Grant Cardone has made a name for himself as one of the top U.S. real estate investors. Some years ago he founded Cardone Capital to – in his words – level the playing field for retail real estate investors. However, people have alleged that this might be a scam and a pyramid scheme. After some research, here is my conclusion:
Cardone Capital is not a pyramid scheme. They offer investors the opportunity to invest in long-term real estate funds without the option to retrieve capital until the final sale. Locking up investor funds in an illiquid asset such as real estate does not make Cardone Capital a scam.
While Cardone Capital certainly is not an outright pyramid scheme, there are some worrying factors to consider before investing. In this article, I have compiled my thoughts and opinions on the inherent investment risks. Let’s dive in!
What does a pyramid scheme look like?
In order to answer whether Cardone Capital is actually a pyramid scheme, we need to understand what a pyramid scheme actually looks like. In a typical one, there is one person – or a small group of people – at the top.
As more and more people join the scheme the few at the top become richer and richer while the bottom majority keeps adding capital. The main point about running a pyramid scheme is that a constant new inflow of capital is required to keep the scam running.
Cardone Capital actually has interesting properties that would make it ideal as a pyramid scheme. Let’s look at those for a moment.
FYI: The best way I've found to invest in ETFs is through M1 Finance. It's free and you even get an instant line of credit! Have a look here (link to M1 Finance).
Reasons why Cardone Capital could be a pyramid scheme
Here are some systemic risks of Cardone Capital’s structure that could indicate a scam:
- Vocal & Absolute Leadership: While not a necessary requirement for pyramid schemes, most tend to have a very vocal and charismatic leadership that entices people to join the “movement”. Grant Cardone certainly fulfills that role to the degree that he is loud, charismatic, and sparse on details.
- Funds Lock-up for 10+ Years: Locking capital up for a longer period of time would also come in handy when running a scam; you always have plausible deniability as to why funds cannot be paid back in full. In the case of Cardone Capital investors’ funds can be locked up for 10+ years until all properties in the fund are sold.
- Lack of Transparency: This is the big one! A lack of transparency of what an investor’s capital is used for precisely is a warning sign. While Cardone Capital promises great returns and has shiny pictures of new apartment complexes it remains difficult to verify what your capital is actually used for.
Of course, just fulfilling these 3 criteria does not make any product an outright scam since all of the above also can hold true for traditional real estate investments. There are many other factors to consider here.
NOTE: The easiest way to add diversification to your portfolio is to invest in real estate through Fundrise. You can become private real estate investor without the burden of property management! Check it out here (link to Fundrise).
How Cardone Capital is different than a pyramid scheme?
Some circumstances make Cardone Capital distinctly different from a pyramid scheme. Traditionally, in a scheme of this magnitude investors that entered the scheme first would be paid out first and receive a return on their investment.
This would encourage later investors to continue joining the scheme as they rely on the success of previous investors in the system. However, in the case of Cardone Capital, this has not happened to the extent that would justify calling it a scam.
Instead, all investors are bundled together in the same funds that liquidate capital more or less at the same time. In a traditional pyramid scheme, this could never work as there might not be enough new funds coming in at the time of liquidation.
In addition, Cardone Capital’s funds are properly registered with the SEC and show their claimed holdings at least on paper:
While this certainly is not a 100%-guarantee it does strongly suggest that the company fundamentally is engaged in the real estate business and owns some form of real assets.
FYI: Another great way to get exposure to the real estate sector is by investing in real estate debt. Groundfloor offers fantastic short-term, high-yield bonds that can add diversification to your portfolio!
What are the risks of investing in Cardone Capital?
- Single Point of Failure: The reliance on Grant Cardone as the sole person who is able to find deals and acquire properties represents a single point of failure in the company’s operations. Should anything happen to Grant, it is unlikely that the company would continue to operate profitably or even sustainably.
- Misalignment of Interests: As one Reddit user put it “Grant Cardone’s business is investing in Grant Cardone”. Whether or not his real estate funds are as successful as the claims Grant always gets a great return on his marketing budget by pushing his personal brand. This does not necessarily align with investors’ interests.
- Inherent Risk of Leverage: This last point is more a general risk to consider when investing in real estate and does not pertain to Cardone Capital in particular. However, the funds use – in some cases – highly leveraged assets to secure loans. This poses risks in an environment of increasing interest rates and a potential crunch in the real estate market.
Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:
P.S.: The links below are affiliate links, which means I receive a small commission at no extra cost to you when you sign up for one of the services. Thank you for your support!
1)Personal Capital is simply the best tool out there to track your net worth and plan for financial freedom. Just their retirement planner alone has become an invaluable tool to keep myself on track financially. Try it out, it's free!
2) Take a look at M1 Finance, my favorite broker. I love how easy it is to invest and maintain my portfolio with them. I can set up automatic transfers, rebalance my portfolio with one click and even borrow up to 35% of my assets at super low interest rates!
3) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).
4) Groundfloor is another great way to get exposure to the real estate sector by investing in short-term, high-yield real estate debt. Current returns are >10% and you can get started with just $10.
5) If you are interested in startup investing, check out Mainvest. I've started allocating a small amount of assets to invest in and support small businesses. Return targets are between 10-25% and you can start with just $100!
To see all of my most up-to-date recommendations, check out the Recommended Tools section.