I first came across Rich Uncles in 2015, when my wife and I were contemplating buying a second piece of investment real estate. Our first was our “accidental investment” condo. Managing the condo was a series of headaches our first few years as accidental landlords, and we eventually hired a $100/month property manager for the rental, as we didn’t enjoy the process. It took twelve years of holding onto the condo before we could sell for a price that was break-even to its original 2005 purchase price (sold eventually in October 2017).
This is all to explain why we ultimately decided to exit the business of holding physical real estate for investment purposes. We would rather have a balance sheet with little to no debt as that brings the GYFG household a lot of peace of mind. Plus, a non-physical investment requires much less mental bandwidth, which I need a lot of to aggressively research and pursue investments of all classifications that fit my profile requirements to hit my goals. But this doesn’t mean that we are no longer interested in real estate as an investment class. We just don’t want to own it directly, and would prefer to invest in it passively (for now).
To date, we have found two alternative ways to passively participate in real estate related investments. Most recently, over the course of the last year we put $100,000 to work through the PeerStreet platform (talked about here and here), which allows us access to the debt side of real estate investing via hard money lending in the residential sector. However, our first experiment in passive real estate investing was through the Rich Uncles platform, participating on the equity side of real estate in the commercial sector, which we will discuss here.
Rich Uncles is a non-listed public Real Estate Investment Trust (REIT) that invests exclusively in commercial real estate. When its first fund opened to investors, it was initially only available to California residents, but they have since started a second fund that is open to investors across the Unite States. Our first investment in May of 2015 was small at $500 to test the waters. We now have $50,000 invested through the platform. With a 7% annual dividend, paid monthly, we are currently earning $3,500 per year in passive income (with our dividends automatically re-invested to stoke the compounding fire).
So, What Makes Rich Uncles So Appealing?
“The essence of portfolio management is the management of risks, not returns.” – Benjamin Graham
Where do I start? The Rich Uncles investment philosophy aligns very well with my own investment philosophy, which looks at investments through the lens of risk mitigation first. I’m looking for investments that exhibit asymmetrical risk to reward profiles, to build what Warren Buffett refers to as a “margin of safety.” As described in my list below of Rich Uncles’ characteristics, I think you’ll see that it fits this parameter very well.
I’m looking for investments that I believe are going to return more than $1 dollar for every $1 of risk I take. Ideally, I want to follow the philosophy of billionaire Paul Tudor Jones, who only makes investments when he thinks there is at least $5 worth of reward for every $1 of risk. This allows me to be wrong four out of five times and still be whole (i.e., break even).
Remember, the primary goal before return on your capital is the return of your capital!
Now, on to the list of characteristics that makes investing in the Rich Uncles REIT so attractive:
(1) Tenants are typically recognizable creditworthy tenants. We’re talking about big companies like Chase, Del Taco, Chevron, Dollar General, GAP, Williams Sonoma, Harley Davidson, Wyndham, etc.
(2) Tenants pay all property-related expenses due to the nature of the leases being triple net (NNN). This includes taxes, insurance, utilities, and maintenance. The leases tend to be long, with an average of ten-year lease terms.
(3) The properties are purchased with 50% or more cash down payment, so there is not an excessive amount of leverage used.
(4) The current fund (Rich Uncles NNN REIT) pays an annual 7% dividend with monthly distributions.
(5) Although I tend to view illiquidity as a feature rather than a risk, most investors like to have some form of liquidity. Rich Uncles provides investors the ability to cash out through their monthly share repurchase program.
(6) About 1/3 of dividends are expected to be shielded from ordinary income taxes due to depreciation. This is actually something I previously thought was unavailable, unless investing directly in physical real estate.
(7) The fees are lower due to no middleman trying to make a commission by selling shares. It’s estimated that the fees are about 10% less than other REITS. 97% of the gross proceeds from the sale of shares will be used for investments.
(8) Rich Uncles REITs (they have two funds, but one is no longer open for investment) are public offerings registered with the U.S. Securities and Exchange Commission ensuring transparency through required financial audits and ongoing reporting.
(9) The minimum investment is very doable for almost anyone at $500.
(10) You don’t even have to be an accredited investor.
Meet The Rich Uncles
The Expected Return
Obviously, no one can tell the future, but I think a 12% compounded return is a reasonable expectation. The 7% annual dividend gets you more than halfway there. The rest would come from anticipated appreciation in the value of the commercial properties.
Keep this in mind: if you’re earning a 7% dividend, your investment is going to double approximately every 10 years. So, in three decades you would have increased your investment by 8X. And this is before any appreciation (which we won’t count on, but will hope for). If you get 12%, your investment is doubling every 6 years and would have increased 30X in 30 years. (Look at the amazing power of compounding with a compound return that is 5% higher.)
This assumes dividend reinvestment.
If you’ve been a reader for a while, you know that I tend to build up large amounts of capital until I have the conviction to go big on an investment. I tend to make large concentrated investments, instead of a lot of small ones. In the last two months I have added $37,000 in new capital to this investment, which brings my current account value to a tad over $50,000 (which was my goal by the end of Q2). On top of this, I am automatically investing an additional $1,000 per month (and all dividends are automatically reinvested). The end goal is to build this investment up to $100,000 over the next 12 to 18 months.
Ok, it’s your turn to take action. If you want the easiest side hustle around to earn monthly passive income, then go set up a free account with Rich Uncles now!
Seriously, what are you waiting for? The fortune is in the follow through. I’m suspecting lately that a lot of people might be reading my blog passively. But you won’t make any money by just reading this post! If I am recommending something, it’s because I am doing it myself successfully, and want the same for you. I promise to try and push you to action more often and more aggressively than I have in the past (your future wealth and self will benefit because of it). My goal is to “get rich fast,” and show you how to do it, too. What are your thoughts? Let me know in the comments below.
– Gen Y Finance Guy