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.
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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: