Were Donald Trump just a real estate developer turned reality TV star with a habit of getting himself embroiled in lawsuits, news that his get-rich-quick seminar business was being sued in multiple courts for allegedly being a thinly veiled scam wouldn't have been major national news. But now that Trump is the presumptive Republican nominee for president, every detail of what could have been a relatively routine legal fight over Trump University is now under scrutiny.
Former Trump students have already been featured in campaign ads accusing the candidate of defrauding ordinary people, and when a judge's order earlier this week led to hundreds of pages of court documents being released—including damning testimony from Trump U employees—Hillary Clinton and other Trump foes jumped on the chance to portray the would-be president as a sleazy con man.
Maybe more important than the employee testimony is the Trump University 2010 "playbook," which reveals the high-pressure sales tactics the University's employees used to lure students, and a preview of the kind of financial advice offered newbie investors. The guide tells salesmen that students should be encouraged to use credit cards to pay for the courses themselves—the most expensive of which cost $35,000—and also told things like, "If a seller will take $10,000 down on a fixer-upper that you expect to make $20,000 on, why not use credit cards?" and "Check with a tax attorney to see how you might borrow from your own retirement account to finance real estate investments."
Is using credit cards and retirement money to buy property really a sound investment strategy? How badly does this sort of sales pitch mislead customers? To help figure this out, VICE spoke to several finance experts, who said, first of all, that the basic premise of Trump U—that real estate can make people rich—isn't off-base.
"If properly analyzed, real estate investing is one of the most common ways normal people can build long-term wealth," Sam Dogen, a 13-year finance veteran, real estate enthusiast, and popular blogger, told VICE. "The reason is because real estate rides the wave of inflation, and real estate is a part of the inflation component along with food and energy prices. Inflation is one of the most powerful economic forces that almost always goes up and to the right."
"A lot of people have built successful careers in real estate by starting small and collecting a property here or there," added Douglas Abbey, who teaches residential real estate investment at Stanford's business school. "You do not have to be rich to invest in real estate. Inherently it is not a bad idea, and it is not inherently risky unless you over-leverage, unless you borrow too much."
The problem is, it seems as if Trump U salespeople were encouraging people to undertake just that sort of risky borrowing—any investment you go into credit card debt to make is going to have to pay off massively to be worth it.
"The average credit card interest rate is roughly fifteen percent, which is more than the average annual return of the illustrious Warren Buffet," explained Dogan. "Further, even if you put down a healthy twenty percent, you are still leveraged five to one. A ten percent decline in the value of the property means a fifty percent decline in your cash downpayment."
The Trump U manual also suggested that people who hem and haw too much be belittled for pussyfooting. It also said that people in bad financial situations should be told that the course offered a quick fix to their woes. "Urgency is proportional to pain," the playbook reads. "Problems are like health. The more a problem hurts now, the more the need for a solution now. And the more it hurts, the more they'll be prepared to pay for a speedy solution. It's got to hurt enough!"
But Abbey, the Stanford professor, said that way of looking at real estate investment is wrong-headed. "Anybody buying real estate should not be looking for a quick buck," he told VICE. "It's just not a business that's well suited to that."
Dogan said a similarly successful strategy for getting rich quick would be to "go to Vegas and bet it all on black."
Perhaps worst of all is the way Trump U salespeople were advised to get students to think of credit card debt as as OPM––other people's money. Nick Clements, a former credit card executive at Barclays about founder of the financial education site MagnifyMoney, called that "horribly misleading."
"Debt can be used––and has been used by Donald Trump––to make you rich," he told VICE. "But that is a very different type of debt, and it is just wrong to create equivalencies."
He gave the example of someone who borrows $100 to buy a building at a 2 percent interest rate. If you collect $5 in rent, you are making a $3 profit. You're borrowing money to make it, in other words. So long as prices keep going up and the markets don't take a turn, you're golden.
"But in this case, people would be borrowing at high credit card rates to purchase a Trump University education with a low value," Clements said. "That is a 'bad deal,' to use the Donald's language."
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