Rich uncles are nice to have—and that might be the play that real estate investment veterans Ray Wirta, Harold Hofer and Howard Makler are going for with their RichUncles LLC real estate crowd-investing platform.
They are partners in the Newport Beach-based online investing system and real estate investment trust. The REIT has grown fast on a business model that aims to make investing in commercial real estate “easy and affordable” for the masses.
The idea was conceived several years ago by Wirta, chairman of CBRE Group Inc., the world’s biggest commercial real estate services and investment firm. He also is president of the investment properties group for Irvine Company.
“It was Ray’s idea, and Howard and I are the implementers of that idea,” said Hofer, adding that the idea behind the venture first cropped up in 2007, went dormant until 2012 and was revitalized in 2012 when the JOBS Act passed.
The act contained a provision on equity crowdfunding that allowed for public advertising to raise funds as long as the investment dollars came from “accredited investors.”
The class of accredited investors is now defined by the Securities and Exchange Commission as those earning more than $200,000 a year or having net worth of more than $1 million.
“So when the act came out, that sparked our interest, and we set out to make this idea happen now that the whole concept of equity crowdfunding has come to people’s consciousness,” Hofer said. “That’s how we got started.”
Backgrounds
Hofer is an attorney by training and has more than 30 years of real estate experience, including participating in transactions worth more than $2 billion. He met Wirta in 1994 when he sold his business to the Koll Co., which at the time was headed by Wirta.
“Howard, [whom I have known for 25 years], is focused on marketing and Web design and technology,” Hofer said. “I’m more focused on the real estate and the legal implications of what we are doing.”
Makler, a serial entrepreneur, started Excess Space Retail Services in the 1990s, a company specializing in real estate disposition for retail chains. He founded Howie’s Game Shack in 2005, a game center for computer and Xbox stations that has locations in Mission Viejo, Buena Park and Mesa, Ariz. He also founded WePOWER LLC, an Aliso Viejo-based renewable energy company.
The partners, at the outset, decided to “base the business upon a very successful model of raising capital,” Hofer said, referring to nonlisted REITs, which don’t trade on public exchanges and are traditionally sold by broker-dealers, “who typically get paid a 10% commission.”
Their idea was to “do it direct-to-consumer and effectively disintermediate this 10% commission,” he said.
How It Works
Hofer and Makler described how RichUncles works:
The partners scope out potential investment targets—in California for now. The venture makes a 60% cash down payment for each building, borrowing the 40% and using investor funds to pay down the loans. It pays quarterly dividends to its investors, averaging at an annual rate of 7.5%. It also shares the profit when it sells a property, split 85% and 15% between investors and the firm.
RichUncles has 13 employees in Orange County, more than 7,600 members, and about $10 million worth of investment properties.
The REIT currently has 22 buildings leased to Del Taco restaurants, one Chase bank branch and one Chevron station.
“We don’t focus on any specific tenant, per se,” Makler said. “We are opportunistic buyers. We search for credit-worthy tenants that have buildings for sale at a price we deem appropriate. … We would consider a McDonald’s, assuming the price and location were right. … I will add that many properties in this marketplace are overpriced, in our opinion, so we search high and low for the correct opportunities.”
Portfolio
Makler said the firm keeps its portfolio to triple-net-lease product types, which means the tenant absorbs the costs related to property upkeep.
“We don’t want … a lot of moving parts,” he said. “We don’t want to have that complexity, because it would translate to reducing the returns for our investors. We like having single-tenant properties where the tenant is responsible for all the property-related expenses. And we have one main job: collecting rent.”
A key challenge for RichUncles is bringing more people on board and building trust, Makler said.
“What we’re doing is based on a high degree of trust,” he said. “Once our investors get to know us and understand how we think and how we operate, they become very comfortable with the fact that we don’t take great risks with their money. If I’m investing my money, I’m going to take a risk, but not when I’m investing your money.”
And Orange County “happens to be best for us, simply because we’re here,” he said. “You can just walk on up. We have had investors literally just come here. … The concern I think people have is, ‘This must be some sort of a scam.’ But being accessible lends itself well for us to be starting here in Newport Beach, in Orange County.”
Competition
RichUncles faces competition from other REITs, but the partners say they are targeting a wider audience than their competitors.
“Our competitors are all focused on these ‘accredited investors,’ ” Hofer said. “Our model is, yes [the accredited investors] are welcome to invest with us, but let’s really embrace everybody else. Let’s get commercial real estate ownership opportunity to everybody.”
Revenues and earnings details aren’t available, but the partners said RichUncles has about $5 million in capital raised for its current REIT. The trust has a $25 million cap on the amount of capital it can raise, a level that Hofer said could reached in the second half of the year.
“We’ll be going on a parallel path to get the next REIT ready,” he said, so that it can “immediately follow after the $25 million is hit.”
The goal for the next one is to expand the scope to nationwide.
“We are gaining so much momentum,” Makler said. “We’re very appreciative of that.”
