A Real Estate Investment Without Market Risk Claims the Radio Guru

Last Updated Oct 8, 2009 10:09 PM EDT

Are you as sick of the market as I am? I have absolutely hit the wall with the emotional roller coaster over the past year. Seeing my portfolio go from riches to rags to riches again, all the while waiting for the next shoe to drop, takes a heavy toll. That's why I so want to believe that I can get great returns without "market risks."

So driving into work earlier this week, I was listening to my favorite local radio financial guru Tom Marron on KVOR in Colorado Springs. This is the same guy that in March, at the bottom of the market, went all apocalyptic on the radio, warning one and all of the next great depression and even told his mother to get out of the stock market.
Guess he decided to come out of his market bomb shelter, because this time he was pitching his seminar for a privately traded real estate investment trust (REIT). He didn't name the investment, but noted this REIT specialized in the medical field. He assured his listeners that this was not a publicly traded company so it had "no market risk."

With my interest piqued, I put in a call to Mr. Marron to get clarification of this claim of no market risk. I noted in the voice mail that I understood that it isn't publicly traded and thus didn't have a stated value every day. This clearly is very different than a publicly traded REIT or a REIT index fund such as the Vanguard REIT Index Fund ETF (VNQ).

But does the fact that it is not publicly traded mean it has no market risk? REITs have market risk from two areas:
  • The value of their underlying real estate either appreciates or, as has happened in the recent real estate bubble, depreciated.
  • They usually have some leverage, meaning they have debt. During times when real estate appreciates rapidly, this leverage works in the investors' favor. During times like the past two years, this leverage works against the investor.
Clearly being publicly traded isn't one of those factors determining market risk. I'll admit that being a private REIT does have one advantage in that you can't look up its market price daily. Yet just because you don't see the daily price of your house, doesn't mean it didn't decline in value.

On the other hand, look at the disadvantages I've typically found with private REITs.
  • You lose liquidity in that you can't readily sell them in the secondary market.
  • They tend to be several times more expensive than a publicly traded REIT. The seminars they are sold through tend to be very expensive, though the high commissions make it worthwhile for the broker.
Will this REIT specializing in the medical field outperform other REITs? It's possible, but this radio guru typically predicts the past. Publicly traded medical REITs did suffer less than REITs as a whole, yet this doesn't translate to future performance. The fact that the medical industry is growing faster than retail is not exactly a secret.

My Advice
When someone says there is no market risk, make sure they are talking about a US Treasury and, specifically, a Treasury Inflation Protected Security. Even then, that claim is debatable.

And whenever you hear a "too-good-to-be-true" claim that arouses your suspicions, make sure you get that claim stated in writing before whipping out the checkbook. Be especially careful in doing your due diligence if the claim is emotionally appealing, and by that I mean that you want to believe it.

It will be interesting to see if this radio guru responds and shows me the product. I'll be sure to write about it if he does. At this point, I'll bet the product he is pitching has not only market risk, but adds the two important negative components of liquidity risk and high fees.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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