I recently passed by a well-known high-end men’s clothing store with a big sign out front promoting their “70% off” sale. I will find an “Up To” in miniature letters immediately adjacent to the 70% off. But like many of us, I still enter the store, hoping to find that magical, perfectly styled Armani blazer in my size, color, and fabric at a huge discount. Not surprisingly, my hugely discounted Armani blazer was nowhere to be found.
This reminds me of the many real estate investments I am now seeing advertised this year promoting eye-popping projected annual returns of 15%, 20%, 25% and more. This sounds too good to be true, like my magical Armani Blazer.
Undoubtedly, this will draw the attention of many looking for outsized returns. A look under the hood tells us that investors are not investing in existing properties but a promise to build and sell condominiums at some time down the road, with investors sharing in the “projected” future profits.
I will not judge the quality of these investments. Some may eventually prove to be solid. However, before investing, a potential investor must thoroughly understand their nature.
- There are apparently no guarantees on a return on your capital or your initial investment.
- They are not liquid; your money will be tied up for many years.
- Should problems with the development or development company arise, some or all of your invested capital will be at risk.
With such lucrative potential profits, I wonder why the development company would not just borrow the needed capital to finance the project's construction from a bank and keep the profits themselves? I can only surmise that the banks found the risk associated with these projects too high, resulting in financing that was either not offered or offered at a very high rate. Allowing the public to fund the project's construction costs would seem a cheaper, lower-risk option for the development company. Bank financing would require the development company to provide collateral and guarantees to the bank, which is not generally required with a public offering. Should things go sour, public investors would have less recourse (if any) available.
In my view, these investments can only be categorized as highly speculative and suitable only for seasoned real estate investors with the necessary experience and acumen to conduct a thorough due diligence investigation and use only capital that, if lost, would not create financial difficulties.
Remember, if it seems too good to be true….
While I’m on the subject, a client called me recently about an investment he saw advertised promising massive returns in a short period using AI algorithms to trade bitcoin. A similar promotion ended up in my inbox suggesting investors had earned an average profit of $33,300 per month. WOW! Elon Musk and other celebrities supposedly endorsed the plan. The promotional material includes reviews from investors bragging about easy and quick returns. However, a quick Google search of the same investment tells a different story. Of the 207 reviews, 96% rated the service as one star out of five, with numerous complaints of high-pressure sales tactics and comments such as “trying to sell something that is fake and scam”, “do not give them your money” and “they are scammers”.
Remember, if it seems too good to be true…
The World Is Getting Worse “Fallacy”
The world we live in is a much better place by virtually all metrics than just a generation ago, despite the ongoing bad news heard daily in the media. Here is one more example.
In 1830, the average worker put in 70 hours a week from Monday-Saturday. That’s basically a 12 hour day, 6 days a week of back-breaking work such as getting up at dawn to milk cows and plow fields. The average workweek is now 40 hours a week or less, Monday-Friday, often in Zoom meetings wearing sweatpants.
Best,
Paul
Disclaimer: The views and opinions expressed in this article may not necessarily reflect those of IPC Securities Corporation.