Grant Cardone shares one of the biggest financial mistakes he ever made – and how he turned it into millions

Key Points

• Real Estate finance allows for considerable leverage, and laws that favor the real estate industry allow for considerable tax breaks.
• The size of a real estate transaction may command more favorable terms, especially for properties that can generate sufficient debt service income.
• Take this quiz to see if you’re on track to retire (Sponsored)

NY Times bestselling author and Executive Producer of the reality tv show Turnaround King, Grant Cardone is one of the top sales training and business consultants in the US. With speaking fees of $150,000 per lecture, he certainly knows something about business and finances. However, Cardone himself admits to mistakes he has made and learned from along the way, and, in Turnaround King fashion, managed to leverage it towards a substantial payday.

Turning a Mistake Into a Multimillion Profit

To rectify his mistake in buying the house, Cardone used the home equity as collateral to finance acquiring an apartment building.

Cardone recalled that he had purchased an expensive house and later realized he had made a big mistake. Rather than selling it and taking a loss, he took a step back to assess his situation, and then took the following steps:

• Realizing he had $15 million of equity in the house, he used that as collateral for a $45 million loan to make a down payment on an apartment building.
• 7 years later, the apartment building’s valuation had increased dramatically.
• The lending entity, seeing the value appreciation, contacted Cardone to inquire if he was interested in refinancing the loan. 
• The lending entity offered him $60 million – more than the last loan.
• The refinance would pay off the $45 million loan.
• Cardone gets the $60 million at close. 
• As the $45 million loan is repaid from the refi, he owes zero tax on the $45 million.

A tax attorney explained that when the property is sold, the load proceeds are paid back and no longer generate the tax deduction, hence the lack of tax assessment. 

Some Takeaways

Real estate mortgage refinance is a commonplace banking transaction that can generate high liquidity and arbitraged profits if conditions are favorable.

The tangible quality of real estate property as collateral for financing is still one of the most routinely used financial leverage mechanisms. Its universal acceptance as an asset class in the banking world has led to a range of laws and strategies that favor the use of real estate as a basis for establishing a country’s GDP, due to its domino effect on other industries. China’s rapid real estate growth bubble and subsequent collapse with the fall of Evergrande is a perfect case in point. 

It is important to note that there are several circumstances that serendipitously helped Cardone to maximize his return on investment that might not be available to others. Some of these include:

• Current prevailing mortgage rates are likely more than double what they were when Cardone financed his apartment building, due to the escalation of inflation over the last 4 years. 
• The terms Cardone negotiated with his lender were likely more favorable than for the average borrower, based on: 

1)  The size of his transaction ($45 million); 

2)  Cardone’s fame, reputation and personal high net worth;

3)  His ability to come up with $15 million liquid down payment, reducing the LTV (loan to value) to under 70%;

4) The underlying property, an apartment building, generated rent rolls that presumably would be able to service most, if not all of the loan, through maturity;

• Cardone does not identify the lender, but odds are it was a party with whom he had done business before and had a good relationship. For the lender to contact him and offer the refinance opportunity with favorable terms, rather than Cardone having to request it, indicates that the lender considered him a valued, and likely, a return client.
• Cardone’s net positive arbitrage result is a result of  a combination of serendipitous events: interest rates falling, property value appreciation, and a good business relationship with his lender.  This combination is not a routine occurence, so that result is not something easily replicated.