Real Estate Investments Paying 15%, 17% And More…

While the global stock markets gyrate with volatility, it is tempting to look at alternatives to traditional asset classes such as stocks to get safer returns. Government bonds and GIC’s are yielding in the 3% – 4.8% range. Alberta investors are inundated with marketing on various real estate investments backed by land or property with regular cash flows paying 11%, 12%, 15% and more. What’s the catch? and why can’t your financial advisor offer you the same investment?

I have had the opportunity to review many of the more aggressively marketed real estate investments in this market. Some may work out but many won’t. Here are things that can affect the underlying returns since many people say…”How can you lose investing in Alberta Real Estate?”

When companies market a particular opportunity, the assumed rate of return is based on a certain term such as 2 or 3 years. It may take a company 6 months to raise the capital required to get the project going. It may also take them longer to either complete the project if building and longer to sell the land or real estate upon completion. A 15% investment over 2 years becomes a 10% investment if it takes 3 years to complete.

The marketing materials of many offerings mention that they are real estate or land backed investments. This may be true. However, I have seen deals that are 100% financed or more. How do they get the money to pay the interest to you, marketing expenses and general overhead? Some projects need to increase in value by over 50% in two years to cover all of these costs. It may happen and again it may not. This does not take into account the possibility that real estate or land values may decline. As well, we hear everyday how infrastructure projects are coming in well over budget. The lastest Calgary hospital will cost over $1 billion to construct after an initial estimate of $600+ million. What happens if the deal you invested in has the same problem? It will affect the overall return.

These investments are offered to either accredited investors which in Alberta are people that have $1 million or more in investable assets or have $200,000 in income for two of the last three years or $300,000 as a couple. Alternatively, you are eligible if considered to be a friend, family , or business associate of one of the promoters which is how they can get around the accredited investor rule.

The second part of this discussion relates to why your financial advisor cannot sell these investments to you. Typicall, when you buy a new issue or a mutual fund, a simplified prospectus with the company history, financials, and details of the board of directors is provided and whether anyone in a board or executive position has been bankrupt or convicted of a crime.

Not one of these investments provides any of this disclosure to allow an advisor or the company they represent to do proper due diligence. As such, the advisor would be held legally responsible if something went wrong.

This summarizes why the investments being marketed are not guaranteed and provide insight into what can go wrong. Any comments on this article are more than welcome.

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One Response

  1. Having been away for a little, I am catching up on my Rothenberg reading. I was particularly interested in this real estate article because like many people, I do see these ads for great interest returns. Although I know that if it looks too good to be true, it is and shouldn’t be persued.
    However, to read a good explanation of these type of offers as you have written really helps me avoid disaster. Thanks and continue to write these timely articles for our continued benefit.

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