Grant Cardone, the founder, and manager of Cardone Capital is no doubt a marketing and real estate guru. With over thirty years of experience in the real estate market, his real estate business, Cardone Capital, now manages over $2 billion and is pretty successful in its own right. Due to the nature of the business, many people begin to wonder if Cardone Capital is a REIT.
Cardone Capital is not a REIT. It is, however, a real estate crowdfunding firm. It pools money from different investors to create funds which are then used to invest in real estate.
In this article, we would be looking at what exactly a REIT is, the types of REITs we have, and what it takes for a company to be a REIT. We would also look at the difference between investing in a REIT and investing in Cardone Capital.
Why Cardone Capital is not a REIT
Tax rules in the United States require that any company that is to become a REIT must have met some requirements first. According to the Internal Revenue Code;
- Any company that is to become a REIT must be structured like a corporation, a trust, or an association. This means REITs should have a board of directors or a board of trustees. REITs must also have shareholders or owners with transferable shares.
- REITs are required to pay out at least 90% of their taxable income as dividends. This is the reason a lot of REITs typically pay higher dividends than other companies. Of course, most REITs also pay dividends quarterly.
- REITs are required to have at least 75% of their total assets invested in real estate. They also need to generate at least 75% of their gross income from the real estate assets they have invested in. Essentially, REITs need to have real estate as their most prominent and profitable venture.
- During the last half of each taxable year, not more than 50% of a REIT’s total shares should be owned by five or fewer individuals. To comply with this rule, most REITs prevent investors from owning more than 10% of their available shares. Also, any REIT must be jointly owned by at least one hundred people.
Only companies that comply with all of these requirements could qualify to become REITs.
What type of business is Cardone Capital?
Cardone Capital is not a REIT. Even their website specifically states that the firm is not a REIT. Cardone Capital is what is referred to as a real estate crowdfunding platform. Just as with any type of crowdfunding, the firm pools together investments to achieve a purpose, in this case, purchasing real estate.
More significantly, unlike with REITs, investments with Cardone Capital are illiquid. And although they pay out monthly dividends from income generated from rents, you cannot sell off your investment at any time you like. Cardone Capital investments are usually structured to last over 10 years, and they could even last longer.
It is possible to confuse Cardone Capital as a private REIT. However, remember private REITs can only be sold to institutional or accredited investors and, Cardone does business with individuals. Furthermore, Cardone Capital is never sold to investors. They merely invest in real estate with Grant Cardone.
Finally, Cardone Capital does not meet any of the qualifications required to become a REIT.
What is a REIT?
REIT stands for Real Estate Investment Trusts, and they were first established in the United States by Congress in 1960. REITs are companies that own and usually operate various real estate assets that generate income for them. They also allow individuals to invest in their different real estate assets by investing in their company.
Here is how it works: A REIT owns different properties to make money. These properties could be malls, apartment complexes, or offices, any property that could make some money for them. As an investor, you could invest in the properties a REIT owns by investing in the REIT. Like with ETFs or Mutual Funds with securities, REITs are a great way to invest in multiple properties at once. REITs are great ways for investors to get into real estate, even when they do not have a ton of money or a lot of time to manage the property.
Over the last five years, REITs have averagely returned 15.76% per year while the general stock market has returned only about 10% per year. This figure makes REITs generally seem like a good investment, which is true since housing is another significant part of the U.S. economy. It is also not always affected by the stock market. However, some REITs are traded on the stock market. They are therefore exposed to the risk of the stock market and risk from the real estate market.
These types of REITs traded on the stock market are known as publicly-traded REITs. Many REITs fall under this category, they are registered with the SEC and trade on stock exchanges regularly. However, we also have private REITs which are not registered neither do they trade on stock exchanges. Private REITs can only be sold to institutional or accredited investors.
Investing with Cardone Capital vs. Investing in a REIT
We have established that Cardone Capital is not a REIT. Therefore, it is necessary to point out that there are significant differences between investing in REITs and investing with Cardone Capital. Ultimately, whichever way you go is up to you and should depend on what you hope to achieve. However, there are some key factors to consider before arriving at any decision.
- Performance: First of all, and most importantly, how well have REITs performed compared to Cardone Capital? Since Cardone Capital is a private company, it does not have much of a public track-record and, performance is quite difficult to determine. For REITs, we mentioned at the beginning of this article that they generate an average of 16% every year. However, REITs are exposed to the risks from the real estate market and publicly traded REITs are also exposed to risk from the stock market. Cardone Capital, on the other hand, generally does not invest in ground-up projects and that minimizes risk. The firm also claims to have never lost investors’ money.
- Transparency: Generally, Cardone Capital seems to be more transparent than REITs. Investors know about the deals they are in; they know the properties invested in, and Grant Cardone claims his investors can easily reach him if they need any more information. A person who invests in REITs would have to depend on the market to determine the company’s value, and the company’s reporting to determine the company’s assets.
- Fees: The fees paid to invest in a REIT depend on what type of REIT it is. Publicly traded REITs do not charge investors to buy shares. However, since shares will be traded through brokers as with regular stocks, brokerage fees will be paid. Private REITs usually charge between 9% to 10% of the total investment. This fee would cover sales commissions and is usually paid upfront. With Cardone Capital, investors pay a 1% annual asset management fee, a 1% acquisition fee, and a 1% disposition fee on property sales. Approximately, investors still pay another 10% to cover other expenses of the fund. Finally, Cardone Capital retains a 35% equity interest in each and every fund.
- Liquidity: Investments in REITs are a lot more liquid than investments with Cardone Capital. With publicly-traded REITs, you can sell your investment at any time. Investments in Cardone Capital are structured to be held for a very long time, usually ten years.
Although Cardone Capital is not a REIT, the owner, and manager, Grant Cardone, once said (on his podcast, The Cardone Zone) that he might become a REIT one day. And so, within the next ten years, Cardone Capital could become a REIT.
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