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We Warned You - and Now So Has FINRA
... about non-traded REITs and gold investments. January 2012
We've repeatedly warned you in my newsletter, in my books, at my seminars and on my radio and television shows about the risks associated with non-traded real estate investment trusts and gold investments.
Examples of what can happen to the unwary investor are legion, but now the Financial Industry Regulatory Authority has added its official voice through two recent Investor Alerts.
Here's what the securities regulator has to say about both products:
Non-traded REITS
When investing in a REIT, your money is pooled with other investors and used to buy real estate. Most REITs trade daily on the New York Stock Exchange, giving investors the ability to buy or sell their shares whenever they wish, subject to current market values.
But non-traded REITs don't enjoy such liquidity. Instead, shares are considered illiquid, and investors might have to wait seven to 10 years before they can liquidate them. In the meantime, they usually receive quarterly distributions that are supposedly based on the rental income earned from the properties.
FINRA warns against four characteristics of non-traded REITS:
>>Quarterly distributions are not guaranteed, and they may exceed operating cash flow. In some programs, rental income isn't sufficient to generate the income that investors have been promised, and as a result promoters have sold properties, borrowed money or used capital provided by other investors in order to send distributions to investors. There is a risk, FINRA says, that distributions may be suspended for a time or halted altogether
>>Being non-traded, these investments suffer from valuation issues. Without recent appraisals, there's no way to know how much the underlying real estate is worth. Therefore, any statement that purports to suggest a current market value is suspect.
>>Early redemption often is limited and costly. Most non-traded REITs allow investors to sell their shares at any time, but they usually limit the number of shares that can be redeemed prior to the REIT's overall liquidation. As few as 3% of the shares might be allowed to be liquidated at any one time — a problem if many of the investors simultaneously decide to sell — and the redemption price for such requests is generally lower than the purchase price, sometimes by as much as 10%.
>>Non-traded REITs can be expensive. Guidelines allow front-end fees and commissions to be as much as 15%, meaning that a $100,000 investment buys only $85,000 worth of real estate. Ongoing management fees can further erode profits.
Gold stock scamsFINRA's alert, titled Gold Stocks — Some Investments Mine Your Pocketbook, warns that some promoters make inflated claims about the value of gold-mining companies whose value is difficult to estimate, much less verify. In one example, the Securities and Exchange Commission took action against a Florida mining company for falsely claiming that a mining project in Ecuador contained gold reserves worth more than $1 billion.
Such investments, FINRA says, are sometimes promoted in free-lunch and -dinner seminars managed by unscrupulous promoters who run "boiler-room operations" (so-called because they use high pressure sales tactics).
FINRA cautions against gold promotions that do any of the following:
>>claim to link stock performance to gold prices > use scare tactics, such as inflation or economic collapse
>>make claims based on a reserve's proximity to an existing one
>>focus on a firm that has changed its name or trading symbol to align it more closely with gold; for example, one company claiming to engage in gold mining was originally incorporated to provide golfing opportunities on private courses for nonmembers.
FINRA's alert explains that, while legitimate gold stocks and ETF investments may be part of a diversification strategy, these investments can be quite volatile. Heavy concentrations in them can put investors at substantial risk of losing much of their money.
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