Some people are fed up with the “hustlers” of the U.S. real estate market. They criticize celebrity investors such as Grant Cardone, the host of a podcast titled “This Is Not Your Daddy’s Economy,” accusing him of promoting a get-rich-quick philosophy that exposes small investors to extreme risk.but the
The hustle mentality in general, they say, is only worsening the everyday frustrations felt by hopeful home buyers in an exclusive housing market. And it takes advantage of those same frustrations.
Exploiting the Stress of a Generation?
Grant Cardone, head of Cardone Capital, is a billionaire. He got to where he is, in part, by turning the financial stress of a generation to his own monetary benefit, according to a recent exposé in The New Republic.
His profit model relies on the existence of a permanent rental class. He buys up multi-unit properties in Austin and other sunbelt metro areas, then pulls out ever-increasing sums of rent money while amassing a portfolio of real estate equity. He selects properties where rents can be quickly hiked. Meanwhile, many of the people who occupy the buildings deal with disarray, disrepair, and displacement through evictions.
He wows small investors by injecting high-energy terminology like 10X into the names of the properties. He urges followers to drain their retirement accounts, and even to sell their homes, and invest in Cardone Capital. Thus, Cardone’s model also depends on extracting what little wealth is available to ordinary people, and discouraging them from being homeowners in the places they live and work.
As his model hums on, Cardone takes in fees, and hefty cuts of the profits.
OK, a Cycle of Borrowing and Crowdfunding. So What’s New?
In the age of podcasts and video websites, the Cardones of the world have access to a massive, 24/7 audience. What those viewers and listeners perceive is an opportunity to put down as little as $1K to become real estate investors.
However, these prospects cannot directly invest in the buildings. Instead, they receive shares, with their money locked up for years.
To make it all work, Cardone must continually bring in new investors. Otherwise, mortgage debt would overwhelm his funds. The cycle continues as Cardone applies for large loans, using the investors’ funds to pay off the portfolio’s debts. Should a fund fail to make payments, the people who contribute their savings would lose their entire investments.
Cardone stands out as a flamboyant individual in the world of investment marketing. But the popular video platforms and investment websites carry plenty of advertising based on similar “hustle culture” energy. The New Republic doesn’t blame Cardone as a person, so much as the whole get-rich-quick vibe that’s exploiting many people’s economic frustrations and their craving for financial success.
The New Republic points to tech platforms, holding them responsible for normalizing hustle culture. Startups like RealtyMogul, CrowdStreet, Fundrise, and Arrived. This new fleet of crowdfunding companies has arisen in the wake of Reg A+ offerings, which were greenlighted in the Obama era through the JOBS Act of 2012. The Securities and Exchange Commission itself oversees the crowdfunding exemption under the JOBS Act. Crowdfunding lets everyday retail investors pool their resources and fund companies. It makes direct investments in the market possible for ordinary folk.
We could say Reg A+ gives retail investors an on-ramp to security offerings where opportunities merge with risks. We might say Cardone exploits that ramp. But major real estate investment companies set the stage.
Wall Street REITs: The Big Kids on the Block
For decades, big corporations like Blackstone, Vanguard, and the like have been meshing retirement funds with market speculation and leveraged debt. It’s not as though working people were immune from funding real estate empires long before Reg A+.
The Blackstone Group’s Invitation Homes made billions by turning typical starter homes into rentals. American Homes 4 Rent, Colony Starwood, Brookfield, and many others have also joined the post-2008 real estate “recovery” that treated hundreds of thousands of homes as investment vehicles. They came with cash and beat out bidders.
Some of the biggest firms went public, forming real estate investment trusts — REITs. Some of them went so far as to offer struggling mortgage borrowers cash to leave their homes.
People who cannot buy (or afford to keep) their own homes can buy shares in REITS. This U.S. real estate model represents a shift in the whole idea of the value of homes. Today holdings in REITs encompass not only houses — but neighborhoods. And they control trillions of dollars’ worth of real estate assets around the world.
Class Actions: The Marks Hit Back
One of the contributors to Cardone’s portfolio was a California senior named Luis Pino. This small investor decided to contribute $5K after attending the “Breakthrough Wealth Summit” Cardone had marketed through social media. The social marketing posts were on the flashy side — adorned with images of luxury clothes and watches, fancy cars, and private jet.
After coming to the conclusion that he’d been played, Pino decided to hit back. And a lawsuit was born: Pino v. Cardone Capital, LLC, argued March 2022 to a San Francisco court.
The class-action allegations said that the Cardone Capital fee system is less than transparent. And the suit went further, claiming that Cardone bamboozled small investors into propping up his real estate portfolio. They said Cardone led them to believe in rewards that he couldn’t guarantee.
And indeed, one of Cardone’s promotional videos said investors could expect an annualized 15% return on their investment. Granted, residential housing did deliver returns of 16% in the decade from 2010 to 2020, per S&P Global Investments statistics. But uncertainty can enter the market at any time.
And Cardone was still promising the moon after the Securities and Exchange Commission wrote to him, warning against making such promises to prospective investors.
Pino has died since becoming a plaintiff against Cardone. Pino’s daughter vows to fight on. Christine Pino’s new class-action suit, filed in a federal court in Los Angeles, again targets Cardone Capital and the star of its social media marketing show. Following in her father’s footsteps, the investor’s daughter claims Cardone regularly employs misleading tactics, and refuses to heed the federal securities regulators.
But will this bring justice? Or just some fines that amount to slap on the wrist for a multibillionaire?
It is crucial for the courts to strictly enforce the provisions of the Securities Act of 1933 against real estate investment hustlers, prohibiting “material misstatements or omissions in real estate investment offerings.”
It shouldn’t take a class-action lawsuit to make this point.
Supporting References
Josh Gabert-Doyon for The New Republic via NewRepublic.com: Fast Money – The Real Estate Hustle-Culture Con That’s Exploiting Investors and Wrecking the Housing Market (Aug. 29, 2023).
Francisco Alvarado for The Real DealTM by Korangy Publishing Inc. (New York): Grant Cardone Hit With New Class Action Lawsuit (Aug. 30, 2023).
Carlos Waters for CNBC LLC, part of NBCUniversal, via CNBC.com: How Wall Street’s REIT Giants Are Reshaping U.S. Real Estate (Sep. 1, 2023; with data provided by Reuters).
And as linked.
More on topics: Fair housing, Wall Street firms get tax breaks
Photo credits: Anders Kristensen and Pixabay, via Pexels.