Money Rehab with Nicole Lapin - Why Entrepreneur Grant Cardone Is Getting Sued

Episode Date: September 6, 2023

Nicole unpacks the biggest headlines on Wall Street and how they affect your finances. Today: an update on the housing market and why entrepreneur Grant Cardone is getting sued— and how to protect yourself from the mess his investors are in. Want to start investing, but don't know where to begin? Go to moneyassistant.com and meet Magnifi, your AI money assistant, designed to help you make a plan for your financial goals. Want one-on-one money coaching from Nicole? Book a meeting with her here: intro.co/moneynewsnetwork 

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It's time for some money rehab. Oh, hello, September. And hello to you, my dear money rehabber. Here's your money news update for the week. And this week, it's really all about the housing market, housing hacking, and some hucksters. But let's start at the beginning with a quick vibe check on what's going on with the housing market. There's a quote that often gets attributed to the famed economist John Keynes. It goes like this. The markets can remain irrational longer than you remain solvent. P.S., his leading biographer says he probably didn't actually say that, but that's not the point. The point here is that the idea behind the quote is true, that you can go broke trying to superimpose your logic over the reality of irrational markets. And there is one market

out there right now that feels extremely irrational, but isn't, and that is the housing market. Let's start with the hard numbers about the U.S. housing market using the best available numbers we have from 2020. And those show that we're short 3.8 million housing units. So what the heck are housing units? That includes everything like homes, apartments, trailers, any legal living space. That is a huge downfall. Now, there are several reasons for this. During the Great Recession, home builder companies that specialize in building new homes for sale got hit really hard and never fully recovered. In the last few decades, zoning laws have made

it increasingly difficult to build more housing. And this is especially true for the type of homes that could really help alleviate the problem. That's high density homes and multifamily units. Finally, the work from home shift and remote work increased the demand for housing and pushed that demand into smaller cities. So while prices are super high, this is not breaking news. I don't need to tell you this. You see this every day. Until there are physically more units of housing built, the law of supply and demand says that prices are going to stay high. Every month, the Commerce Department releases numbers referred to as housing starts. And this is the number of homes that have started to be built that month. And that number

is, I will say, trending up. In July, builders broke ground on 1.4 million new homes. These numbers indicate that real relief is indeed coming eventually. And this is a bit awkward to talk about, but baby boomers absolutely dominate the housing market. At some point, that will no longer be the case, and the housing market. At some point, that will no longer be the case, and the housing market will undergo a shift, freeing up more homes. So in terms of supply, the future is looking better than the current picture. But what exactly is the current picture? Now, the current narrative is that the housing market is frozen by the interest rate problem. Today, interest rates on mortgages stand at 7%. The average mortgage in

the United States is a 30-year fixed rate mortgage. Of Americans who hold those loans, 75% have a rate of 4% or less, and they are simply terrified of giving up those loans, which is totally understandable. It's a huge difference financially, but it also creates a frozen real estate market where people who would normally be selling to move from a two-bedroom to a three-bedroom after the birth of their new kid or empty nesters who would be downsizing are hanging on to their old place rather than risk taking on a new loan with a higher interest rate. So this means the inventory of existing homes isn't coming onto the market at the rate it normally would. And here's a side effect of it that I want to point out. Wherever you have tight supply, some people are going to go into that market and try to profit off it.

On one side of the spectrum, we have housing hackers. If you've spent any time on financial TikTok, I've spent many hours. I am sure you've come across this term. It's a landlord, but a cool landlord, I guess. There are different ways of going about this, but the most popular way is to buy a home using an FHA or a Federal Housing Administration loan. These are loans backed by the federal government to get people into homes. They require a much smaller down payment and they may have more favorable interest rates, but you're required to occupy the home for the first year you own it. So the house hackers SOP or standard operating procedure is to buy a home, move into it, get roommates, charge them enough money to

cover the rent, live in it for a year, and then wash, rinse, and repeat. It's not really the way those loans are meant to be used, so I can't in good faith recommend that you do that, but it does work for some people, especially those people who don't mind sharing a bathroom with some roommates. And those people would not be me. Unfortunately, the same market also attracts people who are trying to profit in far more questionable ways. And here we come to Grant Cardone. Cardone is 65. He speaks with a thick Southern drawl and who resembles kind of a high school football coach who almost made it to the NFL but busted his knee in college, which is ironic

because Cardone hates college and doesn't think that people should bother to attend. Instead, of course, he thinks they should spend hundreds of dollars on Cardone University products where they can get a certificate in seven-figure sales. The course claims to have a value of over $8,000, but it's on sale now for a mere $197 with guest lectures by Donald Trump. While this is skeezy, that is not the worst issue here. Cardone believes that you should not buy a house. Buying a house, he says, is a waste of money. Instead, he claims that you should invest in real estate. But not just any real estate. He wants you to invest in his fund, Cardone Capital. The business model here is simple. He takes money from small investors. He

uses it to buy heavily leveraged properties, evict the old tenants, and then raise the rents. He has repeated this over and over again. The fund locks up investors' money for 10 years, and Cardone promises them an annualized return of 15% in exchange. That's a claim that the SEC has repeatedly warned him not to make because it is false. For bonus ethical issues, he's been accused of skimping on repairs and failing to maintain the building he owns, leaving them vulnerable to lawsuits by renters. Yet renters report that he keeps raising the rents nonetheless on poorly maintained properties to keep profit margins high, which he has to do because Cardone relies on 10-year loans that are

interest-only for the first five years, and then the payments balloon up. While the current tight real estate market supports his thesis, if the market crashes for any reason, so will his empire built on debt. Lawsuits are starting to come in from investors as well as renters, so there is trouble in the water. Listen, I understand the desire to invest in real estate. It looks good, and some people are obviously very successful at it. But anytime someone tells you they are Nostradamus in a video advertising their investment fund, you should maybe back away slowly. People online that are promising you things that are too good to be true. I hate those cliches, but I'm going to say it. They probably are.

For today's tip, you can take straight to the bank. If you're looking to save money on your lease, you can always negotiate with your landlord. We have done that on a previous episode of Money Rehab, which I will link in the show notes. When it comes time to sign your lease, you can offer to sign a longer lease or even give up some perks like your parking spot. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me.

And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.