Tuesday, April 3, 2007

The Investor Concierge Deals

At their presentations, the Nouveau Riche University folks claim that they will teach you how to become financially independent by investing in real estate that provides positive cash flow-- meaning that you will get cash each month because the amount the property rents for is more than the amount of the mortgage payment and the other expenses associated with owning the property. This is a well-known and very popular method of increasing your wealth, especially because if the value of the property increases while you own it, that increase is also yours (if you sell the property). And your renters are essentially buying your house for you, since it is their money, not yours, that is going to pay the mortgage.

Nouveau Riche's database of properties that you may buy is called Investor Concierge, and you can go look at sample deals in the database by visiting InvestorConcierge.com (if you click on the "Guest" button next to the "Login" button on that page you'll be able to see some sample deals). Each of the properties is displayed on a fairly detailed page listing the price, possible financing arrangements, total amount of cash required to close the deal, and estimates of the cash flow possible.

Examination of these sheets shows some very exciting figures for the nouveau real estate investor: the "Estimated Market Value" of the property is frequently 10% or so more than the purchase price, producing instant equity ("Estimated Equity") of $20,000 or more! And the yearly positive cash flow is $2400, all for a property you buy with a cash outlay of only $12,000. Why, you've made $8,000 as soon as you close the deal, right?

Upon closer examination, the flaws in the deal begin to surface: that $2400 a year in annual pre-tax cash flow is only $200 per month, and doesn't include any maintenance or allowance for any vacancy of the property. As long as you don't have any big maintenance needs, you might possibly break even-- and all the while, you're building equity while your tenants pay the mortgage, right?

Wrong. The deal Nouveau Riche shows to you invariably is built around an interest only mortgage-- you won't build any equity at all for the first 10 years, after which your mortgage payment will jump up to a much higher amount. If the deals were structured with conventional principle and interest loans, none of these deals would have any positive cash flow at all.

"But I still have instant equity, right?" Probably not. The "Estimated Market Value" is not an appraisal, but rather just someone's guess at what the property might be worth. And if it is worth that, why isn't it being sold for that? Can you really buy these properties and immediately sell them for 10% more? I doubt it.

"Okay, but the market will go up, and I'll be rich!" If the market continues to skyrocket, it's true, you will be rich. But across the country, in nearly every housing market, this is not what is happening. The correction has begun. The real estate "bubble" will deflate, and then likely stay constant for a while. All the while you'll be paying interest only on a property that is slowly becoming worth less than your loan is for-- a loan you have to pay off if you want to sell.

After all, if these were truly good deals, why would the founders of Nouveau Riche want to train you to take advantage of them? Why not just invest in the properties themselves? The sales presentation claims that the founders made their fortune and now altruistically want to help others make theirs. If altruism is the motivation, then why charge $16,000?

Thursday, March 29, 2007

What is Nouveau Riche University?

Nouveau Riche University is a new multilevel marketed real estate investment program. It consists of three primary parts: a course that claims to teach people how to invest in real estate, a "community" of "investors" who have access to their database of properties to purchase ("Investor Concierge"), and the marketing of the course and community through standard multilevel marketing techniques.

The course is not inexpensive, ranging from $300 per month to a $16,000 one-time payment, depending on the "level" you wish to join at. The level primarly affects how quickly the individual begins getting money from people that they sign up (their downline) and whether they get to see the properties available for purchase first, or after members who are at higher levels.

At the $16,000 level (which of course is strongly encouraged), you receive $8,000 for every person you sign up below you after the first two (the $8,000 from each of the first two goes to the person who signed you up, your "mentor"). So if you can manage to sign up 4 people, you've broken even, and you have full top-priority access to Investor Concierge, which allows you to buy properties in their database, sight-unseen if you wish. You also get 20 days of intensive training in real estate investing, access to conference calls, etc.-- all the things you need to help you succeed in real estate investing (and/or marketing the system, presumably).

But is it really possible to make money investing in real estate using this system? And if it is, why do the principals in the company bother selling the course? Why not just buy the properties themselves? The sales pitch says they are "paying it forward" and have altruistically decided to let others become rich too. This is certainly possible. Other explanations are also possible.