Why smart investors fall for the deceptive lure of easy money

“I call it the ‘high school shabbaton phenomenon,’ ” says Joseph Kahn, founder of VisionRE Realty Advisors, a nationwide consulting firm based in New Jersey. “A friend, a relative, a neighbor from shul tells you about an investment — a hot deal that promises to pay significant returns. Sure, you have some doubts, but you don’t want to be that one loser stuck sitting on the sidelines while everyone else is making big money. You have this real fear of missing the boat — how can you pass up on the greatest opportunity of your life?”

That’s how it begins — with a friendly tip, an invitation, a WhatsApp message or phone call from a savvy friend, neighbor, or relative. And often enough, the story ends with a pretty profit for all involved. In recent months, however, too many investors have seen their stories end with catastrophic loss, as hot deals were revealed to be nothing more than hot air.

What’s behind the string of losses plaguing our community? Is it a natural investment cycle or something more sinister? Are frum investors more vulnerable to bad deals? And what kind of due diligence can help minimize the dangers in a field that promises high rewards alongside devastating risks?

Cycling Up and Down

Like most areas in the business world, the real estate industry has its cycles — booms and recessions, periods of rapid development and times of slower growth. Those natural cycles, however, come along with a darker side: scams, fraudulent deals, and Ponzi schemes tend to increase in popularity and volume during financial booms, while they fall apart in times of distress. It’s easy to promote the lure of big bucks with minimal effort when the market is riding high — but when the pendulum swings the other way and the market experiences a downturn, investors who bought into sloppy deals or devious schemes get hit with overwhelming losses.

“When times are good, people are throwing money to the wind and it’s easy to attract money and keep the deals going,” says Eli Fried of Leatherback Investments. “But when money is scarce, there isn’t enough to grow and even to sustain the deals. On top of that, word spreads about deals that have gone awry, and skepticism follows, leading to a chain reaction of crumbling deals. And that is when things really begin to fall apart.”

After the housing crash of 2008, Fried explains, the real estate market was subdued. People had lost a lot of money and were nursing their wounds; they had no money to invest. Ironically, that was a great time to buy real estate because prices were so low.

But as prices began rising again, the industry picked up. Frum investors who cashed in on the trend during the last five to ten years found that there was good money to be made in real estate. Covid accelerated their earnings, with low interest rates and prices that shot up in a very short amount of time. People were literally making back 100 percent of their money in three to five years.

As more people reaped the profits of the hot real estate market, word spread. People were being pitched deals with 15 to 25 percent yearly returns. (This takes into account an approximate seven percent cash flow, plus the proceeds of a sale or refinance that would happen every few years.)

The numbers seemed almost fantastical — but there were enough success stories to support them. Those in the know discussed incidents of people earning as much as 50 percent returns on their investments. Not all deals worked out, of course, but enough did for the perception to take root that it was a waste — almost a sin — to let money sit idle in a bank account when it could be invested in a hot deal instead.

But there were two new players in the field that differentiated this cycle from previous ones and exacerbated the risks. The first is the growth of “feeders,” and the second is social media.