When it comes to real estate crowdfunding Cardone Capital is one of the better-known names out there. Mostly because it is being endlessly promoted by its founder Grant Cardone with a large social media presence. I wanted to take a look below the hood today and figure out:
How does Cardone Capital make money? Cardone Capital makes money in two ways, from distributions and fees. Cardone Capital operates under a 65/35 distribution split meaning they receive 35% of distributable cash from operations, refinance or sale of the property. Furthermore, Cardone Capital charges an acquisition, disposition, and asset management fee of 1%.
But let’s look at this in a bit more detail!
How does Cardone Capital work?
The basic premise of Cardone Capital is: you invest money, they take care of all the rest.
As the founder and CEO of Cardone Capital, Grant Cardone has been in the real estate game for a substantial amount of time. During the past decades, he has acquired a real estate portfolio worth several hundreds of millions of dollars and has recently started syndicating those deals through Cardone Capital.
Real estate syndication is funding an investment property through multiple investors. Usually, the investors in syndication are equal partners in deal and same-class members of the LLC owning the property. However, syndication can also be arranged in the form of real estate crowdfunding.
Real estate crowdfunding is targeted a different type of investor. Usually, the kind of investor interested in real estate crowdfunding is either less experienced in the actual real estate market or just does not want to deal with the hassle of actually managing a property.
In the case of Cardone Capital, Grant Cardone is able to attract a large number of novice investors who are usually non-accredited and don’t have the funds available to invest in syndication that rely on partnerships. This way investors in Cardone Capital deals are divided into Class A and Class B members of the LLC.
How much do you need to invest in Cardone Capital?
The funds for accredited investors start at $100,000 USD and the non-accredited funds at $5,000 USD.
It is extremely unusual for real estate syndications to be available to investors with $5,000 USD. In this sense, Grant Cardone is true to his mantra of “fighting for the little guy” and making multifamily real estate deals available to everybody.
But as you can imagine Grant Cardone did not get rich by giving away anything out of sheer altruism. Combining his skills and knowledge of the real estate market with crowdfunding has not only given more leverage to buy bigger properties but also opened up an additional stream of revenue.
Here are some of the in which Cardone Capital makes money.
6 ways Cardone Capital makes money
In order to figure out how exactly Cardone Capital makes money and how much they receive in distributions and fees, we need to take a look at some of the investment documents such as the offering circular, the operating agreement, and the subscription agreement.
Most of the exact fees and distribution splits we will find in the operating agreement under 5.2 Fees Paid to Manager and/or Third Parties:
How does Cardone Capital make money?
Here are 6 ways:
Operations comprise everything from maintaining the units and the property to running the day-to-day administrative tasks. The operating cash flow in a real estate company comes from the rents collected from tenants each month.
Cardone Capital operates with a 65/35 profit split on most (if not all) of their funds. This means they receive 35% of all operating profits. This includes all distributable cash that is left after rents have been collected, repairs have been made and employees have been paid.
Refinancing is the process of renewing the mortgage on a property usually at a better interest rate. In most cases, a refinance is also done to return as a chunk of capital back to investors and thereby increasing the capital on the loan.
Cardone Capital makes through refinancing because of the same 65/35 split mentioned above. This split applied not only to distributions from operations but also to those from refinancing. In the event of a refinancing investors’ capital is commonly returned first and the remaining profits are then distributed according to the split agreed upon in the operating agreement.
- Sale of Property
The sale of property usually ends the syndication and dissolves the LLC that owns the property. This is usually done once a certain profit factor has been reached or market conditions require a sale.
In the case of Cardone Capital each LLC – and thus each fund – is comprised of several multifamily properties. This means that the fund will not be closed with the sale of just one property and the investor will not receive 100% of their capital back when a property is sold.
Grant Cardone widely advertises a 3x return on the sale of the properties. He aims to hold the properties for as long as necessary (up to 10 years) until this goal is achieved or he deems it appropriate to sell.
Under the operating agreement in place with all of their funds so far the following happens when a property is sold: 1. Capital is returned to the investor until 100% of their contributions have been returned, and 2. The remaining profits are split 65/35 between investors and Cardone Capital.
- Acquisition Fee
Acquisition fees are charged to the LLC as properties are acquired. There are usually expenses related to acquiring a property which may include travel, negotiations and due diligence.
At Cardone Capital, the acquisition fee is 1.0% of the purchase price of the individual property. According to their operating agreement, “these fees are difficult to determine at this time”. However, it suffices to say that 1% of a multimillion-dollar property can amount to quite a sum.
- Disposition Fee
The disposition fee is made up of any expenses related to selling the property. This may include paying a real estate broker, market transaction costs as well as negotiation related expenses. In other words, fees charged to the LLC as properties are disposed of.
When investing with Cardone Capital you will b paying 1.0% of the sales price of the individual property when they are sold. Again you will find that “these fees are difficult to determine at this time” but same as with the acquisition and especially considering Grant’s of 3x’ing, 1% of the sale price is substantial.
- Asset Management Fee
Asset management fees are any expenses related to managing the property on a day-to-day basis. This may also include some of Grant’s travel expenses and other administrative costs.
At Cardone Capital during the first three (3) years, the Manager or its designated affiliate(s) will earn an asset management fee equal to 1% of the total aggregate capital commitments. Thereafter, the Manager or its designated affiliate(s) will earn an asset management fee of 1% of the total Capital Contributions.
So, how does Cardone Capital make money?
Well, as we have seen there are several ways in which work of acquiring, managing and selling the properties are amply rewarded. Most notable the 65/35 – although be it quite common with real estate syndication – leverages the investors’ money to create profits for Cardone Capital.
With the creation of Cardone Capital, Grant has managed to transform his usual business of owning and managing multifamily real estate and develop an entirely new stream of revenue. Mostly due to the unbalanced distribution split it is worthwhile taking a look at some real estate crowdfunding alternatives for non-accredited and novice investors.
I would recommend taking a closer at Holdfolio. You can read my extensive review here.
Do you have any experience with Cardone Capital? Would you consider investing?