AIPIS 223 - From Nothing to Success with Tom Cafarella

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It's my pleasure to welcome Tom Cafferol to the show. He is co founder of Ocean City Development. They are a real estate firm that is based in Boston. He has an interesting career path. Got started in the wholesaling world with basically no money at all. Built quite a business rehabbing properties and doing a little bit of ground up development as well. We're going to hear about that today. Tom, welcome. It's good to have you.

Thank you for having me on.

Yeah, good. So give us a little background and tell us about your career path. This is a rags to riches story folks, just like mine. Yep, yep.

Yeah, like you mentioned, I grew up poor. I grew up in a suburb of Boston. Not too much money, all that good stuff. And you know, I worked. I was a pizza delivery boy when I was going through college. And I remember the day I was just driving through, kind of keep trying to keep busy, having an audio book on. And I had the audiobook on Rich Dad, Poor dad, which I'm sure you're familiar with.

Never heard of it.

Yeah, so I think, you know, that's the one that kind of gets a lot of people at least excited about getting into the investing business. And I really made the decision at that point that I was going to be a real estate investor. Had no money to do it, had no idea how to do it, but I knew at that day that's what I wanted to be. So I finished up college, got into the accounting world, spent my first couple of years there. The first day that I showed up, I kind of knew there was no chance I was ever going to make it in corporate America. So long story short, I spent probably the first two years of my corporate career trying to figure out how to become a real estate investor, how to get into the game. And I spent so much time doing that that I ended up getting fired from my job. So they thought that I was actually already in real estate. And embarrassingly enough, I had never even bought my first house. So at the time I was just, you know, living in my parents basement, still trying to figure out what to do. And I had ended up being mentored by somebody who said to me, you've got to get involved in wholesaling because that's the only way that you can get involved in real estate with no money to start. And so that's what I did. I got really, really lucky on my first deal. I hit a home run on my first deal, and from there I kind of never looked back because I was able to just stockpile that success into more and more deals, start accumulating rental units, and then build out a real estate brokerage on the back end.

So Tom, what if you didn't get lucky on your first deal and you had a bad deal? Would you still be where you are today? It's an interesting question to ponder.

Well, it's funny because I did really well in my first deal and I think it actually hindered me for the next three or four or five months. So I made really, really low offers in the very beginning stages because I was just super conservative. I didn't know what to pay for properties. And so like I said, I hit a home run on the first one, but I actually went another four or five months before doing my second deal. So by the time I did my second deal, I was actually close to being out of the business altogether. So I think it's kind of catch 22 in terms of whether or not I'd be where I am today. I think successful people figure out a way no matter what. So I think I would have continued on no matter how many obstacles I would have hit. But it was definitely, you know, some luck to get a really good deal on my first one.

Yeah, right, right. Good stuff. Because I often retell this story nowadays that my first rental property that I purchased when I was 20 years old, it really, like, if you look back in it, you know, you'd consider it a bad experience. Most people would say that was a bad experience. You know, I had to evict the tenants. I was only 20 years old. They didn't respect me. You know, I'd knock on the door trying to collect the rent. They just said, you know, go take a hike, kid. You know, I could have easily just given up. And I just, I look back on that and think, man, look at all the millions of dollars I would have missed if I had just said, you know, this real estate investing thing, it just doesn't work, you know, and it's.

A tough, it's a tough thing because the beginning is always the Hardest and you run into your, your most obstacles in the beginning and it gets a lot easier as time goes on. So definitely, for sure. I think that, I don't think there's anybody ever met that said it was easy in the beginning. It's always hardest. Right. In the very beginning stages.

Right, right. But, but you know, I think the harder you work, the luckier you get. Right. Old saying. And I think that there's some real truth to that. You got to sort of force luck. I mean, luck can happen and I believe it does exist. And you know, it falls into some people's laps, but if they're not prepared for it, if they don't sort of push it and earn it to some extent, it's not going to last. It's not going to turn into anything real. You know, they'll have a, you know, little spending money, but it doesn't usually go beyond that.

And sometimes I see people trying to get into the business based on the fact that they want to work like a four hour work week. And I don't think that works. I mean, I think you have to kill yourself in the beginning. And I've gotten to a level now where I'm very successful, but I still work tons and tons of hours. I mean, I like what I do, but I have to work a lot of hours in order to really get ahead of everybody else. So I think that there's no substitute for hard work. And I think hard work can overcome a lot of potential, either handicaps in the beginning or mistakes that you might possibly make.

Absolutely. And I'll tell you something, I had dinner with Tim Ferriss about two months ago in Austin and he's the author of the famous Four Hour Work week book. And let me tell you, Tim does not work four hours a week. He works way more than that. Okay, so that's the thing.

Like that book. I love that book. I love a lot of the principles in the book.

Yeah, it taught me some good stuff too. I agree. Yeah. It's not to be taken literally, I don't think.

I think some people do take it literally though. I think that there can be some issues with books like that and you know, audio and video and stuff like that that kind of makes things seem a little bit easier than it really. Or sex up the wrong kind of mindset. Yeah, but that's my take.

Yep, yep. Good stuff. Okay, so tell us what you did. Like, you know, you're getting your start. It's the first year. Like what was your first fix and flip deal? Tell us about that.

My first fix and flip deal was probably my third or fourth deal into the business.

Okay, so in other words, that was like you did three wholesaling deals before that maybe, right?

Yep, exactly. So came across a deal, needed a ton of work. I got it at such a discount, this particular one that I said I can absolutely not pass this one up because anytime that you wholesale something, you're going to make less than the person that ends up buying it, puts the money in and renovates it as a general rule. I came across this deal and I said, I've got to figure out a way to get this one done. And so I've got two partners, but I only had one partner in the business to start. And we said, we've got to find a way to finance this deal. So we pulled my partner's dad into the business who had the funds to actually do the fix and flip and some of the know how to get the project done. So obviously, anytime that you do your, your first fix and flip, there's going to be issues on the contracting end. We had people that we paid that never showed up.

Oh, come on. Contractors are always so ethical and they show up on time and get the job done on time. You're kidding me.

Yeah. So, you know, like everyone's first, you know, one or two or three deals, you make a lot of mistakes. You don't understand what needs to be done. And we made all those mistakes. But the good thing is, is that we bought at such a discount that it really didn't matter. And so we did really well on that one. And then again, that sparked, you know, us saying, how do we systematize the actual construction piece of it? How do we systematize the marketing piece so that we can get these good deals over and over and over again? And so we continued on with that. And then it was probably two or three years into the business that I actually did what I set out to do on day one when I read that book Rich Dad, Poor dad, which was to actually buy my first rental property. And so, you know, over the course of the past few years, we've accumulated 300 rental units. And on the back of that, like I mentioned, we built up the brokerage because it goes hand in hand with the investment business.

So here's the thing I've always noticed and you know, listen, I've done my share of fix and flips or just flips, even if they're not fixed, but just flip them. And I've done a lot of Buy and holds and we help clients to buy and holds nationwide. Now, as a business, I've noticed that the fix and flippers, they have spending money, but the people who buy and hold tend to be the ones that create real wealth. And I think you're probably gonna agree with me on that because you've transitioned from the. You know, I see how you got your start as a fix and flip guy. You built up some capital doing, but then ultimately you became a buy and hold guy. What would be your comment on that statement about, you know, the fix and flippers have spending money, the buy and holders have real wealth. Of course, nothing is always true. It's just kind of a principle.

So I understood that from day one. I wanted to buy and hold on day one, but I didn't have any money to do it. So that's why I fixed and flipped and that's why I wholesaled in the beginning to get that. You call it spending money, but.

Well, the capital. No, that was the capital.

Yeah, yeah. To get seed money in order to actually, you know, do the buying holds. So I think at the end of the day, every person that I know that's wealthy or financially successful was either financially successful because they bought a lot of rental real estate or they were financially successful because of a business that they owned. And then once they got all that money, they bought rental real estate.

Right.

And those things aren't accidents. So, yeah, I mean, it's definitely a different level. It's a, it's a game changer. I mean, you wake up and you don't necessarily have to necessarily do anything in order to make money versus fixing and flipping. I mean, there's a lot of balls in the air constantly. And I'm really lucky because if it was just up to me and I was the only person in my business, I probably wouldn't do fix and flips anymore. But I've got two really good partners that manage all the construction and make it really easy for me and they like doing it. So we'll probably will never give it up. But I definitely think that buying holds are the way, you know, the long term path for me at least.

Yeah, yeah. I couldn't agree with you more. Couldn't agree with you more. Okay, so building a rental property of what, 300 doors now, right? Rental portfolio, yeah. Yeah. Fantastic. What else do you want people to know?

Well, I think the important thing to know about this market and kind of what has changed since I got into the business. I got into the business on day one where it was really easy to get good deals so you could just buy stuff off the MLS. Very, very simple. That all changed about 2012, 2013, when all of that, the HUD properties, the home paths, all that stuff got taken completely out of the market. So at that point, we almost went out of business because we really didn't know what to do. We didn't know how to find good deals and make money. So that's when our business model completely changed, and that's when we also kind of added the brokerage into the business as well. So we really had to learn to market and hunt down deals. And that's what we've gotten really good at over the course of the last three to four years, which has enabled us really to take our business to the next level. So we got really good at marketing directly for motivated sellers, sellers that wanted to sell their properties to an investor at a discount. And then we built the brokerage on the back of that because, typically speaking, only about 5% of people that sell their property actually want to sell to an investor. So if you're marketing for motivated sellers, typically what you're going to find is that most of them are going to want retail prices. They're going to want fair market value, which why wouldn't they? Every single seller, you know should want as much money for their property as possible. So you, you've got to meet with and get face to face with a lot of sellers in order to get those great deals. So that's why we built, we ended up building the real estate brokerage behind it so that we could handle and process all of those retail sellers who wanted to sell their property for top dollar.

Right, right. Okay, so you bought some of them and then you brokered others, right?

We broker most of them because like I said, the reality is that only about 5% of people actually want to sell their house to an investor. Everyone likes the idea of sell your house fast for cash. No brokerage payment, no inspection, no mortgage, all that good stuff. So most of the people we meet with, they're very excited to get the investment offer until they figure out that it's a discount. So for the most part, we're meeting with a ton of people in order to really filter out to get those great deals. So for the most part, we are listing a lot of those properties, but not because we necessarily want it to be a brokerage, but because of necessity. And so in our market, that kind of gives us a little bit of a competitive advantage because we spend a lot of money and time Marketing for motivated sellers. We spend a lot of money on mailers and cold calling and Google Ads and Facebook ads. So the brokerage itself really helps us just recoup that money.

Right? Yeah, yeah. Good stuff, good stuff. Tell us about how you're sourcing the properties. Give us an idea of how much advertising, how much effort it takes to source the properties. You buy that. I think a lot of people want to know that.

So I've got a huge marketing budget, but I've got a huge marketing budget because of the brokerage. So last year, well, actually 2016, I spent $1.2 million on marketing. And that's between mailers, cold calling, meaning people calling for me that I pay Google AdWords and Facebook ads. So I spend a lot. But that's only because I'm profitable just on the brokerage side alone. So I spent 1.2, I got about 1.5 back just on the brokerage side of the business. So I was profitable just on listings alone. And then it allowed me to fix and flip roughly about 100 properties. And in addition to that, obviously accumulate, I don't know, maybe 50 rental units, something like that. We're kind of actually, unfortunately in a little bit of a buying freeze on the rental side because the price to rent ratio in Boston right now is so out of whack that we want to buy a lot more properties. But a lot of the numbers don't make sense even if we get the properties at a discount.

Yeah. And look, I don't think they'll ever make sense in a place like Boston. That's a high end market. Okay. For our view of rental properties, for buy and hold properties, we got to get 1% per month or at least somewhere in that neighborhood, you know, so, so $400,000 house, you can't get $4,000 a month for that. You're going to get, you know, 22, 2500 maybe. 2500 is probably going to be kind of lucky actually if you do that well. So, you know, a little $120,000 houses in Atlanta, Memphis, Indianapolis, you can get $1200 for those, you know, and, and so, or close to it at least. So that's why it's just always going to be out of whack, you know, unless you go for, do you do any apartments?

We buy three to 10 unit buildings and that's actually the only way in Boston it might make sense.

Yeah. Are those Section 8? Are those government assisted housing or straight rentals?

We do all government assistant because in Boston to cash flow You've got to go into the worst of the worst neighborhoods and it's just super difficult to actually collect rent in those areas. So we go into those areas, we can get that 1% ratio in the worst areas and that's where we're buying right now. But even in those areas, believe it or not, you still have to get a discount in order to get that 1%. So it's a pretty crazy rental market. Not to mention that the tenant landlord laws heavily favor the tenant.

Oh yeah, yeah, Health are terrible. Any left wing liberal place, man, I'm running for the hills. I like landlord friendly markets.

You know, I would not buy here, I would not even consider buying here if I didn't live here.

Yeah, you know, I'm so glad you admitted that. That's awesome. Hey, listen, I grew up and lived most of my life. I do not live there anymore. But in the Socialist Republic of California. And let me tell you, I owned lots of properties there. And you know, California, I mean, I don't own them anymore, but I'm saying I used to and California, it's just the landlord has no rights. It's unbelievable. It's like if you go into court against a tenant in some of these places, you're just the evil landowner. The tenant is always right and the landlord is always wrong. It's pathetic, man.

Yeah, it can take us a year to get a non paying tenant out.

Oh my God. Well, hey, if your non paying tenants are listening to this podcast, they know that they don't have to pay rent anymore because you just told them.

Oh, they already know. Believe me, it's not a secret in Massachusetts.

Well, give us some tips for dealing with that. You know, if someone's listening is crazy enough to invest in these socialist states. What do you do? How do you manage that kind of thing?

Well, sometimes you have to negotiate with the tenants, so sometimes you have to pay them to leave.

Yeah, it's called extortion.

Yeah, they do extortion in a lot of cases. That's what we end up doing. We will take over, you know, properties that are fully occupied. We know that the tenants aren't paying. Clearly obvious. And you know, the first thing we do is we try to get them to cut a deal. So we know that on average it's going to take us six months to get them out. Well, what are you willing to do? Will you leave today?

For keys? Yeah, yeah, it's just cash for keys?

Yeah, cash for keys. And you know, a lot of people are open to it. A lot of them, you know, might be unhappy where they're at and they want a fresh start and all that stuff. And it sounds good and sometimes still they'll fight it to the end and there's really nothing if they really want to press it. Unfortunately, in Massachusetts, there's not a lot that you can do if they really, really want to press the issue.

Yeah. Boy, that's, I tell you, that's unbelievable. Yeah. Okay. What else would you like people to know?

Again, talking about kind of the brokerage component of it, Everything kind of leads back to how do you build wealth in real estate and how do you do it really, with no money to start. So again, I think it's just like working your way up the ladder. Anyone can start with no money. I mean, you can start wholesaling, you don't have to have any money whatsoever. You can market directly to sellers through unpaid mechanisms in order to get face to face appointments and then wholesale. And then from there you can start working your way up to fix and flips and buying holds. But I would recommend for any real estate investor, and this is kind of a controversial topic, but I would recommend highly that you get your real estate license on day one. Because if you are going to get into the business, you're going to lose a lot more money than by not having your real estate license then if you were to have it now.

A lot of people are going to totally disagree with that statement, by the way. Many investors, and you said it was controversial when you said it. Many investors would say you're at a big disadvantage if you have a license. You have to disclose it. You know, everybody thinks you're a professional. They put their guard up, even though most real estate people are far from professional. But.

Hey, I'm one of them. I can make fun of them.

You know, here's my argument to that though. I mean, why wouldn't you be professional? Why shouldn't you be held to a higher standard? I mean, you're going in there, listen.

I understand the reason. That's the rule. I totally, I agree. I think it's a good consumer protection rule. I, I'm just saying that from the investor side of the table, if they have a license, they're going to say, you know, look, it's not good for me to have a license. I mean, I'm handicapped by that. So that's what they're going to say.

Yeah, but we've never had any issues with it. I mean, I feel like, you know, you get out there, you treat people the right way, there's a certain, like I said, there's a certain percentage of people that are going to want to sell to investors. And if you go in there and you're a real estate agent and you say you should list your house, you shouldn't sell it to an investor, they're not going to want to deal with you. And vice versa, if you go in there and the person really should sell retail and you say you should sell to an investor, they're not going to sell to you anyway. So I think that as long as you're able to go out there, I.

Got you, you can, you can, you got a bigger offering, you know, you can do either one. I totally get it. That makes sense.

Yeah. I mean, next, my opinion. I mean, again, I've definitely had people with that will go the opposite way. But. But we've just gained so much by being able to provide both solutions, right?

Yeah, yeah, absolutely. Good stuff. Okay, well, listen, Tom, this has been a really interesting chat. We've got to wrap it up. Closing comment and give out your website.

Yeah, closing comment is if you guys are interested in getting involved in investing in real estate, don't give up. It's 100% worth it. If you just read your first book or, you know, went to your first seminar, it definitely will give you the lifestyle that you want. If you want to learn more about how to do that, you can go to my URL, which is www.realestateinvestingiseasy.com. again, that's www.realestateinvestingiseASY.com. and I've got a short video to show you exactly how to do that.

Awesome. Good stuff. Tom Caffarella, thanks for joining us.

Thank you very much for having me on.

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