Grant Cardone revealed key details of his extremely high-risk business model in a series of frantic stream-of-consciousness videos he recently released on YouTube.
[Update: Grant Cardone took down his erratic “Quarantined in Clearwater” videos, but he can’t take back what he said. It’s out there.]
Here are the key details Cardone revealed:
1. Cardone stated that he gets ten year loans in which the first five years are interest only. He claims he owes a billion dollars to his lenders and has 8000 apartment rental units. Cardone Capital’s website shows 7722 units. We therefore use the lower published figure. Cardone Capital’s website shows $1.7 billion assets under management. This means Cardone paid an average of $220,150 per apartment. This figure is important for a later calculation.
2. Grant Cardone’s published loan figures show an average 3.75% interest rate. Here is how a one billion dollar ten-year loan is repaid where the first five years are interest only:
A. Loan amount: $1,000,000,000 @ 3.75%.
B. Annual interest: $37,500,000.
C. Annual interest divided by twelve months: $3,125,000 per month in “interest only” payments.
D. At the end of 60 months (five years) of interest only payments, Cardone’s one billion dollars in loans balloon massively. The monthly payment skyrockets from:
* $3.125 million interest only, to:
* $18.3 million per month in principal and interest.
Below is a ten-year loan schedule for one billion dollars @ 3.75% with the first five being interest. We used the Calculate Stuff website to create the schedule. The loan assumes January 2020 – December 2030:
How many investors in Cardone Capital would have stayed away if they knew Cardone was using five-year interest only loans that balloon massively at five years? Cardone’s five years of interest only payments totals $221.8 million dollars. While Cardone can write off the interest, the fact remains that he still has to pay off the one billion dollars plus interest in years 6-10. As we show in the next section, he can’t even come close to paying off the debt based on the cash flow from only 7722 apartments.
On a related note, Cardone stated last week in a video that his monthly debt service is $4,500,000. This calculates to $1.4 billion in debt @ 3.75%. Cardone would have to explain the discrepancy. Perhaps he owes far more than the one billion to which he admitted in a YouTube video? Alternately, he is paying a much higher interest rate than shown in Cardone Capital prospectuses which are around 3.75%.
Cash Flow
Grant Cardone stated that he is at 88% occupancy in April 2020. This means he has 6795 units occupied with 927 units empty. Cardone further said that he builds his deals for 85% occupancy and can tolerate 15% of his rental units being empty. It would be logical from a business perspective to lower rents and fill the empty units. However, Cardone factors in a 15% vacancy rate and is content with leaving 927 units empty in his inventory. Why doesn’t Cardone Capital designate these as low-income units, put them into service, and receive government subsidies? Grant Cardone said in a recent video that he doesn’t want to get into Section 8 housing. Apparently, he would rather have 15% of his units remain empty than deal with lower income people. This is disturbing as it shows that Cardone doesn’t want “lower income people” and their problems in his apartments. Make of this what you will, but it has racial overtones.
For the purposes of this article, we assume Grant’s apartments rent at $1200 per month. This is based on Cardone’s expressed preference to keep rents above $800 and not go above $1500. Therefore, 6795 units @ $1200 per month = $8,154,000 per month in cash flow.
$8,154,000 — Cardone’s rental cash flow per month
$4,500,000 — Cardone’s stated monthly debt service on his YouTube video.
$3,654,000 — Balance remaining to pay expenses: Property taxes; 6% to investors; Cardone’s in-house property management fees; maintenance on properties; salaries; insurance; and fund reserve accounts, etc. Note, Cardone takes a 1% management fee per year, so each month Cardone is taking $81,540 per month off the top. In one year this equals $978,480 for his 1% fee.
Grant Cardone’s 7722 rental units fall $10.1 million dollars short per month in cash flow to pay the $18.3 million principal and interest when his billion dollar loans balloon. Cardone Capital becomes insolvent at that point unless Grant Cardone can bring in more cash or sell some, or all, of his developments to decrease his unsustainable debt load. His plan, apparently, is to buy more units as we detail in the next section.
Cardone Capital: The Threshold of Meltdown: If 50% of Grant Cardone’s tenants can’t pay rent in the pandemic, here’s what happens: 3500 rent-payers at $1,200 = $4,200,000. This is catastrophic because Cardone cannot service his monthly debt of $4,500,000. Nor can he pay his employees, investors, property taxes, insurance, maintenance, or anything else. He is headed towards foreclosure and bankruptcy in this scenario.
Why Grant Cardone Must Buy 20,000 More Apartments & Why His Underlying Assumptions Fail and Will Collapse
Grant Cardone said in a recent video that he needs to increase his holdings to 28,000 apartments. At $1200 per unit in monthly rent, and an 85% occupancy rate, his paid rentals would be 23,800 units. Cardone having 4,200 units standing empty makes no sense whatsoever for reasons we mentioned earlier. Nevertheless, this how Cardone designs his model. 23,800 units at $1200 per month brings in a gross monthly cash flow of $28,560,000. This allows Grant Cardone to pay the $18,250,000 per month to which his existing billion dollar loan has ballooned.
However, if Cardone pays $220,150 per apartment unit, then the cost of purchasing 20,000 units is a staggering $4,403,000,000. Let’s assume Cardone Capital can raise 25% down from investors. This figure would be $1,100,750,000. This leaves Cardone to pay interest for five years on the principal of $3,302,250,000.
The monthly interest only payment on $3.3 billion @ 3.75% is $10.3 million dollars.
Assumptions:
$28,560,000 — in monthly rent collections on 23,800 apartments
$18,300,000 — payments of principal and interest on the existing loan of $1 billion
$10,260,000 — the money Grant Cardone has left to pay the monthly interest of $10.3 million interest only payments on the new $3.3 billion loan.
This is where Cardone’s model breaks down. Grant Cardone has no money left over to pay all of the other bills once he pays the $10.3 million interest only payments on the new $3.3 billion loan.
There no money remaining to to pay investors, property taxes, employees, insurance, maintenance, or any other expenses. The numbers don’t hold up to a basic financial analysis. Please comment with your thoughts.
Bottom Line
Grant Cardone’s assumption that he can infinitely expand by purchasing more and more apartments falls apart at a 3.75% interest rate. Let’s examine a 1% interest scenario where the monthly debt service on $3.3 billion is $2,751,875.00:
$28,560,000 — monthly rent collections on 23,800 apartments
$18,300,000 — payments of principal and interest on the existing loan of $1 billion
$10,260,000 — the money Grant Cardone has left to pay the monthly interest the new $3.3 loan @ 1% interest.
$10,260,000 — Balance
$ 2,751,875 — New monthly debt service on $3.3 billion at 1%
$ 7,508,125 — Balance. However, Grant still has to pay 6% in monthly distributions on $1.1 billion to his investors.
$7,508,125 — Balance
$5,500,000 — 6% monthly to investors ($66,000,000 annually).
$2,008,125 — Balance to pay property taxes, employees, insurance, maintenance, other expenses, plus fund reserves.
The 1% scenario isn’t workable as it only leaves $72 per month to pay for maintenance and upkeep on each of the 28,000 apartments. Cardone Capital has to replace refrigerators, garbage disposals, toilets, air conditioning units, fix clogged drains, pool pumps, and pay for lawn and gardening, etc. each month. There is no money left for payroll, property taxes, investors, etc.
However, the real question here is far more fundamental: What banks would loan Cardone $3.3 billion at 1% when he is already carrying $1 billion in debt? Could Cardone even qualify for such a large loan? We don’t think so. The other factor here is that there are larger and financially stronger real estate syndicators to which banks can loan money on a much safer basis. Cardone Capital is not the only game in town. There are better real estate syndicators with much lower risk profiles than Cardone Capital. Thus, even if Cardone Capital could get loans, the interest rates would be higher than 1% to offset a bank’s inherent risks in lending to Cardone.
Another factor: Real estate syndicates with a more robust financial basis and reserves can afford to reduce rents on $1200 a month apartments to $1125. This forces Cardone Capital to bleed or meet the competition. A $75 rent decease on 23,800 apartments is a cash flow loss of $1,785,000 per month or $21,420,000 per year. Again, this is a foreseeable risk that a bank would likely not gamble on. Cardone Capital cannot guarantee any lender that it can hold a $1200 a month rental rate in what will surely be an intensely competitive post-pandemic apartment rental market competing for renters with jobs.
In a 1% loan scenario, Cardone could offer investors 4%. However, this would carry the risk of losing investors to higher yield investment offers. One reason Grant Cardone has attracted 3,200 investors is due to his promise of a steady and reliable 6% return. However, that promise just went up in flames last week when Cardone announced he was suspending distributions for the April, May, and June.
The 1% scenario seems highly unlikely for the reasons we have outlined.
__________
Unsustainable Debt & The Danger of Interest Only Loans
Cardone’s financial model is based upon his need for a massive increase in debt over time to keep his company going. Over against this, Cardone bets that inflation in the price of the large apartment developments in which he invests will keep increasing faster than his debt. Grant Cardone’s model needs inflation-over-time to make it work. However, if you read Cardone Capital’s prospectuses, and we have, Cardone contemplates the risks of of overbuilding and other risks. He discloses risks in the prospectuses and warns that investors could lose some, or all, of their money.
Cardone’s model, in our opinion, is an unsustainable and unrealistic model. There are competitors with more financial strength that also want to buy new and existing properties. There is price competition on rents as we discussed.
The major weakness we see in Cardone’s model are the ten year loans in which the first five years are interest only. As we said, Cardone is counting on inflation in the real estate market to do his work for him and keep him ahead of his debt load. However, Cardone seems to ignore the fact that real estate is cyclical as is the economy. There are real estate crashes and recessions and now a terrifying pandemic.
We think Cardone Capital is a house of cards in a hurricane. Even in its present form, we don’t see how Cardone Capital survives when its loans balloon. Some might say the answer is refinancing to yet another series of five year interest only loans. But what bank would make a one billion dollar loan to a borrower who couldn’t pay when his old loans ballooned? Worse, Cardone Capital is a private equity firm that has suspended distributions. The potential threat of investor lawsuits is a risk no bank wants to be included as an “as named” in.
Cash Management: Luxuries vs. Necessities
Grant Cardone claims you can afford anything. However, Grant Cardone cannot presently afford to pay his investors the 6% monthly distributions he promised them. He also couldn’t afford 44% of his employees and had the lay them off. The big question: How will he pay his monthly debt service when his loans balloon to astronomical proportions?
Unlike Grant Cardone, we like cash reserves and liquidity. We don’t like Cardone’s illiquid high risk investment strategy because it is built upon enormous debt and a bet that Cardone can outperform debt. Betting everything on the assumption that one can stay ahead of enormous debt is always a bad bet, and indeed a guaranteed disaster, in almost any financial scenario. The COVID-19 pandemic has crippled Cardone’s strategy at present such that he suspended distributions and laid off 44% of his employees. What comes next?
Debt is Cardone’s weakness and vulnerability. Cash is not trash as Cardone is so fond of saying. Right now cash is king. We bet Grant wishes he had the $50 million he spent on his jet parked in his corporate reserve account. That money would represent eleven months of reserves to pay his $4.5 million interest only payments. Cardone would have breathing room right now. But instead, he needed the jet as a status symbol. And yet Grant Cardone mocks and lectures young people to not purchase unnecessary luxuries such as Rolex watches. Grant’s G550 jet purchase was his version of buying a Rolex watch when the money would have been better off in a savings account.
Donations to the Church of Scientology
Because ours is a dedicated news site which reports upon the Church of Scientology and Scientologists, we address the Cardone’s multi-million dollar donations to Scientology in this section.
Grant and Elena Cardone have donated millions of dollars to the Church of Scientology over the years. While this is certainly their right to do so, the Cardone’s donations finance Scientology’s Fair Game programs of psychoterror, lies, and defamation. Grant knows all about Fair Game from, among other things, putting a knife in the back of the late Milton Katselas. Grant Cardone knows about the dark side of Scientology and his donations help finance the operations of the Office of Special Affairs.
Grant Cardone donated millions to Scientology and he will never see that money again.
Grant Cardone is beginning to remind us of failed and bankrupt Scientologist businessman Richie Acunto. Once a high-flyer and the owner of Survival Insurance, a Los Angeles firm, Acunto’s $10 million dollar Scientology trophy wound up for sale on eBay after the bankrupt Acunto couldn’t pay for his storage locker where it was stored. That $10 million donation to Scientology could have, arguably, saved Acunto’s business at a key inflection point where he desperately needed cash.
Will Grant and Elena’s Scientology trophy wind up on eBay someday?
Elena and Grant Cardone with their Scientology prize. Scientology bestows these glorified bowling trophies upon Scientologists that donate millions of dollars. In terms of bowling, Grant Cardone is looking at a 4-6-7-9-10 “Greek Church” split right now. The odds of picking up a Greek Church is .03%.
What Grant Cardone is Telling People to Do Right Now:
Grant Cardone should never lecture anyone about anything ever again. And yet this is exactly what he is doing. In his recent webinar, Grant Cardone listed the following things he thinks people should get rid of now. This list, shown below, includes all of the money in your retirement accounts and stocks. That Cardone would ask people to destroy their financial reserves at a time like this is appalling. Cardone ended his webinar by telling people, many of whom are unemployed, that they should spend $975 on one of his courses. Of course, buying Cardone’s course leads to a phone call from one of his people in which is a sales pitch is made to buy more Cardone courses and personalized coaching services.
Grant Cardone wants you to get rid of your friends, idealism, free time, and anything else he deems will get in the way of making money. He wants you to cut expenses even as he roared in one of his recent videos that he will not be selling his jet. The hypocrisy is glaring. We don’t expect Grant will lead by example and sell his $7.5 million luxury condo in a Miami tower either.
Cardone’s list speaks to his slash-and-burn worldview that presently has him on the edge of a long fall into a nightmare:
Categories: The Scientology Money Project
wow
An intriguing analysis! I have a couple of questions/comments:
1. Could the discrepancy of $3.1 m and $4.5 m in debt service be explained by properties where the loans have hit the 5 year threshold and principal payments have to be made?
2. I wonder about your assumption that his loans actually AMORTIZE over 10 years. The lifetime of the loans and their actual amortization schedule may be two different things. The guy loves debt. So why would he pay off a property in 10 years? I suspect that the amortization schedule is 30 years, not 10.
In that scenario, after 5 years he has to pay down some principal but not necessarily ALL of it in 5 years. So after 10 years he’s left with a balloon payment for the remaining principal. In fact, most of the principal will still remain unpaid. At that point he has to sell or refinance.
If the property was well managed, he should be able to sell at a tidy profit IF the economy of that moment is favorable due to increased rents and the resultant increase in equity (as well as whatever little extra equity he built by paying principal for 5 years). Alternatively, he can offer the bank a more favorable refi scenario than he did 10 years before that at the time of the initial purchase.
On the negative side, he’s investing in second and third tier markets which substantially increases volatility, investment liquidity and risk as to how much equity he can build even over ten years.
Of course, he gets his 35% in any case should he sell. Which means that the investment must gain at least 65% for his investors to see even a dime after transaction costs and Grant’s take.
3. Another consideration is that interest rates have no place to go at this point but up. Once they do it will diminish the resale value of his properties accordingly.
4. Dealing in quantity is both a blessing (economy of scale) as well as a curse. An old adage in investment real estate is “you don’t make your profit when you sell but when you buy.” But great deals don’t grow on trees. So if you’re FORCED to expand to keep your plates spinning you will have to resort to sub-optimal deals. In a high-leverage scenario that can become a problem quickly! Maybe not so much for the impresario, but most certainly for his investors.After all, it’s THEIR money that the bets are being placed with.
5. Cash is trash. That much is true if you sew it into your mattress. Or give it to a cult. Or buy a jet that you can only afford in a best-case scenario. When it comes to keeping a business afloat (say, keep and pay your employees or pay out dividends you promised to your investors) or even taking advantage of business downturns, cash is king! If it weren’t so why would Grant be extending discounts to lay his hands on some!
Great questions B.T.C. The two data points I took away from Grant Cardone’s “Quarantined in Clearwater” videos were those I mentioned in the article:
1. He uses ten year loans that balloon at five. However, you could be right about his needing not to pay the entire loan in the second five years. In this case, he would have to sell or refinance at ten years. His time horizon is 10 years.
2. He owes one billion dollars and has monthly debt service of $4.5 million. BTW, Cardone has apparently taken down the videos in which he shared this information. He may have done so in response to my podcast with Chris Shelton or this article. Damage control? I can understand because the data he shared laid bare the nuts and bolts of his business strategy and showed its inherent risks. Cardone has repeatedly said he likes debt and Cardone Capital will borrow as much money as he can. My question is this: Is there a point at which the banks quit loaning Cardone Capital money? Is it at the ten year horizon if things balloon there? Is it when he saturates the finite market for Reg D and Reg A investors who want to lock up cash for 10 years in apartments in a post-pandemic economy?
Cardone said Cardone Capital pays $2 million a month in distributions. Using my assumption of $8,154,000 per month in rental income, Grant’s debt service and the interest payments total $6.5 million monthly. This leaves only $1.6 million per month for all other expenses. I wonder how close my numbers are to the real numbers? I think my model is reasonably close given the data Grant offered in his videos.
Cardone keeps using the figure of 8000 apartments but his website says 7722. He needs to either correct his website to 8000 or stop rounding up to 8000. Another correction: Grant’s twitter profile says $1.4 AUM whereas Cardone Capital states $1.7 AUM.
Cardone said he will escrow the three months of suspended distributions. However, it remains to be seen if he gives back $6 million to investors in July once it’s in CC’s bank account.
Here’s one thing I bet on: Leaks from former Cardone Capital insiders.
“Escrow” he does? I think he has an MU. “Not paying” is more like it. Imagine what he’ll do if his tenants tell him they “escrowed” their rent this month and will do so for the next quarter…
I think he overpromised to his investors from Day One. High leverage (and 85% on real estate is extremely high) is a great albeit risky wealth building strategy as long as everything goes up and you don’t expect to make any money until you sell. (And don’t get your hopes too high if you have to give the first 35% plus transaction costs to others).
As an income strategy it doesn’t work very well , as your analysis shows, due to the high monthly nut. Even if you pay interest only to your lenders. However, 6% income is no small promised return! I wouldn’t be at all surprised if he had to subsidize the dividend with his other ventures which have now dried up. Or pay existing ongoing obligations from new capital influx which brings his enterprise now into Ponzi territory. And good luck raising more money while you’re “escrowing” what you already are owing.
He may be able to weather this and sell properties at a reasonable gain, eventually. But those expecting a monthly dividend check better brace themselves for disappointment. For this is only the beginning, the first month where tenants may miss their rent payment. Anyone financially affected by the current crisis hasn’t seen the worst of it yet. And as Grant pointed out so eloquently, the courts are closed.
Good or bad, many jurisdictions have enacted moratoriums on evictions. Pretty soon, he’ll be paying insolvent tenants to leave or hound them for the rest of the year to become current. Not that it would be easy to replace those tenants with flush ones.
The maddening part: Grant may fall short of his financial dreams but he’l still be making plenty of money. His investors, not so much!
I continue to struggle to make the numbers add up. I went back and checked a number he says is a cornerstone of his model. He says he’s making money at an 85% occupancy rate (i.e., a 15% vacancy rate). That’s gnawed at me for a while, but I didn’t drill into it. Turns out, according to the St. Louis Federal Reserve, the vacancy rate nationwide in 4Q19 was 6.9%, one of the lowest rates in the last 35 years. The only time in the last 60 years that the vacancy rate topped 11% was in 3Q09, in the depths of the 2008 credit crisis, when unemployment was about 13%. In other words, Cardone’s vacancy rate is near the danger zone in a time when the national vacancy rate is near historic lows. That sounds like a screwed-up business model to me.
Why has Cardone built his model to assume a targeted vacancy rate so much worse than the national average, and worse than the worst peak level in history? I think it’s because he’s trying to sell a premium product in second-tier markets. He’d rather take a high vacancy rate than discount on the rent. If that’s correct, then he’s significantly exposed to pricing pressure from better-managed competitors who would discount as you suggested. That’s a very optimistic strategy, and one that’s clearly oriented towards a perennial bull market, as you suggest in the article.
The strategy of selling a premium-priced product in a second-tier market is risky in a down market, because you’ll experience the downturn even faster than high-quality operators in larger, more diversified metro areas will. Smaller cities typically have a much higher percentage of employment coming from a small number of employers, or from a relatively high concentration in a specific industry (farming, coal, steel, shale oil fracking, etc.). This kind of concentration in a single industry means that producers have enough power to limit wage growth, which is what keeps those areas lagging more diverse metro areas structurally over the long term. And that’s in the good times. When times get tough, layoffs are more aggressive and wage growth once recovery begins will also lag higher-end metro areas. The rich get richer and the poor get poorer at the city level as well as the individual level…
Because of the above factors, I agree with your assessment that Cardone will be among the first to feel the downturn, and potentially to have his debt become non-performing. It’ll be pretty interesting when all of this is said and done to see how many class action suits are initiated if he gets foreclosed on many of his limited partnerships. The lawyers will have a field day with him. And the statute of limitations for fraud is 3-5 years after discovery, depending on jurisdiction. So there’s plenty of time for things to return to normal before filing suits. He has targeted unsophisticated investors and probably oversold the safety of his distributions and the likelihood of profiting on a sale.
JPC, I too struggle to make sense of Cardone’s business model. In Cardone’s video of yesterday (4-13-2020), he enthused over a Multi-Housing News report which stated:
The real number in the article was 69% and not “nearly 70 percent.”
Cardone said that as long as the number held at 69% that was good for him. In other words, he can tolerate having only 69% of his tenants paying rent — and this where he is at an 85% occupancy rate. Thus, 70% of his 6795 units paying rent equals 4765 units. At $1200 per month this is $5.7 million per month. With his debt service at $4.5 million per month, he has only $1.2 left over for overhead. This is why he had to suspend payments on $2 million in monthly distributions. This is deplorable financial management.
Cardone could simply reduce his monthly rental cost per unit and aim for >90% occupancy. However, he will not. Instead, he will only discount if a tenant prepays 12 months in cash. At $1200 a month, this means a tenant has to pay $14,400 in cash to get 15 months of rent. The net monthly rental for this 12-for-15 offer is $960 a month. That Grant can tolerate this discounting shows he is, as you say, trying to sell a high-profit premium product in secondary markets.
For the sake of argument, 7,000 rented units at $960 per month = $6.7 million per month. This comes in well under my estimate that Cardone rents 6795 units @ $1200 per month for $8,154,000 in monthly cash flow. Hence, Cardone seems trapped in an business model whereby he will accept a 15% vacancy rate in exchange for a much higher cash flow each month. However, the weakness of this is magnified in a severe downturn where price erosion on rents will occur as a function of competition.
If rents are forced to $1,000 in his range, even if he rents out all 7722 units for 100% occupancy, he comes in at $7,722,000 per month — still off $432,000 from what I calculated to be $8,154,000. The situation gets even worse because at 100% occupancy his maintenance and all other costs increase. His monthly debt service of $4.5 million leaves him $3.2 million per month. $2.0 million in distributions leaves him with $1.2 million for all other costs. This makes it extremely hard to pay property taxes, payroll, maintenance and all other costs on 7722 units. Therefore, Cardone would have to cut distributions by 50% or more to remain operational.
Cardone’s model has no flexibility in a severe economic downturn and, in fact, all of its weaknesses are magnified. The impact on Cardone’s ability to raise investor money and borrow bank money would seem to be significant given his model and its seemingly strange logic that embraces a 15% vacancy rate.
I agree: The 15% is baffling. I have always used 5% for my own properties (admittedly, in a top-tier market only) and I don’t believe I ever even reached that threshold. So I find it strange that someone who uses a model as IMO financially reckless as 85% loan to value would be so conservative (if that’s the right word) on their occupancy assumption.
Furthermore, high planned vacancy rates in a second or third-tier market make no sense to me whatsoever. Particularly, in light of his high debt which makes maximizing cash flow imperative. Even more so, given the fact that he promises a 6% dividend to his investors (IMO, the Achilles heel of his whole scheme).
Meaning: In these markets, rents are relatively low. In a top-tier market it may make sense to keep an apartment vacant with $3000 offers coming in and hold out for a $4000 (33%+) tenant. In a lower-tier market, do you really want to reject a $1200 offer and hold out for $1300 (8%+) instead? Meanwhile, the cost of ownership is not even that much lower than it would be in a top-tier market. Property taxes, insurance, utilities are not cheaper than in a top market and take an even bigger percentage of revenue in these lower-valued markets. Repairs may be a bit cheaper but again, replacing a hot-water heater or a roof takes a bigger percentage of your revenue than it would in a top market.
If Grant wants to make his investors any money in a ten-year time frame, he either has to make exceptional buys (a difficult proposition when you’re dealing in large volume as there are only so many great deals to be had) or increase rents substantially over that time period.
Grant gets his management fee and 35% of the back-end either way. But a property does not even reach its break-even point for the investor until its value has gone up by about 65%. Capital improvements are problematic, given his precarious cash flow. So he needs to either retain tenants willing to endure steady annual increases (min. 7-8% p.a. for this to work) or find other tenants who are willing to pay more for the same apartment. Of course, the turnover scenario creates further substantial expenses to the property.
So is he accepting high vacancy rates as the cost of finding higher paying tenants in hopes of improving a property’s book value? This scheme may work for the listing agent’s brochure at the time of sale. Until the prospective buyer asks to see the books…
I just can’t see how this scheme could possibly work to anyone’s benefit but Grant’s. Certainly not for his investors or tenants. Maybe it’s just my limited imagination as someone who has never created or eclipsed universes…
Jeffrey: Grant’s enthusing over 70% fails to take a few key factors into account.
First, there is no corresponding willingness in 30% of banks, utility providers, insurance companies and tax collectors to show forbearance when it comes to the property owners paying their bills on time. Authorities are all too willing to pass moratoriums on evictions without offering relief to the property owners.
Second, as you pointed out, having a non-paying tenant is a lot more costly than having an ordinary vacancy as the property owner has to continue providing services at their own expense.
Even with those tenants who will eventually come up to speed there will be considerable ongoing unpredictability, expense and hassle collecting. Which is to say nothing about those that will simply give up, stop making any payments whatsoever and stay put until the sheriff comes (which may take quite a while, see #1).or the owner pays them to move out.
Third and most importantly, there is no way that the default rate will hold at 30%. The shutdown began in the middle of March. If 30% of tenants can not pay up a mere two weeks later, imagine what this number will rise to 6 or 10 weeks after the fact. Even those returning to work will be faced with a decision what to pay for first: groceries, car payments and other ongoing expenses where there is no forbearance or rent where there may be legal protections keeping them in place.
Jeff, you say: “Cardone said that as long as the number held at 69% that was good for him. In other words, he can tolerate having only 69% of his units rented — and this where he is at an 85% occupancy rate.”
Actually, the stat was that 69% of occupied units are paying rent. In other words, when Cardone’s occupancy rate is 85%, then 58.7% of units he owns are paying rent if he’s seeing numbers like in the survey. Ouch!
If he’s not seeing that in March, he will be by June, maybe worse.
Here’s a Cardone Capital investor sharing his experiences. One fact he reveals: Only accredited investors who go in $100,000 or more get 6%. Unaccredited investors get 4.5% and the target is 6%.
When Grant sells or refi’s he takes 35%. The investors get 65%. For every dollar made on a property, Grant takes .35 cents.
16:00 Jeffrey, is that the likely problem? Sounds like a good reason Grant sent out new ads, because of what the announcer says he thinks what’s happening at 16:00. (this is all way above anything I’m familiar with.)
These assumptions are incorrect. I am a multifamily investor and have similar loans. The loans may balloon at ten years but are amortized over 30. Nothing amortizes during an IO period so in this case, the principal and interest are amortized over 25. The payment would jump to only 5.14M. Of course the bank knows this and makes sure that the property can support this based on the ratio of cash flow to the mortgage payment. This should be at least 1.15x but is often 1.25x which means the property has $125 of cash flow for every $100 of mortgage payment. It’s also very likely that not all his loans are IO.
Should’ve just bought bitcoin, what a fucking moron
Gary, multifamily and cryptocurrency are apples and oranges. You cannot compare the two. Bitcoin had a market cap of $817 billion on May 17, 2021. Cardone is in debt with AUM of $2 billion and locks investor money up for 10 years at 4-6%.
An investor can get in and out of Bitcoin and make money. Bitcoin is not for amateurs whereas Cardone is. Give me one big money name that has invested in Cardone Capital. There are none to my knowledge. Cardone may have given some sweetheart deals to his friends or paid speakers, but no one in big money is paying attention to Grant Cardone. Cardone Capital is not a play anywhere among the pros whereas Bitcoin is. There were three separate $1 billion dollar Bitcoin buys in 2019 and 2020. These buys were larger than Cardone’s AUM.
Firstly not only do you make bad assumptions on the debt structure, it’s clear you don’t know how making income in multi family works either. $1200 rent + app fee + pet fees + reserved parking income + laundry income …etc. (and there are more!). NOI is what you are searching for. And you don’t have enough info to derive that.
Secondly, he says he underwrites his deals to work at 85% occupancy. Doesn’t mean they target that and sit at 85% forever with 15% of units offline. Some communities are going to be full…especially in todays market where there are more renters than ever!
Thirdly, banks LOVE real estate. Crypto and the stock markets (including beloved tech stocks) are volatile. Real estate is – over time – one of, if not THE, most steady investment vehicle.
I’m sure there is a fourth point to be made here on tax write-offs and taking losses and how across a portfolio that’s not always a bad thing. The tax depreciation is HUGE. Also, he likely offloads the rotten eggs in his portfolio and those end up being someone else’s treasure…someone in his massive customer funnel system. So he makes money off them twice or more!
Cash is trash when it’s just sitting in your account and not working for you. Has inflation come for your cash yet??
Not a scientologist so like your work there. Came here to learn about Grant and the Church. But this post came across as trying to dig up dirt but missing the mark for those who know.