Tom was fired from his accounting job because he was spending too much time researching real estate investing online. Now he his a full time investor and broker. He flips over 100 properties a year and buys all kinds of properties from single families up to 10 unit properties. Listen in to hear how Tom built his real estate business up from nothing, and how he’ll continue to grow. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Tom Cafarella Real Estate Background:
– Owner/broker of Cameron Real Estate Group, Founder of Ocean City Development, a residential real estate investing company
– Host of the Real Estate Mogul Podcast
– His company buys everything from single families up to 10 unit properties
– Quit his full-time job as a CPA in 2008 so he could flip full-time with two partners
– Based in Boston, Massachusetts
– Say hi to him at: http://www.tomcafarella.com/
– Best Ever Book: Rich Dad, Poor Dad
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.
With us today, Tom Cafarella. How are you doing, Tom?
Tom Cafarella: I’m doing awesome, thank you for having me on.
Joe Fairless: My pleasure, nice to have you on the show. Tom is based in Boston, Massachusetts. He’s the owner-broker of Cameron Real Estate Group. He’s the founder of Ocean City Development, which is a residential real estate investing company. His company buys everything, from single-family houses to up to 10-unit properties. He quit his full-time job as a CPA in 2008, so he could flip full-time with three partners. You can say hi to him at his website, TomCafarella.com. He’s also the host of Real Estate Mogul Podcast.
With that being said, Tom, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Tom Cafarella: Yeah, my background – like you mentioned, I was an accountant out of school; I hated it, I hated getting to work every single day, and I ended up getting fired because I was spending so much time reading online about real estate investing. Luckily for me, I was pretty young; this was ten years ago, I was 25 at the time… I did need to make a lot of money, and I knew at that point I needed to make a decision; I needed to go one way or the other – either I was gonna stay in corporate America, or I was gonna figure out how to be an entrepreneur, how to be a real estate investor… So I just started failing on my own, just trying every single thing, and finally figured it out.
Today we’re doing over 100 fix and flips a year. Like you mentioned, I’ve got a real estate brokerage of over 150 members, and just basically right now as of October 2017 trying to make as much money as I can while we’re in a market that allows us to make a lot of money.
Joe Fairless: Are you holding on to any of these properties?
Tom Cafarella: I am, but I’ve actually sold off some of my rental portfolio, and I don’t know, Joe, what market are you in?
Joe Fairless: I invest in primarily Dallas-Fort Worth right now.
Tom Cafarella: Okay, so Dallas has gone through a lot of appreciation, but some of my rentals in the past three years have doubled in price, so it’s really difficult for me to consciously hold on to some of them knowing that it’s gonna take so much longer for the prices to get up to that price point… So we’ve sold off some of our rental property portfolio, done some 1031s into other markets. I do hold on to some, but I make most of my income as of today fixing and flipping.
Joe Fairless: Okay, you already answered the question that I was gonna ask, but I’d like for you elaborate if you wouldn’t mind on the 1031, because I get it – if you see the property is double than what you paid, you sell, then you said you’re 1031-ing… Approximately what percentage of deals that you have sold have you 1031-ed, versus just taking the cash and putting it in the bank and using it somewhere else?
Tom Cafarella: We just started 1031-ing because we just kind of got fed up with paying the taxes. We just started doing that, and now we’re gonna try to 1031 everything going forward that we sell.
Joe Fairless: Alright, so the percentage isn’t as important as really your philosophy now. So you’re now doing the 1031. From an investor’s standpoint, when does and doesn’t it make sense for you?
Tom Cafarella: I think it makes sense if you can get into a market that is more flat, that hasn’t had as much appreciation and where you can get a lot of cashflow. I think it doesn’t make sense — what I see a lot of times in my market is people will 1031 over one inflated property, and then 1031 into another inflated property. To me, that doesn’t really solve the underlying problem. If you’re cashing out to make a lot of money and then you’re only 1031-ing to save on the taxes but you’re going right into the same market, to me that doesn’t make any sense.
Joe Fairless: Good point, really good point. The hundred fix and flips that you’re doing – that’s a lot of deals… I assume most deals you’re making money, so what are you doing with that money if you’re not actively acquiring new deals in your market?
Tom Cafarella: We’re always actively acquiring new deals.
Joe Fairless: For buy and hold I mean.
Tom Cafarella: So you’re talking about I sell a fix and flip, what am I doing with that money?
Joe Fairless: Yeah.
Tom Cafarella: I’m mainly rolling that into more fix and flips. So if we lose money on some of the deals here and there… You know, we might lose money on three deals out of 100, but it’s pretty few and far between.
Joe Fairless: So you’re creating a larger and larger bankroll for your fix and flip business. And then are you investing in other markets for buy and hold with some of that, or are you just putting most of it into the bankroll to do more and more fix and flips?
Tom Cafarella: Both.
Joe Fairless: We’ve started to invest in Jacksonville, Florida because it’s a market that we like a lot, so we’re pushing a lot of money there as of today. Then we also invest back into the brokerage as well, because we see that as kind of a play for us when the economy does start to go down a little bit and dip and we’re not making as much on the fix and flips. So really the best way to say what I’m doing with the money now is I’m trying to figure out how to keep making a lot of money when the market changes, and we’re anticipating that happening pretty soon. So my income might go down, but I don’t want it to go to zero, and that’s one of the things that we’re putting a lot of emphasis on as of today.
Joe Fairless: And you said one of the ways is to invest back into the brokerage…
Tom Cafarella: Yeah.
Joe Fairless: Another would be — is that the investing strategy in Jacksonville?
Tom Cafarella: The investing strategy in Jacksonville is to buy cashflow properties. In Jacksonville you can buy single-families that still cash-flow right now, and I like that model a lot. I like to look at “What’s gonna happen when the fix and flip income goes to zero? How much am I gonna make?” So right now we’re putting a lot of emphasis in building my brokerage, buying cashflow properties in other markets… We’ve got cashflow properties in the current market, and I also have a partnership program where I partner with people out of state and help them fix and flip properties, and I make money on that, too.
So those are kind of my other revenue pillars to make sure that, again, when the market does change, I’m still making good money.
Joe Fairless: As far as the brokerage goes, when you invest money back into the brokerage, what are you investing in specifically, and how do you track that that has an ROI?
Tom Cafarella: For example, we just did an $80,000 buildout of our office. So what ends up happening is you put the 80k into it, and how do we track the ROI? We’re looking at year-over-year what we’re doing for sales volume and number of agents. For example, two years ago I only had five agents in my brokerage, and I didn’t need to do an $80,000 buildout. But now that I’m up to 150 agents, I need to do the buildout to attract more. Eventually, I wanna have somewhere between 500 and 1,000 agents in the greater Boston area, so we need to build ahead of that space.
Other things in terms of reinvesting back into the brokerage to get that to grow would be hiring specific staff. For example, I’ve just recently hired a sales manager who is responsible for helping the agents get from point A to point B. She’ll work with them directly and coach them in order to get their sales up. So investing in capital expenditures and in labor as well.
Joe Fairless: What’s the lifetime value of a new agent that joins your brokerage to you?
Tom Cafarella: To me minimum probably $30,000 to $40,000.
Joe Fairless: That’s incredible.
Tom Cafarella: Again, it’s about who you’re bringing on, how you can help them and how long they stick around. If you get somebody good, they’re willing to work hard and you can train them, it’s very profitable. But of course, the thing that is a little bit difficult on the brokerage side is people could come and go as they please, and they’re always getting recruited by other top brokerages, so if you don’t do a really good job of helping them, then you’re gonna lose them.
Joe Fairless: At 150 brokers, $30,000 lifetime value, that’s 4.5 million dollars. That’s great. I’m glad that you talked to us about that; that’s helpful for anyone who has a brokerage, just how to think about it… Or anyone who’s joining a brokerage, their value to their team.
Tom Cafarella: The reason besides having the multiple revenue pillars to get us through the storm when the market changes – we needed people to take our leads. So as a real estate investor who fixes and flips over 100 houses a year in a very competitive market, we have to get the sellers before their property goes live on the MLS. So we have a huge marketing budget to get face-to-face with these sellers, and we needed agents in order to take these leads, in order to take these face-to-face appointments. So our brokerage has kind of grown on the back of those leads, and then obviously when we go to fix and flip a property, we can put a sign in the ground, we can promote the properties that we’re gonna be selling, so we generate a ton of buyer leads. It really works hand-in-hand, so if you’re a real estate investor, you have such an easy platform to become a big real estate brokerage.
Joe Fairless: That’s a great point, and something that could be another revenue stream, so thanks for mentioning that. You started out – I believe, because I’m reading this in your bio – with three partners. Is that correct?
Tom Cafarella: I’ve got two partners. I started out with two partners.
Joe Fairless: You started out with two, okay. You have two partners, so you’re the third, and you still have those two other partners.
Tom Cafarella: Yeah. At the end of the day, it’s segregation of duties. So in the investment side of the business, I’m the person who is responsible for generating leads and getting properties under contract at a really good price, so that we can make money. I also run the real estate brokerage. My two partners manage the construction and the accounting and legal side of the fixing and flipping business, so that we all have separate duties, we all have separate roles and we all work really hard and don’t get in each other’s way for the most part.
Joe Fairless: The construction, accounting and legal – does one person handle the construction, and the other two, accounting and legal?
Tom Cafarella: Exactly. Essentially, I’m typically in the office, managing the salespeople who are out making my offers for fix and flips and listing properties. My second partner is out in the field, managing the contractors. My third partner is in the office, making sure that we’re lining up financing, making sure that we’re getting the deals closed, making sure that any legal work, architectural work that needs to get done, permitting – basically, all of the administrative work behind the business itself is getting done.
Joe Fairless: That leads me to believe that you’re the one who’s really charged with the growth of the company.
Tom Cafarella: Oh, yeah. Basically, they say to me I create the masses… [laughter] But it’s my job to create the masses. So if it wasn’t for me, there would be no business to be had, but if it wasn’t for them, there would be a lot of business, but it wouldn’t be getting serviced. So it’s great that you can get a good deal under contract, but if you can’t actually renovate the property, then there’s nothing that can be done there.
Joe Fairless: Understood. Tell us the story of a deal that you’ve done recently, just to give us an idea of what type of projects you’re working on.
Tom Cafarella: They’re all kind of the same. They’re all cookie-cutter typical single-families. In my market, we might buy something for $300,000, put $50,000 or $60,000 into it, and then sell it somewhere in the high fours, low fives, in that range. We do so many, and it’s basically like just a factory, that for the most part for me not many of them stand out anymore. The ones which stand out are the ones that we did in the early days where I was really actively involved negotiating with the sellers, getting face to face, sweating out every deal… But now it’s kind of like, they come and they go, and I don’t think too much about them anymore.
Joe Fairless: Based on your experience, what is your best real estate investing advice ever?
Tom Cafarella: My best advice is you have got to learn the sales and marketing aspect of it. I see way too many people, especially today, trying to get deals on the MLS, trying to buy properties of HUD, trying to do things really the easy way, and they can never get a good deal. If you can control the sales and marketing funnel, so if you can market to get face-to-face with sellers and then do the sales part to get the great deals, you can make a ton of money. But if you try to shortcut that and not create the sales and marketing funnel, you’ll never make a lot of money in this business and you’ll always struggle to get a good deal, and you’ll start buying deals that don’t make sense, because you need to do your next deal… So that would be my advice – learn the marketing and sales side before you learn anything else.
Joe Fairless: What are some tips that you have on the marketing and sales side?
Tom Cafarella: There’s only three things that work when you talk about trying to generate leads for sellers in today’s market. There’s cold calling, which you can do for free; there’s online marketing, Google AdWords, Facebook Ads, which you can pay for, and there’s mailing. Those are the three things that work really well; they all have a different cost, they all have a different type of lead that will come through… So my advice would be to put together a budget if you can, and put it into one of those three mechanisms. If you don’t have a budget to me, then you have to cold-call… Which is fine, you can definitely generate a lot of face-to-face appointments that way, but that’s your only option if you don’t have any money.
Joe Fairless: Which of those three has been the best ROI for your company?
Tom Cafarella: That changes. So we’re having this conversation in October 2017; October 2017 Facebook Ads for me are the biggest bang for your buck. It changes though, because the market becomes crowded. Three or four years ago I would have told you mailers, but as of October 2017 everybody’s mailing. So when we go on a mailer lead, typically we’ll go on that appointment, and stacked on that person’s dining room table will be ten other letters. Obviously, the point of marketing in general is to eliminate your competition, to not have a bunch of bidding on a property, so you wanna go where other people aren’t going.
Number one for me right now would be Facebook, number two would be cold-calling – and we pay people to cold-call for us.
Joe Fairless: One thing that’s not in one, two or three is word of mouth referrals and intentionally having a system to generate word of mouth. Do you have anything for that?
Tom Cafarella: I’ve never seen anybody effectively do that, and I’ll tell you why I don’t think that that works… Because the majority of sellers period don’t sell to investors; maybe 5% of the overall population sells to an investor, so you only know so many people in your sphere of influence… And I know this from my real estate brokers that work for me. From your sphere of influence, you might only sell ten properties a year; the good agents, maybe they sell 20. So if a good agent is always prospecting to their sphere of influence and they’re selling 20 houses a year and only 5% of typical sellers sell to an investor, that’s only one investment deal a year. So to me, the problem with the sphere of influence is that you’re not in control of your business.
If you really wanna have a pipeline of doing a ton of deals, I don’t think that sphere of influence stuff will work. Maybe you get lucky and you do one a year, two a year, but I don’t think that you can really create a huge company off of sphere of influence when it comes to that. You don’t get many referrals when you buy properties at a discount, it’s just not typically a referral-based business.
Joe Fairless: Got it. As far as Facebook goes – you said that’s number one – what are you doing there?
Tom Cafarella: We’re just writing ads to people… We’re putting ads in front of them – “Sell your house fast for cash. Click here to get your offer today!” They’re clicking on it, that goes into my CRM, my inside sales agent is making that call to book one of our agents to go to a face-to-face appointment. So we’re not doing anything magical on Facebook other than we are running the right images, the right copy, we are putting it in front of the right people. So when you are talking about Facebook, those are the things that matter.
People, when they’re on Facebook, they’re not looking to sell their property fast. You don’t log into Facebook saying, “I wanna meet with an investor this weekend.” But if you put that ad in front of the right people… And it’s crazy what Facebook knows about you today; Facebook knows how old you are, Facebook knows where you work, Facebook even knows if you’re likely thinking about selling your property.
Joe Fairless: How is that possible?
Tom Cafarella: Based on what people’s interest are. For example, one of the things that you can look for is somebody looking for loans. Somebody that’s looking for loans is looking to buy, but it’s also possible that they’re looking to sell, so Facebook does know if you own property, because what Facebook does is they will actually take the data that they have and they’ll run it against other data. So Facebook automatically knows their age, because this is required in Facebook; they know your age, they know your name, they know the city that you live in, and then they’ll run that data against public records to see if you’re a homeowner. So Facebook knows if you’re a homeowner or not, and if you’re a homeowner that’s looking at mortgage rates or something like that, you’re possibly thinking about selling. So that’s just one example of someone that is possibly thinking about one indicator that will lead them to believe that you’re possibly thinking about selling… And it’s not 100% accurate, but when you run the algorithm the right way, you get your cost per lead down a lot.
I used to pay on Facebook somewhere between $200 and $300/lead, but now that I’ve got my filters down correctly, I’m at about $100/lead, which is very low for a motivated seller lead.
Joe Fairless: Did you learn that yourself, or do you have a team?
Tom Cafarella: I have a team. I have somebody that just runs these ads for me, and I actually started now running ads for other investors in other parts of the country too, because they were experiencing that the cost per lead was really high, so we ended up just offering that as a service. But the reality is that on Facebook you just have to keep trying and testing, so the person who runs them for me will split-test all day long. They’ll say, “What is the cost per lead if I run this image? Okay, great. How does that compare to the second image? Okay, I’m running the ad in front of this city. Okay, how does it compare to this other city?”, and they just keep working and split-testing to get the cost-per-lead down as low as possible.
Joe Fairless: With cold calling and mailing, any top of mind tip for either of those?
Tom Cafarella: Well, they’re different. When it comes to cold calling, you need to get good data, so you need to make sure that you’re getting cell phone records. The biggest mistake that people make is that they’ll get home phone numbers and have a lot of difficulty… And you need to loan them into a three-line dialer, so that you’re calling anywhere between 500 and 600 people a day. That would be my tip on the cold calling.
On the mailing, there’s a couple tips. The first is that you wanna make sure that you’re mailing the right people. A mistake that I see some people make is they’ll mail people from a list; maybe it’s a notice of default list, somebody’s behind on their mortgage… So when you’re mailing, you don’t wanna mail for somebody who bought that house two years ago, because it’s unlikely that they’re even gonna be selling, period.
You also don’t wanna mail to people who are in a younger demographic. I’m a 35-year-old guy – 35-year-old guys don’t tend to sell to investors. So you just wanna make sure if you’re mailing that you’re mailing to the right type of person and the right type of property.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Tom Cafarella: Yes.
Joe Fairless: Let’s do it! First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Tom Cafarella: Robert Kiyosaki, Rich Dad, Poor Dad.
Joe Fairless: Best ever deal you’ve done that you haven’t talked about?
Tom Cafarella: Man, that’s a tough– [laughs] That I haven’t talked about? I don’t know…
Joe Fairless: Well, that you haven’t talked about with us.
Tom Cafarella: Oh, sorry. Yeah, that would be my first deal – I wholesales something and I made $115,000… A two-family in Summerville, Massachusetts.
Joe Fairless: Your first deal?
Tom Cafarella: My first deal, yes.
Joe Fairless: You made how much?
Tom Cafarella: 115k on a wholesale. And I’ve made more on deals, but that was the luckiest deal based on the skill that I had and what I was doing at that time.
Joe Fairless: Why didn’t you just retire? [laughter]
Tom Cafarella: You know what, that deal actually hurt me though, because I made so much that I started doing the wrong things, because I didn’t have the skills necessary to really ramp up the business… So I got lucky, and then what I ended up doing unfortunately was I spent a lot of that money on marketing, and I went a long time before doing my second deal.
Joe Fairless: I’m glad we got the rest of the story, as Paul Harvey would say, on that. That’s good. What’s a mistake you’ve made on a deal?
Tom Cafarella: A mistake I’ve made on a deal – I’ve made this mistake multiple times… I bought a deal that on paper looks good, and the numbers work on paper, and then not thinking “Is somebody gonna want to live in this house?” And it probably sounds really stupid, but if you run comps in an area and your ARV is a certain number and your formula tells you you can pay 150k, that doesn’t always necessarily mean you should pay 150k… If nobody’s gonna want to live in that house at the end of the day, I wouldn’t buy it. And just simple things, like it has super low ceilings, or a terrible layout, and I would just think twice about buying that property.
Joe Fairless: Best ever way you like to give back?
Tom Cafarella: Best ever way I like to give back is raising up people in my brokerage… So helping people that work for me make a lot of money.
Joe Fairless: And how can the Best Ever listeners get in touch with you?
Tom Cafarella: The best way to get in touch with me would be to go to my URL, www.realestateinvestingiseasy.com. If they go in there and they put in their e-mail, they’ll get onto my newsletter. I hold trainings every single day for people who want to get into real estate, and it’s totally free. So if you’re putting your e-mail at www.realestateinvestingiseasy.com, you’ll get the links with all of that information and how you can get on that free training each and every week.
Joe Fairless: You’ve got a machine, and I appreciate you showing us the inner workings of it. Thank you for being on the show, talking about how you’re doing 100 deals (fix and flips) a year, what you all are doing, and that is you’re preparing for when the market changes, having revenue streams… Three ways you’re doing that – one is your brokerage, where on average it’s $30,000 to $40,000 lifetime’s value of a new broker who joins. Two is to buy cashflow properties, and you’re looking and actively involved in Jacksonville, Florida, even though you’re in Boston, Massachusetts. And three is a partner program where you help people do fix and flips and you get a cut of the action.
Thanks for being on the show, plus talking about the marketing tips, the three ways to get sales and leads… I really appreciate you spending time with us. I hope you have a best ever day, and we’ll talk to you soon.
Tom Cafarella: Thank you, Joe.