Hey everyone Me: Kevin Here in this video we are going to react to parts of a video I made five years ago on Grant Cardone and Cardone capital and since then there have been some changes. So in this video, not only are we going to review what was true back then and how that compares to fundrise and Vanguard and REITs and otherwise, but then we're going to talk about how some things have changed some of the new fees which are a bit lower but why we'll talk about debt and we'll talk about what you should do going into 2024 here. obviously not as personalized Financial advice, but as perspective for you to consider them. So let's get started with a throwback to over five years ago benefit to having an exit strategy is Grant gets to make money on his website.

He tells you exactly what the fees are for his business and the business model. Anytime a property is acquired, Grant takes a 1% fee, anytime a property s sells, Grant takes a 1% fee and to manage the investment Grant takes another 1% fee. So let's do an example with this $32 million deal. $32 million $8 million invested.

Let's be generous and say the fee is based on the $8 million invested in Under Control and not on the 32 million because the numbers would be ridiculous then and maybe they are ridiculous. 1% of $8 million is $80,000 on purchase $80,000 to Grant and we put the deal under contract like Bang you just tell me what your terms are and I'll give them to you whatever you want I'll give it to you H I Love that analogy. So that right there, that little cut that I did what over five years ago here is actually really important for understanding one of the biggest downsides of a real estate syndicator. So understand this: when somebody gets paid money to buy real estate and to sell real estate, what do you think? their motivation is it's to buy and sell real estate estate.

So if they're a real estate fund manager and they're incentivized to buy and sell, making you pay 1% every time they do that, then their goal is to tell you how great it is to constantly be buying and selling real estate. The reality is buying and selling real estate is extremely expensive. Every time you sell, you have to rely on the market moving in your direction. You have to rely on the buyer doing their due Dil inspections and getting financing.

You have to pay agents fees, escro fees, title fees. It's a disaster and it's very expensive. But it's how syndicators make money. and so that's why.

that little aside there where cardone's kind of like hey, you give me the terms I'll give them to you. Of course, you're not incentivized as a syndicator really. to get a good deal, you're incentivized to deploy Capital One of the big downsides of a syndication. But let's keep listening in to some of the comment interor for the management every single year: $80,000 to Grant and upon the sale of the property, $80,000 to Grant Uh, on that, $8,000 a year for management? What a lot of the fund managers do.

And Cardone I've seen this in some of his ppms as well. maybe not all of them, but some of them. uh, what I've seen is what they'll essentially say is we're going to not charge the management fee for say 10 years and that will make it look like we can send you more cash flow on a monthly basis. Then when we go to sell the property, we're going to take all those 10 years worth of management back at that point.

And so then what you're left with at the end is even smaller. because you weren't paying 10 years worth of management even though you owed it, it's there's There's so many fees in real estate, it just rubs me the wrong way. You're the one to decid to work for 1% Don't tell me man, oh my god, Dude, don't Oh my God me. This is funny because Cardone here is making fun of real estate brokers working for 1% Meanwhile, he's literally collecting 1% on everything he can.

You're the one that picked that freaking job. And then you wonder. Well, I mean okay, so there's not that big of an incentive to sell a property, right? No, No There there is. We're getting to that.

What's brilliant about that? 1% in the middle? that kind of slides in there. as in not the 1% to purchase and find the property or 1% to sell the property Is that's not to manage the building, That management expense. Oh no No no no, that's coming out of the Investor's pockets. For what it costs to op at the building, right? So it's not a management fee.

It's a management fee to manage the manager, right? So that's actually known as an asset management fee. When you hear AUM or advisory fee or asset management fee I want you to think how much is the building and then it's 1% generally of that building cost. That's the asset management fee. Now somebody has to get paid for dealing with the tenants, doing the leases, dealing with the repairs, and the complaints, and the tenants.

the toilet. That's all that nonsense. Okay, that is the property management fee. So when you hear Cardone taking the 1% management fee, it's actually 1% as a management fee to manage you, the investor your money and pick up the phone.

Go! hey, property manager, how's the property doing Not actually doing Property Management himself. That's a very big difference people forget about. You're actually paying for two managers every single year. That means if you have a 400 unit building, there's going to be an on-site management company.

That company is going to get a fee and Grant takes 1% of that $8 million to manage that management company. And again, every PPM is written differently. The example we're using in this video is 1% of 8 mil which is the equity in the deal. Most of these management fees are charged on the total asset under management, not the equity.

Those little 1% fees. Everywhere they add, they add, they add, they add, they add. They make the syndicator rich. Now let's talk about the real killer as to why the exit strategy is the best business model Grant has ever come up with.

and I'm so excited for him. but you should know about it and it's not only him who does this syndicators across the world do this I Figured to try to clarify some of what's going on so you can understand the Brilliance of this scheme for Grant Cardone but how expensive it is for the investor I Thought I would show you how this looks over a 10-year period of time. Uh, and then I'll explain some of the differences between you know what a syndication is and like a read or whatever uh as well as how these fees are different from what you would expect regarding a property. So first this section right here.

this is just the fund. This is like similar to the Cardone fund structure which is a real estate syndication. Let's say you bought a building for a100 million and by year 10 it was worth double which would be great. Okay, like great timing the Fed's printing money real estate prices are going up.

Most of that's going to be luck, especially since a lot of these you know buyers of multif family buildings and syndicates. They don't really care about getting a good deal up front. as we heard Cardone say we play that little clip like bang you just tell me what your terms are and I'll give them to you whatever you want, I'll give it to you, just tell me your terms and I'll buy the deal. That's what they're looking for because they're trying to deploy Capital because they don't really care about doing work on the deal.

Usually they just want to raise the funds and then hold the funds because that's how you make money. Because watch. If you acquire a $100 million deal and you take 1% Commish as a syndicator, you make a million bucks instantly for acquiring it. Then usually what the syndicators do is they defer their property management for 10 years their revenues for 10 years to make the cash flow appear higher and then they collect that when they sell at the end.

So that way it seems like they're Distributing more and remember these are Asset Management fees not Property Management fees. That's very different. Asset management is like managing the manager. You're managing the money not the tenants.

so it's your a fee. And so 1% per year for 10 years is $10 million assuming the property is just $100 million property until you sell it and it's worth 200. Uh, and then you're going to take 35% of the gain. So 100 to 200 you'll take 35% of that on sale, which will be 35 million.

Approximately I'm shaving off like realtor fees and stuff like let's just say we're netting 200 here, right? Uh, and then you get another 1% on disposition, which would be another $2 million. So now all of a sudden when you put all of these fees together on a 10-year hold a syndicator who potentially has zero of their own money in the game. They may initially and then they get bought out by their investors, so they pretty much just ride for free with your money. They could be making roughly 50% of the deals long-term profit because look at this: a million up front: 2 million at the back acquisition disposition, 10 mil for for the management of the money plus 35 million for the sale gain.

That's nearly 50% of the entire gain. $47 million in fees. But it's not just that. Then they also write in all of our administrative funds, the secretary work in the office, the investor relations people that we have working to manage the money like all of the the legal reimbursements for the filing to be able to raise the money in the first place.

those are usually all additional reimbursements. Plus you get travel reimbursements in these syndications like if you really want to make money off of other people's money, doing relatively little other than fundraising and then picking deals, a syndication is a fantastic way. In a brilliant way. Like you can't You can't shade it because it's just like you make so much money with it.

A brilliant way to make a lot of money, but not as an investor. It's a brilliant way to make money if you're a syndicator. I Personally don't like this because I think that's unfair to the people risking their Capital It's way too expensive. Way too expensive.

So I'm not a big fan of this. that's a syndication. So for me, when I hear Syndicate whether it's the 8020 model or it's 65 35 I'm not the biggest fan these. Partnerships no go people get excited because they're like oh, but I get a K1 and I can depreciate.

That just complicates your taxes you don't necessarily want K1 it's more complicated anyway. What's also important to remember is that these syndication fees are different from your actual property fees. Usually when we look at a property, we like to say that a building has expenses known as Timmer T I mm Urur plus d plus I property taxes Insurance Maintenance management, utilities, reserves, depreciation and interest. All of those those expenses here in Orange are not part of The Syndicate fee like operating the building, the property manager for the building, the repairs for the building.

all of that still comes out of the investor cash flow on the deal. so you just get less of a yield on the deal because you're really paying two property managers here, the money manager and the property manager. So those are syndications. You can see this a lot with Partnerships as well.

Very expensive in my opinion. You do get companies like Fund Rise who have tried to make this a little bit less expensive. and what they try to argue is that they just take a 0 uh or or .15 uh fee which is basically 15 basis points. So if you multiply by a percentage, it would look something like this.

But the reality is, Fundrise charges 15 basis points for the actual advisory fee they call it, and then they charge another 85 basis points for the asset management. So they're also charging the same 1% per year. They're also charging 1% on acquisition, and often they're charging one or 1 to 2% on loans or construction that they're doing as well. So the fees are actually way higher for Fundrise than it makes it seem like.

because in addition to paying these the 1% here, the annual 1% over here, plus the construction and lending fees and disposition fees or realtor fees or whatever. In addition, all that, you're still paying the property expenses now Fundrise. and I think this is totally wrong. Like it's almost scammy when when you do this, Fundrise says oh, but you know Vanguard's uh uh re fund or whatever or real estate fund charges maybe 15 basis points.

Oh well, we charge 15 basis points as well. Again, that looks like this if you're going to run it as a percentage, right? And by the way, I didn't mean to put this little percent sign here because if you multiply by 0.15 it already does that for you. So ignore that little percent there. But wait a minute.

The same problem exists with Vanguard because Fundrise is taking your 15 bips and putting it into an expensive management fee setup. but with Vangard, they're putting you into rats and builders that also often have 8020 split models or asset under management fees built into them. So like it's literally just fee burying under fee burying. And the more you go through the paperwork, the more you're like you're just getting feed to death.

Now maybe you could find a Reit which uh, Grant card on, for example likes to poop on REITs I Don't really understand why because you get preferred dividends on them. He's like oh well, you own paper. You don't actually own the property bro. your K1 ownership interest is the same.

It's a piece of paper. The title for your car is a piece of paper. The deed for your house is a piece of paper. The share certificate of a real estate investment trust which is can be publicly listed or not is a piece of paper Like they're all paper.

Theoretically, they represent an underlying asset that is real. like real estate. Or sometimes in the case of reats, you could have mortgage reats. But a what you really have to do is you have to look if like if you're investing in a Vanguard real estate fund, you have to look at the underlying companies and go well, what fees are they charging? Because if you're in REITs that have the 8020 models or all these asset under management fees, you're spending a lot of money on all of this as well.

So the reason I'm bringing light to this is Uh is is really just because people keep sending me emails and messages and DMS they say Kevin Can you explain all of these fees? Because obviously you're running a housing startup where you buy fixer uppers. uh, and you rent them out. Whether they're multif family or single family, you're looking for wedge deals. Wedge deals is basically buying deals under market value.

We're not trying to time the market, We just buy properties under uh, market value. Uh, and so people are like, well, well, are you a Syndicate no, Are you a re no, Are you fundrise? No, we're we're none of those. We're not any of those. and I'm not even fundraising for money in this video or whatever.

I'm just trying to provide value and perspective. We're trying to build Really a competitor to like You know, the Ey buyer models like, uh, you know we think we could basically bankrupt Open Door Okay, that's like a three billion doll company. Now we think we can bankrupt them. We don't think they're a great company.

Uh, you know, Red Fin When Zillow was it, we think we can do better than those companies. So I'm not here to to talk funds. uh and if we ever did any kind of Fund in the future I Personally have an inspiration to say how can I take all of these non-property related fees and basically make the fees zero? So that way you basically change the game of investing in real estate. where like, imagine if somebody actually provided a fund product in the future where there were legit.

no fees like you go through the whole PPM and it's like damn, there really are no fees. It'd be such a game. Cher Because everybody's taking so so much freaking money in fees now. Obviously then people are like, well, how do you make money? How do you charge no fees? Well how House Heack makes money is We buy good deals like we actually put the work in to not pay market value like a lot of the rats or syndications do.

But we actually try to buy a good deal under market value. and now all of a sudden you have a market value deal that's fixed up stabilized, rented out, no fees. That's the difference. So uh, there is absolutely an opportunity to have uh, zero Fee real estate.

uh. investing out there, but it doesn't exist today. Uh, you know we don't even have that today. It's something that I think is is a goal we can Aspire towards and I think there's a huge opportunity there.

Now let's consider the revised fees the updated fees because now it's really expensive to do real estate. Consider this: you got a 7% property yield back in the day with a 2 and 1/2% mortgage. you've got free cash flow of 4 1/2% Potentially that's a great deal, but if today you're buying a 4 and A2 cap property because prices went up and all of a sudden you're paying 7% interest only in interest. You're actually negative 2 and a half% on that deal now.

I'm not the biggest fan of negative cash flow, but there are times that actually Mak sense. If you believe the property value can appreciate or will immediately appreciate more in value that is. Remember, there are multiple ways to make money from Real Estate There's making money from the cash flow and then there's making money from the appreciation of the building above and beyond. Whatever it takes to actually maintain it because if you don't maintain it, it depreciates.

But otherwise, let's consider Grant Card Own's new and revised fees. Let's say, because it's harder to raise money now Grant Card Own raises $50 million and he leverages that 3x. So you have a $150 million deal Grant Cardone's still going to take that 1% 1% acquisition is based on the actual property value which is is $1 1.5 million. Let's say he could double it at some point.

We'll call it after 10 years which would be great leverage depreciation. Fantastic 1% of this. We're going to take $3 million over here for Cardone. Now the management fee is going to be based on the equity which would be 500k at this number.

But if we double, then uh, when we go to sell this building assuming we do an interest only loan, we're still going to have $150 million of debt. But we should now have $150 million of equity. and that's the benefit of Leverage The benefit of Leverage here is you get a potentially tripled the money in the deal. That's not bad if the whole building doubles in value, right? So you could potentially have a triple that on the equity up to $150 million.

So that means the management fees would be anywhere between $500,000 to $1 1.5 million. Let's make the math easy and just assume it's $1 million per year for 10 years. Therefore, $10 million. Now we have an example of the total fees pre waterfall with debt.

In this case, the total fees would be $14.5 million on a $150 million deal. Uh, that so far isn't that bad. It's like almost like a 10% Venture Capital Carry right? But Cardone has now a new fee. It used to be 35% probably still is for the old funds, but because interest rates are so high and it's harder to raise money for Real Estate It looks like Cardones reduced this to the classic 8020 model law of Supply and demand.

Can't Get Enough Investors, you lower your fees. So now Cardone is pushing for a 20% waterfall which in this case the gain on the deal could be $150 million. Say, everything works out perfectly. 20% of that gain n a fees would be about $30 million.

So now we're going to add these together here and we're going to realize that Cardone on this deal is still pulling about $44.5 million in fees, which is basically the entire amount that investors first invested in the deal which if we consider it on a math basis, it probably works out to splitting costs 7030 investor 70% uh, and Cardone 30% roughly if we are able to double the property value. so this is a lot better than 50/50 Now, keep in mind there's still going to be reimbursements. This assumes you have cash flow taking on debt in this environment and it assumes the property building value can double. This is still a lot of money for moving people's money into a building and then waiting for leveraged appreciation to do its work work.

And remember, with leverage comes risk as well. So this gives us an updated look on the fees. Now does that change anything in terms of what you should be doing? Probably not. Let's talk about that.

The reason I say probably not is because quite frankly, you could find real estate investment trusts or other funds that don't charge you nearly a third of your profits to go Leverage Real Estate. Most re have debt and that's because they're doing the work of Leverage for you and they're dealing with the tenants and toilets for you. You still have to be careful though. a lot of these rates can still charge you somewhere around 20% Just run the scenario.

I Just showed you twice. Cash Basis Leverage basis and look for the fees. Fees really add up heavily and so it's generally not a surprise for you to end up paying between 20 to 40% investing in real estate opportunities with somebody else doing all the work for you personally. I Would like to try to figure out how to get all of this down to zero or as close to zero as possible.

That's a dream of mine and a goal of mine. We don't have that at this point. so we're not fundraising for anything in this video or whatever. we're just trying to add perspective.

So what's the best thing though? And I'll never, ever ever take this away from somebody? What is the best thing to do in my opinion? Not as personalized Financial advice for you? Uh, but in someone's situation? Well, for the vast majority of people with a net worth of under 500 K to a million dollar, one of the best ways to start is actually buy real estate yourself. I'm a big, big, big, big fan of finding something that you could turn into a rental yourself. Don't over improve real estate. Don't buy funky properties next to highways, busy roads, under high tension power lines, or with funky additions.

Just buy yourself a normal three-bedroom two bath. Don't over improve it. Put 10% down, 5% down, 15% down. Something like that with a a 30-year fixed trade mortgage at a payment that you can afford.

Don't overextend. And when you get in, don't go remodel everything. It is way easier to save money by saying no to remodeling something than it is to try to get a discount on your vendor that you hired to do some work for you. Way easier just to say no upfront.

So buy real estate. And then when you move, rent it out. Now you have your own leveraged appreciation and by default, by not paying syndicators the fees, you're up probably 20 to 40% on your own version of Leverage depreciation. And since you have a 30-year fixed rate mortgage, you're not even in a situation where you're paying an interest only loan that's doing payable in 5 to 10 years.

Instead, the house is fully paid off after 30 years. You never have to refinance if you can afford that payment. It doesn't change. There's no margin called.

the loan doesn't get called. It's a much safer option for somebody getting started. now. I've got a lot of videos on the channel of exactly how to get started and how to buy wedge deals.

Go to the little playlists on the channel. You could see all the archived real estate videos. There's some really cool ones, but look I'm I'm a really big, big, big, big believer that if you're just now working on building your wealth, you've got to stay away from fees. The fees will absolutely destroy you.

Instead, do everything you can to get into real estate. One of the best things to do is buy it yourself. If if you don't want to buy real estate yourself, look for something that gives you that lowcost diversification. The danger here though is if you throw money into a Vanguard real estate fund, remember, they might be throwing your money into funds that also have those 20 to 40% fees.

So be careful about that like you're paying Vanguard to kind of be the distributor for you, right? Uh, so look for the best options for you. I I I I think at this point there aren't that many great options I Wish I could recommend one that I thought was was better. Uh, so we'll see. maybe we.

We'll save that for a future video. But for now, consider diversifying into real estate yourself and be aware that even the syndicators are starting to have to lower their fees. But even at the lower numbers, they're still ridiculously expensive. Thanks so much for watching! And I Can't believe that after five and a half or almost six years here, pretty much nothing's changed.

It's still a glorious business model for Cardone.