 properties under the NNN REIT, and as more investment flows into the REIT, more properties would be acquired (though there is of course the risk that they receive capital to invest faster than they can sensibly deploy it, which would potentially drag down returns).
Regulatory framework and due diligence expectations
Rich Uncles is offering shares in their REITs to non-accredited investors, though the current NNN REIT isnot available in all states. Also, while investors need not meet the standards of accreditation as defined by the SEC, Rich Uncles itself has set some “suitability requirements”, which are that investors must have either a net worth of $250,000 (excluding primary residence) [em]or[/em] an income of $70,000 and a net worth of at least $70,000. (There may be some further restrictions at the state level as well, depending on where you live.)
The REITs are “blind pool” investments, so investors are not able to opt-out of particular properties, and are relying entirely on Rich Uncles’ judgment about which properties to acquire and all the terms of the purchase, any renovation, etc.
Also worth noting is that while their model of avoiding the use of broker-dealers does reduce the sales commission, there are potential side effects prospective investors should be aware of. As they state in their prospectus:
Because there is no independent third party underwriter selling our shares or managing the sales effort, there will be no outside independent review of our finances and operations in connection with the preparation of this offering, other than the attached independent audit of our financial statements. Other REITs who use a licensed broker-dealer to sell shares are subjected to a due diligence review by the underwriter or dealer manager to satisfy statutory duties under the Securities Act of 1933 and the rules of FINRA or the national securities exchange where the REIT securities are listed. Therefore, our stockholders must rely on the information in this prospectus and will not have the benefit of an independent review and investigation of this offering of the type normally performed by an unaffiliated, independent underwriter in a public securities offering.
There are plenty of other real estate investment crowdfunding choices that also aren’t reviewed by a broker-dealer, but as a counter-balance to the case agains the sales commission, is something prospective investors should understand.