Paul Winkler: And welcome. This is “The Investor Coaching Show.” I’m Paul Winkler.
That’s what we talk about around here: investing, educating … well, not just investing. Financial planning topics, retirement planning topics, saving for the future, answering questions.
There was a question that came in. Jim asked this question, actually, last week, and I just was trying to find some information on it because I just don’t watch TV that much.
The question was, “Paul, the internet and cable are saturated with ads for”—it’s a real estate investment trust, and I’ll play a commercial for it in just a second because I did find it.
“It seems like a scam to me. Just want to know what your take on this was, so I could advise friends who are thinking about investing in this.”
Yeah. Friends don’t let friends invest in some of these things you see advertised on TV. But anyway, this was the ad for it.
When Investment Ads Are Too Good to Be True
Commercial: Investors, in this economy, you need to diversify financial risk, hedge inflation, and take some money off the table before market drops.
Paul Winkler: Okay. Right off the bat: hedge risk, diversify, and take some money off the table before market drops.
What do we know about market timing? Market timing doesn’t work.
And it’s universally—you look at it, this is what everybody wants to be able to do. I want to be able to figure out where the market’s going to go next and get out before it goes down.
Well, if I get out, then I am having to sell to somebody else that has the same information on the other side of the trade. Basically, I’m selling to somebody that must think it’s going to go up.
If you look at who is trading and who is buying and selling, when you’re buying or selling a stock or buying and selling a group of stocks, you’re not buying and selling to somebody that is a complete buffoon. These people do nothing but trade these particular companies all day long.
If you look at the biggest market mover of the past couple of decades, or some of the biggest market movers, several of the biggest market movers, every one of them was news. Brand new information that came out, and it was not on anybody’s radar screen.
And just one real obvious example would be 9/11. All of a sudden now, the whole game changed right there, but it wasn’t something we knew ahead of time, a week ahead of time or two weeks ahead of time, that some people were going to fly an airplane into a couple of buildings.
Let’s continue on.
Is Real Estate a Sure Investment Bet?
Commercial: Consider the NRIA prime realty fund. Equity markets now look overextended and riskier while real estate hedges inflation and stock risks with increasing rents.
Paul Winkler: Okay. Appeal to greed and fear all in one fell swoop.
If you want to get somebody to do something, get them into fear mode. That gets people to take action faster than anything.
And then appeal to greed. And in a sense, the logic: “Hey, these rents will actually help protect against inflation.”
Well, the problem is, if you have rising rents, you also can create less demand for properties and create more demand for people buying their own place rather than renting off of you.
You can have companies that move out of areas. You can have changes in economic conditions which create lower demand for properties.
There are all kinds of things that can happen when you have increasing inflation, and not all of it’s necessarily great for real estate. Matter of fact, real estate can come down pretty hard.
We’ve seen it before many, many times. I’ve been doing this 30 years, and I’ve seen several cycles.
I’ve seen tax changes that created an incredible drop in real estate prices when some tax advantages were taken away. And there are several of those possibilities on the horizon as well, as government looks more needy for more tax revenue.
Are Realty Funds Needed for Diversification?
Commercial: New home and apartment construction is a diversification into hard assets.
Paul Winkler: And that’s a typical thing that people talk about when it comes to real estate. I like it because I can touch it. I can feel it.
Well, and I talk about companies in general. Number one, you already have lots of exposure to real estate when you own stocks because companies own real estate and lots of it. Number one.
Now, people talk about being able to touch it. I talk about companies and go, “Hey, I can walk into a company that I happen to own stock in, and I can touch them as well.”
Now what’s evidence of ownership? Well, with a piece of real estate, it’s a deed.
With stock, it’s a stock certificate. We still have the same property protections and rights, and also have exposure to real estate.
But do I want to over expose into one asset category? That’s where things get really, really dangerous.
Commercial: NRIA develops where housing supply is limited, but demand and rents are booming. Experts say 3.8 to 6.8 million more homes are needed now.
NRIA has substantial properties built and selling in prime markets today with a 15-year track record of 3 million square feet constructed, rented, or sold.
Paul Winkler: Notice it wasn’t about returns.
Commercial: … development pipeline, receive monthly cash flow and double digit annual targeted returns by …
Paul Winkler: Okay, so that’s something that they do a lot.
You’ll hear that kind of language: targeted return. There’s a targeted return of whatever percent.
So you can target the moon if you want to. It doesn’t mean you’re going to hit it.
And that’s how they get away with it from a compliance standpoint. You can say, “Hey, we’re just targeting. I didn’t say you were going to get this return.”
And if you read the fine print, it tells you about all the risks. But people just hear what the return is supposed to be, and they, “Oh, target a return? I would love that return.”
Well, so would everybody else.
The rest of the ad was just giving their phone number and saying you could use your IRA and all of that stuff.
Research Shows the Real Story
Let me just talk a little bit about this. Number one, if it sounds too good to be true … I mean, you often hear that.
But I went and did some little bit of research on the internet to see what I could find, and there was several pieces. You can do the same thing.
There was an interesting article in Hudson County View. It says, “SEC probe underway, whistleblower alleges fraud at Secaucus-based real estate fund” was one.
The one that I thought was more interesting though, it was “N.J. firm promises to make clients rich. Is it too good to be true?”
And this was nj.com. You can find this.
And it was an article written back in October. It says, “Nine-month investigation [by] NJ Advance Media raises troubling questions about NRIA’s practices and business connections.”
And this is by Bill Myers and Kyle Campbell for nj.com.
“Billboards offer an irresistible come-on,” they said, “ … promise of pristine life on Easy Street. ‘Reality Investment Done Right’ one says, alongside an image of a silver-haired couple riding bicycles on the beach.
“Radio ads for the same realty company feature former Fox News personality Bill O’Reilly, promising a ‘10 percent monthly payout.’”
I mean, just kind of get your head around that. That kind of payout. What?
Now technically, what they say: “targeting it.” They said “promising it,” and they say “targeting it,” which makes it a little bit more compliant.
Investigations Underway
“NRIA claims to have amassed $1.25 billion in assets in 15 years in business, focusing on high-end real estate in gentrifying city neighborhoods and tony suburbs from Palm Beach to Brooklyn.”
And it says, “The alluring pitch, however, may mask a more sordid reality.
“On the morning of March 4, FBI agents surrounded the Secaucus home of the firm’s then-portfolio manager, Nick Salzano. A tense, hours-long standoff ensued, locking down the suburban neighborhood.
“When Salzano eventually surrendered, authorities charged him with attempting to con an investor as part of a North Bergen housing development project.” …
“Investigation has widened to include other NRIA leaders.” And they have a list of people here.
You can read the article yourself, and you’ll look it up, but it’s “This N.J. firm promises to make clients rich. Is it too good to be true?”
And I think—the title is right there. That’s what you want to think about.
Is it too good to be true?
“Neither NRIA nor any of its [other] executives, who declined multiple interview requests, have been accused of any wrongdoing.”
So we don’t have anything yet is basically what they’re saying here.
“Who are the men—they are all men—” … they comprise its management team.
And it says they’re operating in “a 10-story, glass-walled office … in the Meadowlands. And how has NRIA soared among those ‘sophisticated investors’ despite mass marketing efforts that resemble TV infomercials?”
And you look at it and go, “What’s a sophisticated investor?” There really is no such thing.
People can be taken in at all levels. I harken back to Bernie Madoff.
Bernie Madoff, who did he take advantage of? The wealthiest of investors, people that should have been in the know.
And matter of fact, they actually mentioned that here in the article.
Guaranteed Returns Are Red Flags
It says, “In digital ads and confidential memos to would-be investors, the firm guarantees a Bernie Madoff-size return of at least 12% on investments.” …
“‘Anytime a return is guaranteed, you’ve got to ask, ‘Why? What’s going on? How can you guarantee a return?’ says Tony Caiazzo Neff, an independent compliance expert [based] in Boyertown, Pennsylvania, whose whistleblowing led to criminal and civil charges against a $1.8 billion New York private equity fund and its executives earlier this year.
“‘When you see a guarantee of a high return with zero risk, that is a classic red flag.’”
And they talk about other people in here. I’m not going to mention all the names in the article.
Like I said, you can go look at this yourself. But it says a couple other lines in here that I thought were worthy of picking out.
“Indeed, NRIA is one of thousands of private equity companies that rose and soared from the ashes of the Great Recession. Loopholes carved into reforms passed under the Obama administration absolved such companies—called exempt reporting advisers—from registering with federal or state regulators.”
The oversight, I mean, that’s literally what we’re looking at. Who protects investors?
“A growing chorus of critics—including SEC chairman Gary Gensler—say it’s time to put an end to the kind of self-regulation that has allowed companies like NRIA to flourish. Gensler has put exempt private funds at the top of his reform agenda.”
And the point here that I want to make, which I think is really, you want to listen to this thing.
Firms Exploit Greed and Pride in Investors
“‘The reality is, for many of these cases, nobody is going to know until the horse is long out of the barn that the issuer is doing business in the states, and that’s a problem,’ says Rick Barry, a former enforcement chief for the New Jersey Bureau of Securities.
“‘When there is a problem with exempt offerings, by the time it gets uncovered, the money’s usually gone. And it’s expensive (and) difficult—if not impossible—to recover any money.’”
And this is a classic case of where my emotion—“I want something for nothing.” Greed.
“I want to take it to the man. I want to win.”
“I’m really smart. This makes sense to me.”
“Oh my goodness, yeah. Real estate in these gentrifying neighborhoods. Oh yeah, this is the golden goose.”
And the reality of it is you got to think about, who on earth would want to pay that much to use your money? If it’s a guaranteed return, go and borrow money and do leverage up to the hilt and keep it for yourself.
Why would you ever give away that much return to somebody if there’s no risk?
This is one of those things where you go, “There’s nothing …”
And a lot of times we don’t have anything solid to say about these types of things because it’s typically in my experience—doing this over 30 years—that you don’t know how big of a problem something is until it’s too late.
And they get shut down, and this goes away. And somebody’s walking in with a pair of handcuffs in a striped suit.
That’s typically when you find out something was a problem.
And it’s much better if something just sounds—it’s like your grandmother, grandfather’s advice or mom or dad’s advice. If it sounds too good to be true, just say no.
Walk away. Don’t get pulled into that. It’s not worth it.
So there are a lot of red flags on this one. Thanks for the question.
And if you got a question that you want to run by me, paulwinkler.com/question is how you ask them. Just shoot me that.
And what we’ll do is—you put your email address, and what we do is we’ll send you a copy of the answer, just so you hear what I talked about.
You don’t happen to be listening to the radio that day, doesn’t mean that you’ll miss the question. That’s the way you do it.
Paulwinkler.com/question.
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