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September 7, 2021

Firefighter Pension Vs Remarkable Power Of Multifamily Real Estate With Tom Lafferty [EP065]

Have you ever wondered about the difference between receiving a firefighter pension vs building wealth through real estate investing?

Tom Lafferty has invested in approximately 25 multifamily properties, including 10 syndications and approximately 4,000 units as a general partner. Tom spent 23 years as a firefighter and retired as a Captain of a Station in the DFW area. He started real estate investing in 2012 and shares his experience and also discusses the difference in wealth building when comparing his firefighter pension to his multifamily investments.

In this interview we discuss everything from how he got started investing in real estate, why he chose multifamily over single family homes, what are some of the biggest challenges that come along with breaking into the large scale multifamily investing space, and how he selects deals to invest in. This is one episode you won't want to miss!

Table of Contents:

A Firefighter Turned Real Estate Investor

A Firefighter Turned Real Estate Investor
Photographer: Matt Palmer | Source: Unsplash

Darin: Tom Lafferty lives in the Dallas area. He was a firefighter for 23 years and retired as a captain of a station in DFW. He’s a coach with the Brad Sumrok Multifamily Mentorship Group. He is personally invested in over 25 multifamily deals, both as a limited partner and a general partner. He's worked with many new investors and he shares the traits that he's seen propel new investors to success.

Both Tom and I are in the same multifamily mentorship group, Brad Sumrok Group. When I joined about three and a half years ago, he was assigned to me as my coach. When I started underwriting deals, I was sending my underwriting to Tom to review. He'd look at it and be like, "Darin, I think you missed this, or you missed that." He helped me through the ropes, in terms of getting started.

He’s also a buyer's broker. He happened to help on my first syndication deal and helped me land that deal. There were some tricky things that we had to navigate through that, he helped coach me along the way. Huge resource, been in the business for a while, and I'm just so glad that he's on. Tom, typically, the first question I ask is, how many properties and how many units are you invested in?

Tom: I've done 22 earlier this year, it's 24 or 26 now. Most of those are as an LP, passive investor. Working on my 10th syndication right now. 22 total, 10 as a general partner, and that's probably about 4,000 units.

Discover How To Save Taxes and Build Wealth

There’s a Definite Bias

Tom: I invested in a lot of smaller properties as an LP. You run across people with these gigantic accounts, that's not me. But I've done super well on some sub hundred unit properties. As you know well, those things can be a great deal. It's about 4,000 doors and 22 to 24 total properties.

Darin: It's funny that you bring that up because when I first started in the business, that was something I noticed. Everybody talks about how many units they have. I knew I wanted to syndicate. So I started to invest passively into some larger unit deals, just to get that resume up. But you could invest 50K or 100K into a small deal, and do just as well or better, than going into a larger deal. It just sounds better on a resume.

Tom: There's a definite bias, I see it all the time. I watch people who have struggled to raise money on some deals that, as a passive investor, I was like, absolutely. I know the person. Like with you, you're a good example, I worked on several deals with you. So I know how you underwrite, and I almost wouldn't have to look at the numbers to invest in a deal with you. Then there's other people that are the opposite.

Darin: Pushing the envelope a little bit.

Tom: It can matter if you're a KP. If you're signing a loan, it can help to have those bigger numbers. But yes, as a purely passive investor, I don't care if it's 50 units or 350.

Darin: You have a little bit of untraditional background getting into this. Can you share what you were doing prior to getting into real estate investing and how you got in?

A Full-Time Firefighter Pension

Tom: It's not really that untraditional in the regard that I didn't have any experience in real estate. The vast majority of people, for sure in Brad's Group, a lot of us have come in with professional jobs. Lots of people had single family experience, but I was a full-time firefighter for a suburb of Dallas. Did that for 22, 23 years, and retired as the captain of a station in 2019.

I started investing in real estate in 2012, it’s when I first learned about multifamily. I just heard something on AM talk radio about a seminar that was coming up, and I was intrigued. So I went and listened, and I ran across apartments by accident. I thought, there's no way this is for people like me, that's for billionaires. You can't buy apartment complexes. I ran into a bunch of people just like me who were doing exactly that.

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Brad knows this, so I don't mind saying it, but I spent probably six months trying to shoot down what he was teaching. I was like, if this is so great why isn't he doing it? Well, A, he was and is doing it, but B, he loves teaching it. It took me a while to realize that, but I ran across a lot of people who had a ton of success. I just put my head down and nine, 10 years later, here I am.

Darin: You mentioned you were skeptical. There's a lot of people that when they first get introduced, it's like, this sounds too good to be true.

Make a Fortune Out of a Firefighter Pension

Darin: Another piece when I first got involved that didn't sit right with me initially was, we're going on these bus tours. This one group is selling the deal, and they're in the Sumrok Group and they're selling the deal. They're going to make a fortune, they're going to double their investor money. Then there's another group that's buying it.

Tom: How's it going to work for them?

Darin: I'm thinking to myself like, the next buying group is the sucker. It took me a while for people to educate me on, well, the first group ran out of money. They had a business plan to take it from point A to point B. Then they didn't have any more capital to take it to the next level. This new group comes in with fresh capital, they can do additional upgrades that they, the original group, couldn't do. Then they could take it to a completely different level. That took me a while to really get past that, and understand it.

Tom: I deal with that, not on a daily basis. But I'm still doing the coaching thing and the buyer brokerage thing, and I get that constantly. I get it, I was the same way, it took me forever. We're doing one right now, and lots of questions I got was, "If there's so much room to increase rent, or this seller is such a well-known big-time operation, it makes no sense that they're selling it. Why would they do that?" It's nonstop. The one we just sold, of course, you were in and a guarantor with us. Gosh, did we sell it for a lot more than we paid?

Set Aside Money From the Firefighter Pension

Photographer: NeONBRAND | Source: Unsplash

Darin: I was thankful to be a part of that one, for sure.

Tom: Since I was the seller, I had a lot of people asking me, "Is this plan they've got for real?" I've sold deals to people I've known before, and I'm always super upfront. Here's what I'm concerned about. I would set aside money for this. I'm more interested in them doing well. I don't want to be nervous when I see them years from now. But this one, I was like, absolutely. Yes, there's things we could have done, and then COVID hit and everybody hunkered down. We just didn't do it. But there was so much room in that deal. I think these guys are going to crush it even though they paid twice what we did. It happens all the time.

Darin: If you don't mind, let's talk about that deal a little bit. You mentioned I was part of that deal. I was a key principal on that deal and signed on the loan, I was not a general partner. But, it gave me the key principal experience. With that, you still sign on the loan. You want the deal to do well, plus you invested money. Talk a little bit about how you got that deal. What were some of the concerns going in? The listeners don't know you, but I know you. You are conservative, and you're humble.

Tom: Scared.

Darin: Right, all those things. You were going forward with it, but you were also a little nervous.

Tom: Brad will tell you this too. He said, he's never done a deal that he wasn't afraid he was paying too much, and I'll attest to that. You always think that.

Pushing Your Firefighter Pension Using Conservative Underwriting

Tom: When you push your business plan to where you think you can, everyone says they're using conservative underwriting. You're never going to see an offering that says, we were ultra-aggressive on this ever, even if they are. We have guidelines that we do have to stick to, like rent growth and exit cap rates, all these things.

But on that one, it was technically off market. It was not listed, but every broker in town was showing this deal to every buyer. It got to be a joke, and nobody could get to the price. I'm thinking, what business do I have buying this thing if I'm willing to pay more than everyone else? I made my offer, and they did not accept it, it went to somebody else. That guy was taking way too long to negotiate the contract.

They were three weeks in, and the broker came back to me. He said, "If you can step in at his price," and it was 10.8 or something like that, "then you can have it." I looked at my numbers. We stressed them again and went over everything with a property management company. I said, "I can't do it. 10.6 is the most I can do." Which looking back is so stupid to have almost lost that deal.

Darin: For 200 grand.

Tom: Yes. They said, "No, we can't do it." But the next day they called and said, "Okay, we'll do it." It was supposed to be a new debt, with a million-dollar prepayment penalty to the seller. For whatever reason, it just worked better underwriting it as an assumption. I said, "Instead of 11.6, can I pay 10.6 and assume your existing loan?"

Pro Forma Rents

Tom: They thought about it for a day, and they said, "Yes, that's fine." That's what we did. Then we took out a supplemental loan, along with the new debt. We were nervous about pro forma rents, we knew the seller. They were very open and said, "We're not great managers. Our occupancy has just plummeted, our income is dropping.

We were thinking, we're going to have a lot of turnover. Our income in the first year is going to be very rough. I was nervous about all those things. You go around, and you shop all the comps. You’ve got a good idea of where market rent's going to go. But there are a lot of properties nearby that were in worse shape, long-term ownership, and they just weren't pushing rent.

That was a big concern. I didn't want to push too much and be the highest in the market. Yet, we were one of the nicer properties. It was tricky, and it obviously turned out great. It’s a pretty simple deal, once we got through that first. Funny story about six months in, the portfolio manager from Arbor, which you may have gotten some notices too, because you were on the loan, they were reaching out to us.

They were like, "Hey, guys, your occupancy is 77%. What are you doing?" The income was this before and I said, "It's your loan, we assumed this from you, go talk to those guys. We're cleaning up their mess." He said, "Okay, that's fine." But they did ask. That was one of our challenges. First, we closed in June, and a month later, one building lost all power.

A Conservative Approach

Tom: There was a big $10,000 repair and somebody called the city. Things like that were a little nerve-wracking. But for the most part, for three years, it was just a great running property.

Darin: When I got involved, I had been working with you for a while, and I knew you were conservative. I knew that if you were going after this deal, you went after it from a conservative approach. But after you closed, all of a sudden, I'm seeing the monthly reports and things are not going the right direction, initially.

So, it's like, what's going on? Then as an LP, you just have to let the GPs roll for a while. The business plan doesn't always go in a straight line. There could be hiccups along the way. But like you said, it turned out to be a great deal. What is a great deal from the listener's perspective? As an LP we more than doubled our money in what, three, three and a half years?

Tom: Three.

Darin: That's amazing. I had heard about people doubling their money in two or three years or four years. But that was the first deal that actually went full cycle for me. I was very thankful. On that one, I didn't realize that you initially had put in an offer with new debt. I thought it was always an assumption.

Tom: My offer was always an assumption. They were not shopping for it that way, it was new debt what they wanted.

Darin: Talk about the difference between doing a deal with new debt versus as a loan assumption.

Dramatically Better Than Firefighter Pension

Tom: It depends on market conditions. At that time, interest rates for new debt were probably upper threes, maybe 4%, maybe lower than that, 3.5%. It was dramatically better than what the existing loan was. That's why they thought nobody's going to want to assume this dog of a loan. The interest only was already over.

We were going to be amortizing immediately, and it's just not a good situation for new buyers. But, like I said, I underwrote it both ways, and it worked better the other way. With new debt, like you look at today, when we sold that deal, our interest rate was probably almost 5%. Right now you can get below 3%.

Darin: That's a huge difference.

Tom: Yes, no way. Even a point, even a half point, as you know, can make your numbers dramatically different, better or worse. New debt, you can typically get interest only, which helps your cash flow, you can get all these things. You can choose your lender. We've assumed two loans this year that are existing, and the rate was a little bit higher than what new debt was. But it worked out, so that's what we're doing. Typically, it's much more desirable to get new debt, but not always.

Darin: I don't know if this is the case, but I would think that it narrows the buyer pool.

Tom: An assumption?

Darin: Yes, comfortable with doing an assumption that you may end up not competing with as many buyers. Is that the case or not?

Tom: Maybe. If you're assuming agency loan, you have to already have agency experience, and that's the same with new debt. I don't know that it necessarily does.

The Buyer Pool

The Buyer Pool
Photographer: Sangga Rima Roman Selia | Source: Unsplash

Tom: It's just, if there's somebody that has to have interest only, and a deal does not, maybe that would reduce new buyers. But I don't think it does too much as far as the buyer pool. It doesn't seem like it.

Darin: Now, on that deal, what was the largest deal you had done prior to that?

Tom: To that one? I did 32, then 78, and then 106, and this one was 154. So, I had done three. Two bank loans, full-recourse bank loans, which nobody does anymore. Then I helped Staples get their first deal, and that was a ready, bang. I don't remember. But then Oasis was my third or fourth.

Darin: I don't know if you said it or somebody else, but it was a big deal for you.

Tom: It was double what I had done before, for sure.

Darin: This past year, I recall you having two deals at the same time. You weren't trying to do that, but all of a sudden it just happened that way in two different states.

Tom: We've had two deals at a time, twice this year. It's been absolutely crazy. I typically do a deal every two years, and there's been four this year. I'm partnering with a couple other guys. Obviously, we have more bandwidth. But it's been crazy. It was all just relationships. Three of the four were off market. Somebody called us about it and we liked them, and they worked. So, we said, this is a terrible idea but let's try it. It was a mess, it was hectic. But we got them done, and so far, so good.

The Oasis Deal

Darin: Talk about partners. The Oasis deal that we were in together, you basically said, "My life's crazy, I just don't know if I'm going to have enough time to manage the day-to-day on this. I want to partner with somebody else that's going to be running the day-to-day and I'll oversee it." How did you pick your partner on that deal?

Tom: It wasn't so much of the time. I don't love that part of it, I've done it. A lot of people will do asset management just for the fees. It can be very lucrative, especially as you get up into the bigger deals. It's hard to walk away from that. But I thought my time is better spent building relationships with brokers and investors, and looking for new deals. That's what I enjoy.

I’ve met multiple people in the group that had expressed an interest in doing that. I found somebody who had left a corporate job at a C level job, advanced degrees, all kinds of things. We hit it off personally, and I asked him, and he said, "Sure." He lived near the property. I gave him a couple of points from the GP. He did all the investor communications.

He's a numbers guy, CFO by trade, and he would go through the financials, and communicate with the management company. He was always updating me, and we talked. To me, it was worth it to give up a share of the deal. When it's all said and done, it was a pretty big chunk of money that he got for doing that.

The Good Points of Firefighter Pension

Tom: I was happy to do it, and I continue to do that now. I've got a partner that's just an outstanding asset manager. I just know he's better at it than I am, I don’t want to do it and I continue to operate that way.

Darin: Those are good points. I've seen it happen a number of different ways. Some people will form a company, and they'll form a company with two or three different people. Maybe one person is the asset manager, one person is the investor relations and deals relationships with the brokers. They build a company that way.

Then as they get more deals, maybe they bring on asset managers and that sort of thing. Other people do it the way you're talking about. Like, I go out and partner with people who like to do the pieces that I don't like to do.

Tom: We're having those discussions now. He's managing probably eight deals now, and spends a lot of time doing it, and enjoys it. He's good at it. But a few more, we're talking about having to potentially hire somebody. There's also another piece, you can find a partner who we can train and let them manage that.

Of course, as they get experience, they tend to want to go off and do their own thing. I don't necessarily want employees, we're not looking to grow a big company. But at some point, you've just got to realize what your time is worth.

Darin: That's smart. You're a coach, you see people coming into the group from all different industries, all different levels. What are the characteristics of people that you've seen become successful? Versus those that come in and maybe they falter away?

It Takes a Ton of Work to Earn a Firefighter Pension

Tom: I feel like I've had this conversation with you years ago because you looked at a lot of deals before you got the one that we worked on. Dante and I, my partner in the brokerage, we talk about this a lot, too. We do see some really common traits or actions or what. But the guy that comes in and just underwrites every deal that comes out, they go tour them all. They start talking to every broker in town, they put in a ton of work. It takes a ton of work to win a deal.

They really go hard at it, and then they don't win it, and it just crushes them. They're so emotionally tied to these deals. Those people tend to just burn out. You have to have a box that you're looking for. And you can't be underwriting every deal of every age construction, every size, every city, you need to focus a little bit. You had the exact mix of what we see that is successful, which is you looked at some deals. When you didn't get them, maybe you were upset, but it wasn't like it just crushed you. You're like, it didn't work, let's go.

Darin: I could say that it hurt. It sucks when you put in all that work, and you don't get it.

Tom: Especially when you're close, yes.

Darin: Yes, and you come in second or third. But I tell my kids, "Look, I got a day or two, and then I got to pick myself up and go after the next one."

A 250 Unit Deal on the First Try

Tom: You didn't look at every deal in town, you were willing to look for your first one. You were willing to look at sub 100 units. I see a lot of people that come in. They've seen somebody on the stage that did a 250 unit deal on their first try, which you can do. It's not unheard of. They were probably a smaller partner with a more experienced person to pull that off. But people see that, or they partner with three or four people. And they say, "An 80 unit deal is not going to make me any money."

So they won't even look at them. They don't understand what a difficult road that is, to be a first-time buyer looking at a 1980s property in Arlington, Texas. You could walk in there as the new buyer. Be the highest offer by a million dollars, and you may not get it because these brokers don't know you. They're not certain that you're going to bring the deal back to them when you're done with it. Just all these things.

It depends on the sellers, too. Some sellers, their hot button is absolute certainty of closing. If they have any doubts that you're going to be able to do it, they won't pick you. Again, I'm not saying people can't do that on their first deal. I've seen it, but you were willing to look at smaller ones. You got a smoking deal, I suspect is probably going to do incredibly well when you sell it. Your first deal's always the hardest. You've done it.

A Firefighter Pension Is Enough to Cover the Gas

A Firefighter Pension Is Enough to Cover the Gas
Photographer: Juan Fernandez | Source: Unsplash

Tom: My first deal was 32 units. I probably made enough money to cover the gas I spent driving back and forth to that place. But it was building a track record that investors saw, it was building a track record with brokers. I'm a big fan of doing what you have to do to get that first one done. But the burnout is one thing.

Then one other common thing that doesn’t work is somebody will call me and he'll look at a deal. Maybe not even really go after it that hard and I don't hear from them again for six months. Then they look at another one. There has to be something between that 100% and burnout versus dipping your toe in. You've got to stay active, stay in communication with the brokers. It's a mix of those two things.

Darin: It's good to hear. You and Dante see a lot of different people, a lot of different deals, and a lot of different approaches. I had one guy talk to me on Instagram, and called me. He said, "I'd join one of these groups if they would just guarantee me a deal." I was like, "Don't join."

At the end of the day, whether you're part of the Sumrok Group, or a different multifamily mentorship group, or you just find a mentor or you just go after deals on your own, however, you do it, if you're expecting somebody to knock on the door and just hand it to you, don't waste your time.

You’ve Got to Do the Work to Earn a Firefighter Pension

Tom: If that existed, what would that mentorship cost? Half a million dollars? It would have to be expensive. You've got to do the work. The other thing I'm always harping on, and I'm still learning it as I'm really close to a lot of these brokers now. I'm friends with them.

We go skiing and our families are together. You have to stay in communication with them, but you can't be a pain. I know of people who are just bugging them to death, trying to take him to lunch. These guys are so busy and they've got so many buyers that are capable.

It's a balance between staying engaged, versus driving them crazy. Driving them crazy, doesn't have to just be the number of contacts. It's how you interact with these people. You get frustrated with them. I've had people just rip these brokers apart because they thought their OMs were too aggressive, or the comps you used are terrible. This is ridiculous. These guys don't like to be treated like that, just like anyone else. It's time staying in the business, engaging with these guys, treating them well, and making them want to call you back.

It's funny, I've seen people lose deals over that. Where the broker just told me that guy, I don't want to work with him. I've had the opposite where somebody won a deal, and for whatever reason, they toured the property with this buyer. They said, "I really like that guy. I just connected with him." Whatever they're doing to make that happen, it's a real thing, and it makes a huge difference. It is a relationship and a people business, for sure.

Earn More Than a Firefighter Pension From Different Avenues

Darin: Absolutely, in so many different avenues. With brokers, with partners, with limited partners, attracting capital. There's so many different facets to it. Earlier, you just mentioned it off the cuff, you said giving it back. Brokers may not be sold that they're going to give it back. Explain to the listeners what that means.

Tom: These guys are as concerned with getting a fee for selling a deal. They want to make sure it closes, so they get paid. But they want it to be sold through them again, they do not want it to go to another broker. They really look at keeping control of a deal and selling it 10 times if they can. If you think about it that way, it makes a ton of sense. It's almost like an insurance agent getting a fee for annual premiums.

It happens, deals go to other brokers and it makes everyone mad. You can potentially burn a bridge like that. Because then, when that broker has another deal for sale, do you really think he's going to want to sell it to you if he sold one to you, and you didn't come back? That's a big golden rule.

Darin: When people come into the industry, until they're told that, they don't really think about it. They're just thinking about buying the deal. But that's something that I was coached on, talking to the broker and letting them know. My expectation is this. Plan on working it back through you guys on the sale. The other thing, and I don't know if you've seen this, but if there's two buyers that are around the same price point.

A Buy and Hold Investor

Darin: One is a syndicator that has a reputation of turning deals in three or four years. Another one is a buy and hold investor that's going to hold the deal for 10, 20 years. Does the broker have more inclination to suggest the syndicator get it?

Tom: Yes, they do. There are other factors. If there's a long-term holder, that's a great person to work with versus a syndicator that's a jerk. They know he’s going to have trouble or maybe might not be able to raise the money or whatever. But no, I've been given direct feedback on that. I lost the deal recently, it was neck and neck. I won't bring up brokers or buyers, because you guys would know all of them.

But great guy I was competing against, we're friends. He's a well-known long-term holder. The broker was like, "That stinks that I'm going with him. But I had just got another off market deal from the same broker that was under contract." There were various factors, but they will definitely tell you that, "I'd much rather you sell this thing in three years versus 10." For sure.

Darin: It's more money for them, and another transaction. You talked about what you're passionate about, which is building relationships. You don't like asset management as much. When did you learn that? After your first deal?

Tom: I definitely learned it on the first deal because I self-managed it. I didn't do another deal for two years.

Darin: Whisperwood, yes. I actually looked at that property at one point as well.

A Firefighter Pension Requires a Great Management Situation

A Firefighter Pension Requires a Great Management Situation
Photographer: Charles Forerunner | Source: Unsplash

Tom: It's for sale right now for the third time since I owned it. I had a great management situation, I borrowed a manager from the property next door. Essentially, we had a full-time 40-hour week manager on a 32 unit deal, which is great. But I spent so much time on that. Brad finally had to tell me, "It's time to look for your next one. What are you doing?" I already told you, I had a 10% sponsor compensation piece.

And I thought the numbers were just so tight that I couldn't do more than that. I did not take an asset management fee. When it sold, the investors got 105% in two years. We did really well in two years, but I made probably $30,000, which is a chunk of money. But when you look at two years of work, I might have covered my gas money driving back and forth, which I did too much. But at that point, I was like, no more self-management.

The second one, I had a third party, but it was a massive turnaround. The seller falsified records. He lied about replacing the roofs. We were undercapitalized. We put probably $8,000 or $9,000 into this thing, which is a lot in our circle, and we budgeted for about $5,000. We were way under, and there was just a lot of stress and a lot of back and forth. The income would go up on paper, and then one month, it would take a big drop. Delinquency was terrible.

Bad Tenants

Tom: We just had such bad tenants going in, that this guy had put in. They had 18 down units out of 78. Even more, we’re not paying even though they had reported that they were. The investors got 85% in two years when we sold it. So, we did great. But it was just so much work, and on the third one, I was like, I'm ready not to focus on that. Let someone else do it. But I would do it again.

I debated doing it on one we bought recently. All these big deals, it can be a six-figure per year number, and it's a well-paid job. But if you do it right, you spend a lot of time on it. I thought if I don't do that, and it allows me to do one more deal per year, it'll make up for that. That's the thinking right now.

Darin: Talk about mindset, because when you got involved, first of all, you were skeptical. Then you started out small with a 32 self-managed deal, then you've grown. Now, this year, you did four deals. But it doesn't happen overnight. You have learning lessons along the way and you build your own experience level. And you gain confidence in yourself and in the process.

Tom: I've been slow in the confidence-building part. I'm finally starting to give myself a little bit of credit for underwriting these deals well. Or being as conservative as you can, putting investors first. For some reason I've had it in my head. If I put out that we're going to give 80% in five years, I still have this feeling.

When You Put a Firefighter Pension in the Stock Market

Tom: If we returned 70% in five years, I almost look at that as it's almost the same in my head as losing the property. It's a total failure, which is stupid. When you put money in the stock market, you know it can go down. But I think that's gone a long way towards building the track record that I have.

I spent every waking moment researching and studying and all that stuff for the first many years. Then it was probably too much. I was taking in information from way too many sources. It's funny, I've had somebody this week that's new say, "What books do I need to read? What podcasts, what seminars do I go to?" I was kind of hesitant, so I gave him a couple. And I was just like, "Be careful about doing too much."

Brad's been promoting that it's a great time to buy, the whole time I've been in the group. There's other people that have been in the business longer than him that were saying, absolutely not. Don't buy, the run's over, the market's going to crash. They didn't buy for many years, and we did. Like Oasis Springs, we did 2.5 times our money during that period.

Not saying it can't happen, but you just have to learn what you can and decide who you want to listen to. In my case, there were way too many people. I had to live with that.

Darin: This business lends itself to being able to, you can be you, you can be your own character. I know that your communication when it comes out, it's almost apologetic.

Why You Should Invest a Firefighter Pension

Darin: It's like, all these other deals are coming in my email box. This is why you should invest in this deal, because this, this, this. Then yours comes in, and it's like, "I don't want to bother you, but I got this deal. I'm putting it together and just talking to a few people. It may be something you want to look at." The next thing you know, two days later, it's full.

Tom: It's not how I intended to come out. But I've often been accused of people saying, are you trying to talk me out of this? Especially if it's someone I'm close with, I want them to fully understand what makes these things go up or down. What happens if rent growth is lower than we say, or higher than we say? I want people to understand the risks and the benefits and all that good stuff.

Darin: I have to imagine now that you're partnering with some people that are taking the asset management piece. Not only do you have a great track record, but your partners have a great track record as well. At some point, look, you're presenting an opportunity. That's what it is, it's an opportunity.

It's an opportunity with people that have done it, and have had success. You talked about the stock market. A lot of people invest in the stock market, and it's like throwing dice. They don't really know the investments they're getting into, and where the valuations are.

If you say you buy Amazon stock, well, if you buy $10,000, or $50,000 worth of Amazon stock, it's $10,000 or $50,000 worth of Amazon stock. But in these multifamily deals, there's a ton of leverage.

You Don’t Have to Double Your Firefighter Pension

Darin: The equity piece is only 20% to 30%, 35%, depending on how much the rehab is, of the deal. You don't have to double your money, you don't have to double the price.

Tom: A lot of people don't get that.

Darin: Which is so different from the stock market. If you buy a stock at 100, to double your money, it's got to go to 200. But it's not the case in these multifamily deals because you've got the leverage of the loan. All the profit goes to the equity holders.

Tom: You're getting a return on the bank's money, minus their interest. That's one of the greatest things about it.

Darin: That and depreciation is not bad also. Tax efficiency is pretty amazing.

Tom: I did have a mindset, it was some time this year, I had a big revelation. In Brad's group, it's always been a no-no to take acquisition fees, where it is definitely the norm in the real world. A lot of us were new. Investors should get a proportionate share of the return because they're taking a big risk on you. But somebody was questioning me about it, and I was saying I didn't have a lot of confidence in my track record.

It dawned on me one day. At the time, I had $500,000 of my own money in non-refundable deposits with a title company. If the deals fell through, gone, I lose it all. This particular person had been in every deal I did. I looked at the dollars I had made for them, and it was a lot. It was a lot of money they had made.

Great Opportunities for a Firefighter Pension

Really Great Opportunities for a Fighter Pension
Photographer: Paul Skorupskas | Source: Unsplash

Tom: I thought, the confidence kicked in a little bit, and I was like, we are taking a fee on this one. I'm 100% fine with it. Also, to win this one deal, we had looked at probably 40. Flown across the country, spent nights away from home, and all this stuff. People don't see that, they don't think about it. But it did dawn on me exactly what you said, we're working our butts off. Yes, we're doing very well or else we wouldn't be doing it. But these are really great opportunities for people.

In the beginning, when you're talking to investors, you definitely want everyone you can to invest. You’re maybe telling them what they want to hear and all this stuff. Now, it's like, if somebody asks me a question, I answer it, and they're skeptical. If they're giving me a hard time, I might just say, I'm fine. Don't invest.

Darin: Maybe this isn't the right opportunity at the right time.

Tom: Yes, and I'm fine with that, and maybe I won't send them the next deals either. You're right, as you go, it does flip.

Darin: You brought up another point that I think a lot of passive investors don't realize. Is that, the syndicator fronts a lot of money in the beginning. Sometimes there could be this thought process from passives, like, they just want my money. They can get the deal closed and make money off of me. But the syndicator is not going to front non-refundable deposit money, and all the fees for the attorneys, the third-party reports, the inspection, the appraisal.

Something People Don’t Realize

Darin: If they don't have confidence that the deal is strong enough to be able to raise the money. That's something that a lot of people don't realize. The syndicator fronts all that money, and then they raise capital. Assuming the deal closes, 60 days later, they get refunded that capital, but the syndicator fronts all of that. That's the risk on the syndicators.

Tom: And the debt, of course. We've signed how many 10s of millions of dollars worth of debt this year alone. It is non-recourse, but there's ways recourse can be triggered. There's really the biggest risk for syndicators if they want to stay active. If a deal goes badly, they're not going to do any more deals. Investors won't want to invest with them, lenders in particular won't lend to them. It's a huge risk to your reputation, your finances, everything.

I'm not a big fan of somebody taking acquisition fees if it's their first couple of deals, or even if they've bought several, and they don't have a track record to show how they've performed. But once you do, it's entirely reasonable. People are fine with it, for the most part. In our little world, our fees are dramatically lower. Typically than what you would see in what I call the real world or the outside world.

Darin: I was talking to somebody, I'm not going to mention names. When he said what his acquisition fees were, his track record when he was talking about returns for the limited partners, they were still really substantial. I was like, at the end of the day the most important is, the investor is putting money in. Are they getting an adequate return back, an expected return back?

Doing Deals Just For the Big Fees

Tom: I've also seen people that I feel like we're doing deals just for the big fees. They get really aggressive. If those deals don't perform, I'm certainly not going to invest with them again, for sure. It all comes down to track record. You might be able to do that for a handful of deals. But if you keep doing it, people aren't dumb, they know what's going on.

Darin: Another thing you brought up was the lenders. This is a kind of another safety net. If you're part of a mentorship group like we're in, I'm going to underwrite the deal. Then I'm going to present it to a coach like you and you're going to look at it. Put your eyes on it, and you say, it looks good, or, we should tweak it here. Then, I've got a business partner, and they've got to review it. There's a third-party property management company that has to put their numbers into it.

But then you go for the loan, and if you're going to the agencies, Fannie and Freddie, I don't know. Multifamily World, large scale multifamily world, maybe they do, I'm ball parking, maybe 50% of the origination. They have these massive databases of all multifamily deals across the entire country.

Going back years and years through up cycles and down cycles. They are not going to approve that loan if they don't think the property can have the results that are in the business plan. That is huge. The loan is based on the operations today, not after we do the rehab. They're like, all right, what's the income today?

A Deal That Supports Higher Leverage

Darin: What are the expenses today, and I'm going to loan on that. Once that lender, Fannie and Freddie approves the loan at the same amount, sometimes they'll even say, you're going to do 75% but I'll do a 78% LTV loan. Well, that's even more confidence that this deal could support higher leverage. That's another confidence factor, from my standpoint, and from an investor's standpoint in a deal.

Tom: I would say that it's more like people who are worried about, am I going to lose all my money? Because those guys are looking at debt coverage, they want to make sure their debt is covered. They don't care how much money we make as investors and syndicators. They’re more concerned with that.

But I do think it's a huge peace of mind for investors that, as the general partner, I can tweak anything I want in that spreadsheet and make it look like an amazing deal. But you, as the investor, don't want it to just break even. That's where the safety net kicks in. You have to have trust in the syndicator that they're being realistic in their projections. But it's a huge safety net that, if this thing goes terribly wrong, the lender feels like it's probably going to cover itself.

The very first passive investment I ever made, out of the 22 or 24 I've done, there's only one that hasn't done well. It was the very first one I invested in. I knew it was a high-risk, high-reward situation. It was a terrible market. But it was showing like a 236% return. I was like, if we missed that by 50%, I'm still doubling my money. It got hit directly in the face by Hurricane Harvey, it had a management company that was falsifying records and stealing.

A Fatal Fire

Tom: We had a fatal fire that killed some kids, which was terrible, with an ensuing lawsuit and a judgment. Just everything that could possibly happen, happened on this thing. The hurricane flooded the whole downstairs, the whole first floor. We dropped to 50% occupancy. The flood insurance was taking forever to kick in. Just miserable.

The sponsor on that deal is now one of my partners and friends, because of the way he handled that deal. He never came back to us for a cash call, he fronted like a million dollars of his own money to keep it going. Until everything came around, and he got it turned around, and it was starting to do really well.

It had gone to a special servicer at that point. Meaning, the lender was like, "You're in trouble, you're in the naughty box right now. This guy is going to watch over you." That servicer, we think, started seeing the opportunity and said, "We're going to just take the property from you." Which they could. We said, "All right, we'll sell it." We sold it and everyone got their money back, we didn't lose a penny.

But I was like, with all of that going wrong, we didn't lose money. I just thought that was a huge lesson. It’s also a big lesson in having your GP be financially strong. Because otherwise, I've seen a lot of big deals get done. Where they've put together a bunch of people with maybe a million dollars net worth each. If something goes bad, they're coming straight to the investors for more cash, which the operating agreements allow you to do. It was a big learning lesson for me.

A Firefighter Pension Opens Opportunities to Be a Passive Investor

Tom: But the biggest thing I've learned now is when I look at opportunities as a passive investor, sponsor A might be showing a 236% return.  Then sponsor B is showing an 80% return. But I know sponsor B super well, I've invested with them before. I feel like the first guy has a much bigger chance of missing his numbers drastically, versus this guy who might miss it by 10 points.

It's not a science, but I've really limited the number of people I'll invest with. It's now almost, I would say 90% or more is the person I'm investing with. I've just learned. I invested in a deal in October in a small town that normally I wouldn't have any interest in. He was getting a 50-50 Split, the general partner was getting 50% of everything. I had nothing to review, no numbers. He said, if you want in, you can, and I did it. Invested in it without seeing anything.

Darin: You know him.

Tom: It was last October when we bought it, and it's already probably worth twice what we paid. He knew there was an opportunity. I don't know how often I got off on that tangent. But lesson learned.

Darin: That's important. Also, you did 20 odd deals. They talk about, with the wealthy, first thing is preservation of capital. Then secondly is to make an adequate return, and grow it. Being in 20 odd deals, and not having lost money in any of those deals. One of them came to break even, and the other ones had substantial returns, that's pretty strong.

What Your Firefighter Pension Is Going to Look Like

What Your Firefighter Pension Is Going to Look Like
Photographer: Bermix Studio | Source: Unsplash

Darin: Talk about financial freedom and the difference between what your path was before. 20 some odd years as a firefighter, and with that comes a pension. Then secondarily, as a real estate investor, and the growth and wealth, doing that. Now, you have two different ways of growing wealth and income. Talk about those two, and which one’s had more impact.

Tom: By far, the real estate. The way most pensions work, and for sure, mine is the return. You can do a sample of what your firefighter pension is going to look like, given any retirement date. It goes like this, it gradually increases. As you get 25, 30, 35 years, it obviously goes up a lot. But retiring at 22, or 23, whatever it was, it was not much. It was maybe a third of my salary. It’s pretty irrelevant, really.

It took me a year to finally pull the trigger on that, even though the real estate had probably 10X-ed my salary. It was a six figure salary. But, my fear was, the day I retire, the market's going to fall apart, or it's going to crash. Everything's going to shut off.

Darin: The real estate market?

Tom: Yes. Because I was listening to some people that were predicting that, and it could, of course. We don't know. Some other virus can come out or nuclear attack or whatever.

Darin: Who knows.

Tom: We had built up enough savings, and a lot of these investments were now creating income. We’re like, we would be fine for at least a couple of years, if everything fell apart. So, let's do it. My wife works, and she could work more if you wanted to. She's a self-employed attorney.

Complete Financial Freedom

Tom: We just decided to pull the trigger. The health insurance was really painful. It's super expensive, if you're buying your own. But it's just yes, we've got complete financial freedom at this point. It's funny, up until very recently. I had no idea, and I still don't have a great idea. Because I was not tracking distributions from all these investments. I went back years and tried to plug in what we've made.

And I had no idea how much money we were getting from these things. We started out putting $50,000 into two or three deals, and then those doubled. And we just put it all back into other deals and kept doing it. Now, we're putting bigger chunks into fewer deals. But 22 years of a full time job couldn't do for me what five years of real estate did, that's for sure.

Darin: What's the advice to the skeptics out there? I’ve heard about real estate for years, but I didn't get involved until three and a half years ago. I was in my late 40s. There's people out there that hear about it, and they're skeptical. What's the advice to the skeptics?

Tom: I would just say that, if nothing else, it's a great alternative to other investments. My wife and I really struggled when we first put money in. It was four deals. We we’re going to financial planners trying to figure out, what do we do with this cash we're getting? We stumbled on the idea of, we're going to hire a fee-only planner. The guy has no interest in selling us anything. He'll have the golden answer to us.

The First Thing You Can Do With Your Firefighter Pension

Tom: The first thing he did was when he looked at all of our stuff. We only had, if it was four deals, it was like $200,000 invested in real estate. That's it. The first thing he said was like, you guys are way overweighted in real estate. I'm like, "What?" I don't know what our net worth was, at the time. It wasn't huge, but $200,000 was not a big piece of it. And it dawned on me, these guys have this training.

They've got these buckets that they see, and he was treating what I was doing, which was an active business. I'm involved in this every day, I know what deals are good and what aren't. He was equating it to sticking money into a REIT. It's something you totally have no control of. I still struggle today. We’re almost completely out of the stock market. We have some, but it's almost all in multifamily real estate, almost everything. That was really scary for the longest time. I ran into so many people that are ultra-high net worth. They do the same thing.

I did some reading on family offices. A lot of those guys invested almost everything in what made them wealthy. That's not diversification. But anyway, for people that don't know anything about it, I can't imagine not having something. It is a physical asset. It's likely not going to go to zero, which a stock can, probably not a blue-chip stock. It's been a slow process, but I've completely changed my mind on how I feel about my confidence.

You Are Responsible For Your Firefighter Pension

Darin: It takes time, and everybody goes through their own process with that. But what I would say to people is, we were all trained. Get good grades, get good jobs, climb the corporate ladder, put money away in your 401(k). It's just going to grow. But what we lost is accountability. What I would tell people is, you make good money, you put money aside, you are responsible for that. You as the listener are responsible for the money that you put aside, and where you put it.

If you just put it in a 401(k) and just hope that it's going to grow into this huge nest egg, then shame on you. I say that to myself, shame on me that I did that for so many years. You need to actually learn about the investments that you're investing in. Real estate is one of the alternatives that you can look at. But no matter what you invest in, it's your responsibility to learn and get comfortable with that investment.

Tom: It was funny, one thing that flipped a switch for me. I was on an accident scene at work, just sitting there after everything was over. We're waiting for stuff to get cleaned up. I was talking to one of the police officers. He was a lot younger than me, maybe mid-30s or something like that, somehow real estate came up. He just said, "I heard you're doing this apartment thing." He's like, "Yes, I've got some single family homes, and they've done really well for me." I’ve come to find out, he's got like 60 homes. I was like, "What?"

Can You Retire Now With Your Firefighter Pension

Can You Retire Now With Your Firefighter Pension
Photographer: Julius Yls | Source: Unsplash

Tom: He said, "Well, my dad always did it. So I started doing it in high school." He would do all the work himself. I started asking him, I was like, "That's got to be paying you a lot more than your police salary. He's like, "Oh, yes, I could retire right now if I wanted." I was like, why aren't people taught this? All your money in your 401(k), maybe it's growing, let's say and it's doing all these things. You can't touch it. Yet, he had all this money. These houses were literally filling his bank account every month, and not going down in value.

I've run into a lot of people like that. If anyone's read Rich Dad, Poor Dad, it's the investor versus the employee. These 401(k)s, you start taking money out, does anyone really think tax rates are going down? Probably not. It just sounds so dismal now. Well, when you retire, your income is going to be a lot lower. So, your taxes are going to be lower. I don't want my retirement to be like that. That was a big light bulb for me on the investment side. It's just so different from stocks and bonds. Not that those are bad, I know people make a ton of money at it. For me, I'm pretty much done with all that.

Darin: I hear you. What do you like to do outside of work, for fun?

Tom: I was a big tennis player. I hurt my stupid arm a couple of years ago and haven't been able to play since. Then golf, haven't done that. Just briefly got back into it, which is why I look sunburned. I just got back from a trip.

You Can’t Pass This Up

Darin: I didn't realize you play golf. We should get out there and play some time.

Tom: You and I were going to play with Nick that one day. I have a torn rotator cuff that was doing really well. I went on this trip, it was with a bunch of real estate multifamily owners. And I was like, I can't pass this up. Played twice and it's just way back to being a problem. Golf, tennis. I love to snow ski, I like playing guitar.

Darin: I see the three guitars in the background there.

Tom: The real estate, especially when you're actively doing deals, it's just not a lot of that going on.

Darin: It can consume you, for sure.

Tom: That's the main ones.

Darin: If somebody wants to reach out to you, what's the best way to get a hold of you?

Tom: I wish I had a great answer to that. Probably just my email at this point, which is tdmultifamily@gmail.com. A really smart guy told me several months ago that I should have a domain and start building a social media presence. I actually did buy tomlafferty.net. But I've done absolutely nothing with it. I know I need to do that. I was listening to Charlie Young. If anybody saw him at Brad's, they met at this time.

He’s talking about how it's taken decades to build their investor list. They've got people that used to put $100,000 in their deal. Now they're putting a million. That's so much more, my personality is to build long-term things with loyal investors. But it’s dumb that I'm not at least doing something. I don't even put a post when we close a deal like everyone else does.

How You Get Connected

Darin: Part of it is your personality. You're very humble and you're relationship-driven. Social media can be uncomfortable. Just like doing your first deal is uncomfortable, like a lot of the steps. But once you do it, you get comfortable with it. The thing is that, when all of a sudden somebody that you didn't know reaches out and you help that person.

Tom: That's how we got connected.

Darin: That's how you got connected, then, not the guy that has all these questions and is skeptical. But the guy is like, "I really need some help." Genuinely, you like to teach. You like to help people. If that person seeks your guidance, and you help them. That's when all of a sudden you see the value in it.

Tom: I have this notion that I don't want to be the guy that's like, look what I had for lunch. There's a lot of that out there.

Darin: I'm not going to lie, it's uncomfortable at first. I hired a guy to help me with Instagram when I first started. Because I didn't have an Instagram account, and my kids had one. They were laughing at me that I was going to be on Instagram. I'm like, "What do I have to do?" He's like, "You got to post every day." I'm like, "What am I going to post?"

Tom: That's the other thing.

Darin: I was nervous to hit send. Like everything in life, if you do it enough, you get over it.

Tom: That's the other thing. I feel like it's going to be so much work because I've heard the same thing.

Double Your Money

Tom: You don't want to just put something, and then don't do it again for six months. I should at least have a website where people could see what we do or what I do. I need to get on that.

Darin: I'm very thankful to you for coaching me and helping me get my first deal. For letting me be a KP on your Oasis deal and more than doubled our money on that deal. I wish you and your partners much success.

Tom: When's your next one coming? When are you going to do another one?

Darin: I partnered with a couple of guys this year. It was outside of the Sumrok Group though, because of Dustin Miles who used to be in the group. I partnered with him and Hayden Harrington on an A class deal in Houston. Right now, I'm in a deal with David Lagat. That one's a big fixer-upper, it's like 40% occupied. It's got a lot of opportunity, for sure, but it's a mess. It is going to take some real work. But I'm looking forward to seeing that because so many of the other deals are easier value add, 90% plus.

Tom: Very cool.

Darin: Hope to work with you again soon. Our listeners, again, I hope you enjoyed that one. Until next week, signing off.

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Darin Batchelder

Wealth creation through real estate provided me with a new passion to get the word out and let others know that they have an alternative to investing in the stock market.

If I can inspire and educate just one person to take action that results in life changing wealth creation then the work to launch and grow this podcast is well worth the effort.

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