Tuesday, June 15, 2010

You Must Factor Liquidity Into Your Decision Making

Most people in America have been taught over the years to blindly put their money into so called "investments" by registered representatives, people who are sales persons for themselves and their firms. These sales persons hold FINRA Series 6, 7 or 22 licenses. Does your financial advisor (don't make me laugh) hold a Series 6, 7 or 22? If so, then you are a victim of their sales efforts.

I just read an article in a financial industry trade publication about Non-Publicly Traded REITs. Readers of this blog will know the Non-Publicly Traded REIT's are on my Do Not Buy List. The gist of the article was that sales are up and lots of people are buying these investments. This is not good, in my opinion.

Non-Publicly Traded REIT's generally pay large commissions to your FINRA Series 6, 7 or 22 licensed registered representative. These commissions can be as high as 8%.

Let us assume that you put $100,000 into one of these Non-Publicly Traded REIT's. The results are that $8,000 of your money, let me repeat that, your money is going into the pocket of the FINRA Series 6, 7 or 22 registered representative and the firm that they work for, in addition to the firm managing the REIT. So, far what have you received? A vague promise of diversification, the potential for a high return plus recurring income from the dividends. What you do not know is that the firm managing the REIT is structured like a Ponzi scheme. They take money in, then pay you dividends from your own money. Oh, I almost forgot. Your $100,000 is now totally illiquid.

The REIT takes your money and "invests it" (quit making me laugh) in real estate properties that are supposed to make tons and tons of money for you. Most of these REIT's have to pay real estate sales commissions every time they buy a piece of commercial real estate. Further, they usually hire a property management firm to manage the property that they bought. Of course, the manager of the REIT has a large staff of real estate experts that have to be paid. Do not forget that they have to pay your FINRA Series 6, 7 or 22 registered representative and their firm. I wonder...after all this...how much of your $100,000 is still left? Well we know eight percent of it is gone to commission, so it is at least down to $92,000. If I am being conservative, I would suspect maybe another $5,000 is gone to all the issues that I described above. This leaves you with $87,000. Oh, I almost forgot. They are paying you 6% interest on your $100,000, so that is another $6,000 knocking your $87,000 down to $81,000.

After all that, you need a 23.46% return on your money just to break even. I know what you are thinking. These REIT guys are good managers and their last REIT made 10% last year. Well they paid you 6% in income in the first year, if they did make 10%, then your are still down for the count. Also, a little known fact is that the REIT manager gets to decide how much their return is each year. How do they do that? Well, with commercial appraisals of course. How much are commercial appraisals? They are a whole lot more than residential appraisals I can assure you. Sadly, more of your $100,000 is gone.

The worst thing about Non-Publicly Traded REIT's is they have terrible liquidity. You cannot get your $100,000 back generally for 10 to 12 years. Now, do you see why this so called "investment" is on my Do Not Buy List? I hope so, but apparently there are a ton of people out there still buying them. Sales are up on these investments, it is sad to say.

Liquidity is the name of the game. This is a news flash. You can actually invest your money so that every single thing you invest it in can be accessed within a couple of days. Now, that is a novel idea. Invest with Liquidity in mind.

Here is the rule: If it is not liquid, then do not invest in it.

Yours truly,

Rick Johnson