Posted by Rob Minton
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I've written about it before, both on this blog and in the Income for Life Members-only Newsletter, but it bears repeating again.
Focus on investments you control.
The lesson was reinforced by the whole Bernie Madoff ponzi scheme that got so much attention, and, unfortunately, it comes to light again with the collapse of an Idaho company called DBSI Inc.
According to an article in the Minneapolis Star Tribune, DBSI has filed for bankruptcy, leaving thousands of investors likely empty-handed.
The company apparently specialized in commercial properties, getting investors to put up cash for part-ownership in properties and "guaranteeing" a rate of return.
This sort of real estate investment appeals to investors and would-be investors because it's passive. This company promised a return of 6 to 10 percent, according to the article, without the investors' involvement in the property. The lure of passive real estate returns enticed approximately 8,000 investors nationwide into handing money over to DBSI, the article said.
The company got around securities regulations issues by structuring the investments as something called "tenants in common," or TICs. From the article:
"TICs, the little-known investment that proved DBSI's downfall, involved selling little pieces of commercial property to lots of investors. A single office building, for example, could be owned by 20 or more individuals, each of whom would receive a deed for their percentage. DBSI would buy the property and flip it to the TIC investors at a markup, from 20 to 40 percent."
The company would hire a management firm to operate the property, and investors would just sit back an collect checks. Seems a nice setup if you're the investor.
However, the company guaranteed the investors' monthly payments, regardless of the properties performance. That should immediately raise a red flag -- no business, no investment can keep paying profits regardless of its revenue. How did the company keep paying its investors? Apparently with money it received from new investors -- which makes it little more than a Ponzi scheme itself.
Now, I'm not saying that all companies that do this are crooks. Or that it's always bad to invest in property that others manage, creating passive income for you. But this company, apparently, sold these investors pieces of property without disclosing risk, according to the article, and that's the key thing.
In any investment, there is always risk.
Yes, this company seems to have taken the money of unsuspecting investors, including some who were counting on the income for retirement. Shameful. And, yes, this company looks to have exploited a loophole with the TIC structure that helped them avoid securities regulations when, in effect, they were selling securities.
But there is still a lesson for the investor: Be wary of investments that you don't control.
If something seems too good to be true, it probably is. There aren't such things as "guaranteed" real estate investments. You don't want to deal with companies that don't disclose that there are risks. You want to steer clear of anybody promising you a return no matter how many vacancies the property incurs. According to the article, the company bragged that no investor ever lost money.
Steer clear.
It sucks that there are companies who continue to dupe investors. It sucks that it gives reputable real estate companies a bad name. It sucks that so many people who cling to the idea of truly passive real estate investment just hand over their hard-earned money.
But it serves as another lesson for investors.
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