Rehab yourself or contract it out- How to analyze?

Question

What is the best way to analyze if it is worth doing renovations yourself or if you should hire a contractor?

If you choose to hire contractors, what’s the best way you’ve found and determined they are quality and reliable?

Here is the situation: My husband and I are the main people working on our flip and rent apartments. We do this on the side of our full time W2s. We are about to acquire another destressed multifamily , but won’t be able to tackle the project for a few months. I see as many thousands lost in potential rental income.

My husband is very particular about the quality of work, and is concerned contractors will be expensive or not meet his standards. We mainly do our own work because a shortage of liquid capital, but also because we haven’t found reliable contractors.

If we do hire contractors, should we tackle each of the apartments all at once or one unit at a time. If we do one at a time, we can use the money when one is rented to roll into the next renovation.

The scope of work is basically window replacement, minor roof patching, drywall patching, texturing, painting and flooring. If you have any suggestions on contractors in the Milwaukee area, recommendations are appreciated.

Thanks and have a great day!

Bill Parsons · Answer

@Whitney Rekowski

If I may offer the two cents of a lowly contractor...

I absolutely agree with Nick that unless you are a contractor, it's not worth it.  In addition to the financial end of things, despite what many think, a true contractor is far more knowledgeable in their field and can get the job done much more efficiently. Owners trying to rehab themselves often don't know little tricks such as adding a spoonful of dish soap to their mud to help eliminate air bubbles (and thereby, an additional coat), or that the process of coalescence in exterior paint is negatively affected by an ambient and/ or surface temperature below 50 degrees.

Being from Cleveland, unfortunately I can't much help with the Milwaukee area. However I can offer some general tips for vetting. For starters with regard to your husband's concerns and some of what Brandon was saying, "expensive" is rather relative. Yes, there are guys out there that are high, but many are reasonable, and at the end of the day, most of us in the trades hold firmly to the maxim that "you get what you pay for", and not a few owners aren't really willing to do that. Want a toilet swapped out for 30 bucks? Sure, you can find someone who will do it for that; but it will probably leak within a day.  I know of someone in this neck of the woods that wanted a 40 by 40 basement completely finished (from bare block walls to livable space, complete with carpet and a full bath) and expected to only pay ten thousand for labor, materials, permits, etc.  Now, Remodeling Magazine's 2015 Cost vs. Value Report puts the cost of a 20 by 30 finished basement at 65K for the national average; quite a difference. So the best bet is to do some research into what a project might entail and what it might cost. One site that can give you a general idea of costs for your area is www.homewyse.com

Additionally, as concerns standards of quality, that is almost entirely affected by solid communication: you and your husband being perfectly clear to the contractor as to what you expect, as well as he or she asking questions, taking good notes and measurements, writing a thorough estimate, and a detailed contract (min. 10-12 pages in my opinion). Some things you should ask for, and which they should have no trouble producing for you, are proof of their current business liability insurance, Worker's Comp., and at least 2-3 references from previous customers, ideally including pictures and from those who have had work done similar to your project.  Get about 3 solid, detailed estimates (any more than that is really just tire-kicking) and if state licenses are required, such as electrical, ask to see their licenses. Be wary of sites like Home Advisor: they don't vet contractors, any more than they vet leads for us.

Hopefully this will give you a good start. Best of luck with your project!

J Scott · Answer

You just need to be able to answer two questions:

1.  How much would you be paying those contractors on an hourly basis?

2.  Do you want to work for that much per hour?

For example, if a painter is going to cost you $15/hour, then you need to ask yourself, "Am I looking for a $15/hour job?"  If so, do it yourself.  If not, hire it out.

Personally, I don't want to work for $15/hour -- it's part of the reason I got into this business.  So, I wouldn't do a job that I can hire out for $15/hour.  Likewise, I personally wouldn't do a job that I could hire out for $25/hour or $50/hour.

Given that nearly all of my contractors are going to cost less than $50/hour, I see no reason to be doing work myself.  I'd prefer to focus on the tasks that are generating $250/hour or more -- these include finding deals and raising money.

In other words, if I spend 50 hours finding a deal that's going to generate $25K in profit, I just made $500/hour.  Ultimately, I make more money by doing that than by saving/earning the $15/hour by painting my houses myself.

Bill Parsons · Answer

I do not have one at the ready just this moment, however at the minimum, a solid contract should have the following:

1. Definition of terms

2. Description of work

3. Schedule of work

4. Payment schedule

5. Change work orders

6. Punchlists

They don't necessarily have to be in this order, nor do they have to be confined solely to these six. We have probably close to a dozen more in our contract, dealing with everything from customer-supplied materials, to licenses permits and fines, to default/right to stop work. but these six should be the minimum.  #'s 2 through 5 are the most critical. #2 should spell out exactly what they will be doing on the job, including all the materials, with the names, brands, model numbers, and anything else that's of importance on the job. It should clearly define the scope of work.  Included in the contract should also be any plans, specifications, drawings, photos of the proposed work, etc.

The payment schedule should be well-defined as well. With all due respect to any who may disagree, as regards downpayments, contractors are not lending institutions; just like no one buys a car without a downpayment. A portion of job costs should absolutely be given before commencing work/ at the contract signing.

Two other things that will give you a sense of if they're legit: The first is if they deal with changes to the work separately and with an additional form specifically for that purpose.  They should present you with a sample copy at signing and explain how it factors in to the original contract. The second is the federal (and state if applicable) Notice of Right to Cancel, commonly called a Right of Rescission, which should be included in the contract by law.

No, definitely don't go with the lowballer; he'll be out of business within 18 months because he doesn't know what he's doing

Nick L. · Answer

@Whitney Rekowski It's never worth doing the work itself unless your primary job is being a contractor.

All the time, energy and sweat you put into the rehabs could be spent on more profitable activities like finding more flips, expanding your W-2 skills or building your liquid capital. In your case especially so, because it sounds like your husband's standards are higher than are needed.

If you're putting in more work than is needed to get your target rents, then you're over-improving. In the Milwaukee area, renters don't expect perfect cosmetics - they just have to be slightly better than what other apartments are offering. The bar is so low that this is rarely a problem.

As to finding the right people, you just have to use trial and error. I've found great people from Craigslist, Angie's List, personal references, heck one is even my next door neighbor! Of course you can find terrible people that way too.

Speaking for myself, I am willing to pay a certain premium to use a contractor who knows how I like things and can make intelligent decisions without me having to watch over him all the time.

Account Closed · Answer

Very few people have all the skills required to do a full rehab. Yes, everyone can learn to clean and paint walls but that is not what is required when you buy a discounted distressed property.

You really don't have a choice but to sub the work out.

Marcus Auerbach · Answer

@Whitney Rekowski I definitley agree with my fellow colleagues above - contract it out. I think I am in good company when I admit that I was looking for the cheapest contractors when I started out. Today I pay a bit more per hour in average, but my overall project costs have gone a little while (because we are much faster) my finish quality is much better. Also, much less headaches.

Like @Dawn Anastasi said finding good contractors is not easy, especially if you want good, cheap and fast. (By the way you never get all three) The way I look at it you have the fly by night guys on the low end and the subdivision guys on the top end. The first group is from hell and will cause you gery hair while the second group is excellent but will make you broke. What you need is the guys in the middle.

A good place to start is @J Scott's book about estimating rehab cost - he knows investor pricing (vs consumer pricing) and so you know what you should be paying and dont rely on the contractor telling you how much it will be. The funny thing is when you get three bids expect them to be wildly different. J's book gives you a good base line.

Finally dont make large down payments, materials delivered to your job at the most. If you have to make your first payment on the first day of work, when they are actually on your job, but never before. And then pay as the job progresses. The only time I got talked into 50% down (leaving for a business trip out of country and under pressure to hire) was when I got screwed royally.

Bottom line: contract it out and dont go with the cheapest guy either. What you pay is what you get.. Good luck!

Manolo D. · Answer

@Whitney Rekowski If you are over quality work, then you are spending too much, unless you have a premium on rent, then it is not really worth it. Your basic scope is much more complex, however it seems like you two are handy enough to do some of the lesser time part like painting, i would suggest just a subbing it out instead of hiring a GC. I would suggest a modified work time like 9-6 so your subs are still there when you arrive in the afternoon, or require for them to wait 15 mins to go through the days work and the following days, we have a system like that, two week look ahead and current week's progress. Good luck.

Hugh Ayles · Answer

I understand doing the work yourself because of capital.

However if it is a few months before you can start the work, you will be accumulating carrying costs not to mention potential lost profits.  That might offset any savings you gain by doing the work yourself.

Whitney Rekowski · Answer

@Nick L. I wouldn't say we are 'over improving' with putting high quality finishes, just making clean apartments where tenants want to stay long term. Good point though.

@Brandon Stevens Great advice. I think this might just be the push for us to start contracting out tasks. It will just take some learning on how to juggle various project timelines that rely on each other

@Bill Parsons Do you have a sample contract you've used in the past I could reference? I will definitely start with 2-3 quotes for each job and see where the prices average out. I have heard too many bad outcomes of "going with the lowest bid" and will try to avoid.

@Manolo D. Thanks Manolo, I agree we will subcontract and just have to change our typical schedule to meet the crews onsite for clear communication

Account Closed Luckily this isn't our first rehab and rent property, and we very well could do it all ourselves again. I just need to validate that hiring professionals to finish these units faster will in the long run be more profitable.

Chuck Brickman · Answer

Great question.

I've found that it really deals with cost versus benefit. It all depends on your circumstances...your available and constructive time, finances versus holding costs. There is no one right answer...it depends.

Rationally play the numbers out ahead of time...determine what potential costs will be using the various options presented.  Consider all options such as...contractors doing the work entirely at one time, in part, unit by unit, husband doing the work by himself, in conjunction with contractors, possible delays, tempermant etc. Once you see the financial specs I'm thinking it will help determining the best course of action.

I've had some great experiences with contractors and some not so great. Trust but verify. There are a lot of strategies you can use with contractors to limit the potential downsides. You need to be involved with checkpoints and control of financial expenditures.

Rehab yourself or contract it out- How to analyze?

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