Why investors should be their own general contractor

OP

Investor · Spring, TX · Member since 2015 · 15 posts · 18 votes

9y

I agree. When you consider being a full-time investor is more than a one person show we recommend one of the partners be a licensed agent/broker while others perform the tasks of the investor. But again, that is based on how TREC in Texas has set the rules for dealing in real estate.

Joshua S.

Vendor · Charlotte, NC · Member since 2015 · 18 posts · 3 votes

9y

Great post. I agree so many people are confused about this.

OP

Investor · Spring, TX · Member since 2015 · 15 posts · 18 votes

9y

Thanks Joshua!

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Rental Property Investor · Knoxville, TN · Member since 2011 · 701 posts · 531 votes

9y

@Stacy G. good post and appropriate timing as I came to BP to post a question on this very topic. So in your opinion the investor should become a licensed general contractor? Get license, insurance, etc and pull their own permits for the subs to work/pull theirs under?

I manage my own rehabs but am not licensed. It has worked out well but the licensing issue has come-up more lately and I've debated on which route to go. I've decided I want to get an in-house PM and have been debating getting my GC license to handle all permits, etc and spent time today running the numbers for getting my license and setting-up my own 3-4 man crew. Setting up a construction business with employees has been the very last thing I've wanted to do but I'm trying to be open to different perspectives as my current model isn't working as well as I'd like anymore. I would be interested in your, and anyone else's, perspective on what I've come to so far.

I calculate that I can hire a 4 man crew at above market rates, guarantee a min 40hrs/week for 52 weeks, pay workers comp, payroll taxes, etc and still save 20-30% per project in labor costs. This figure is based on a current project and obviously will vary. Again, I've had no desire for employees and managing them so to help mitigate this problem I figure by paying above market rates I can attract a higher quality crew and reduce employee mgmt by me. For example the crew leader could have a background running jobs for a larger builder or even his own business but has gotten burnt-out managing the business side of his own company. This person will handle all the day to day coordinating of the jobs, managing the crew, procuring materials, permits, inspections, etc. The no.2 guy could manage the crew himself but doesn't have as much experience as the crew leader and so forth. Eventually, I could bring in a PM or promote the crew leader to a PM to oversee more of the business and further eliminate me out of the day to day rehab process which is my least favorite part of this business and why I'd be happy paying higher rates to remove myself more. I've also played with the idea of reducing the hourly rate to my local market rates and implementing a profit sharing and bonus program but not sure which, if either, would be attractive enough to hire the level of crew members I'd need in-order not to babysit employees constantly.

I know this concept isn't new but to me and the idea of implementing it in my business it is new. I'd be interested in peoples takes on this, pros, cons, experiences.

4 Reply

Engelo RumoraBusiness Member

Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes

9y

Originally posted by @Stacy G.:

This is in follow up to a recent post by Engelo Rumora "The Top 3 People Most Likely to Rip You Off in Real Estate Investing"

Probably one of the more misunderstood words in construction is "general contractor". Based on my experience, what most people consider a general contractor is really a project manager. And therein lies the problem because many tradesman who advertise themselves as general contractors are not nor are they good project managers or business managers.

Merriam-Webster defines general contractor as "a person or business entity that contracts to be in charge of a building project usually involving the use of subcontractors."

When I started my career with a production home builder (general contractor) there was not a single employee in the company who lifted a hammer. But, we were definitely in charge of every house we built hiring designers, salespeople, bookkeepers, purchasing agents along with project managers. The latter being the person in the field who managed the vendors and trades in order to get the job done. The project manager was responsible for controlling costs and expediting completion of the project on behalf of..........you guessed it, the general contractor!

As an investor a project manager is the person you need on your team. Otherwise you are paying for overhead in the form of expenses which may not be necessary to your project as well as losing control of a critical aspect of your investment, construction costs. Plus you have the person overseeing the day to day operations of your business focused on your success.

NOTE: this is post should not be considered legal advice and is written from the perspective of conducting business in Texas. Rules & regulations in your state may be different and you should seek appropriate counsel on how to address state or local requirements for acting as your own general contractor.

Below is from a "whitepaper" I wrote for new investors a few years back looking for advice in how to best manage their rehabs.

Begin whitepaper (edited version)

Why You Should Be the General Contractor: The Advantage for Real Estate Investors

As a real estate investor your goal is to know your business inside and out while rehabbing properties at the lowest possible cost. You can’t do that if you are leaving it to someone else to act as the "general contractor" of your rehabs without gaining knowledge. Worse yet, you are paying a premium for the management of a key part of your business. Doesn’t make a lot of sense does it?

Retail real estate and remodeling is a general contractor industry. And there is a perfectly valid reason for that model. Owner/occupants are engaging in a one-time transaction in which they require a professional to be their expert in all areas of the project. It makes sense for them to engage in a turn-key solution.

But, real estate is your business and in your business YOU should be the expert in the industry or at least partner with the right kind of experts. What investors typically need is a project manager, but what they typically hire is a general contractor. Below are some reasons why the GC model is potentially not in the investors best interest.

What many GC's do is manage the scope of work & bidding process to get the job…….period. Lowest bid usually wins (and makes a newbie investor initially happy). A GC does not have a direct interest in the investor’s profitability. Their interest is in their own bottom line. Some are more honest than others, but you can’t change the facts. The GC’s objective is to position their bid such that an investor purchases a property and hires them to do the work. It is a GC's primary goal as they do not make money unless an investor makes a purchase. The investor's profit is not their principal concern.

The better solution? Hire a project manager who is invested not only in the rehab, but the overall profitability of the deal.

A good project manager is invested not only in a single project, but in the investor's long-term success. It should be a true partnership. You need them to provide an honest onsite evaluation of your prospective deal and rehab budget as we all know in certain cases investors (especially newbies) are so inclined to get a deal, they are blinded to whether it truly is a “deal”. Your project manager should strive to give you an honest evaluation of the rehab costs to prevent bad deals from happening, not the number you want to hear. No one has a crystal ball, but most investors prefer their (potential) bad news to come when they are analyzing a deal not after they are stuck in one.

Using a project manager has the potential to attract better subcontractors. Your project manager should not be focused on scoping the rehab at one price only to seek out the lowest quality/price sub or have a good quality sub shave their price so he can work in more profit for himself. They should use subcontractors on your job who charge a market rate for quality work. Plus there is a huge difference between retail and wholesale subcontractors. Your project manager should have relationships with wholesale subcontractors who have the same philosophy as the investor. Do quality work, but focus on what needs to be done to get the best return at the best sales price (ARV).

Here are some key points to remember when using a project manager:

- A project manager should be knowledgeable in real estate investing and provide advice to help you evaluate deals, not just bid on repairs to get the construction work.

- A project manager's fee should run you less than 25-30%+ a GC has in their bid for overhead and profit

- A project manager can provide you with a rehab budget are based on estimates which you both try to beat, not a fixed scope of work

- A project manager should negotiate with subcontractors on your behalf to get the best quality at the lowest price, not the cheapest work.

- A project manager should be knowledgeable in permitting and other compliance processes to ensure a project does not get delayed, or worse yet work has to be redone, due to improper management of those requirements.

- Subcontractors should be paid at cost for their labor by the investor with no markup or commissions paid to the project manager.

- Materials (excluding some turnkey items like roof or HVAC) are should be purchased by the investor at cost with no markups or commissions to the project manager.

- A project manager should not markup change orders, plus they should work for you to get those done at the lowest cost (or even for free).

- A project manager's should be paid a flat fee (with or without bonus) such that their interests are aligned with yours to make the most profit on each deal.

Let’s get to the meat of the matter: A project manager working for an investor should have no incentive to use substandard materials or subcontractors. A project manager should not have an incentive to scope a project in such a way to make a profit off of change orders, markups, etc. A project manager should have no incentive, and I mean no incentive, to delay or otherwise not complete a project as quickly as possible as time should be money to them. Lastly, a project manager should have every incentive to help make their investors make money so they use them again and again.

End of whitepaper.

In summary, you will find many of your experienced/successful investors either hire project managers on a deal by deal basis or have project managers as full-time staff. So, if it doesn't make sense to them, it probably shouldn't make sense to you!

Thanks for the mention Stacy and great follow up to my vlog.

Keep posting detailed stuff like this and Bigger Pockets will love you for it hehe

I sure did slug things out for many years in order to find some great people that I have on board now.

Trial and error. Rinse and repeat lol

Much success

Oz Realty4.5367 Reviews

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3 Reply

Rental Property Investor · Knoxville, TN · Member since 2011 · 701 posts · 531 votes

9y

Thoughts

Account Closed

Johnson City, TN · Member since 2014 · 586 posts · 705 votes

9y

How much volume are you doing that you can guarantee full employment year round? Thats easy to do in July but hard to do in January. I have run big construction crews before and it is great when the work is plentiful but workflow isnt a steady stream. I did my own projects as well as did subcontracting gigs. Eventually, if you have a big crew, you find yourself working for them instead of them working for you. You end up taking jobs that you might otherwise pass on just to keep them busy. These jobs tend to end up being the pita jobs and the money losers. if subcontracting out the work is costing you that much then maybe you are using the wrong subs. If you are doing a high volune business and have a well organized job and pay promptly, subs will be eager to work for you and give you their best pricing. Even in a busy time, smart subs will give you great service and pricing because they know its about a long term relationship.

3 Reply

OP

Investor · Spring, TX · Member since 2015 · 15 posts · 18 votes

9y

@Account Closed, thanks for your comments. I assume your first question is geared towards bringing someone on full-time. My experience is depending on the scope of each project one PM can handle anywhere from 5-10 projects simultaneously. It sounds like you are talking more about the challenges of a GC versus a individual investor? What we do in our business is provide individual investors PM services so they don't have to deal with those issues. Basically, we act as PM's for contract and there are some others in our market who offer similar services. We do have buyers who are larger institutional investors with their own PM's on staff. You are correct it is a challenge keeping crews happy as well as may have to take some work at times you would pass on at other times. Part of the cycle of running a business. Fortunately we currently have enough construction in Houston to select more good work than bad, although labor prices have been increasing with the increased demand. The challenge there is getting those increases into the market and investors factoring them into their costs when negotiating purchase price on distressed properties. Hope I was able to address your questions!

OP

Investor · Spring, TX · Member since 2015 · 15 posts · 18 votes

9y

@Christopher B. Thanks for comments and your post! You have some really good questions and I will try to respond as best as possible. First, a good thing to always remember when reading things on BP or getting advice in general is real estate is like politics, everything is local. I.E. my note about the post being based on doing deals in Texas. What works in Houston or Texas may not be exactly applicable in Dallas or Knoxville. State and local laws can vary drastically.

The same contrasts came be found when comparing laws and regs governing real estate licenses, transactions, etc. I have heard many gurus and seminars pitching programs which might work perfectly in their own backyard, but are illegal or not practical in other parts of the country. Make sure you are getting advice from those who know your market.

Case in point is your question about being licensed as a GC. The state of Texas requires specialty trades to be licensed, but not general contractors. But, certain cities within Texas have had their own requirements for GC's above any minimum standards set by the state. So, my answer to the first question would be no, an investor does not have to be licensed as a GC in Texas to do their own rehabs.

Our company provides PM services as well being a general contractor. We are not licensed, but would be if laws changed. We do carry separate insurance policies for each. When we PM a project we advise the client to get coverage which protects them accordingly. In answer to your question about permits, we pull permits in the name of the investor listing us as a contact on the permit as well. Mechanical permits are pulled under the master project number. Permitting gives contractors control of the project and I have seen bad contractors use that control to the disadvantage of the investor,

Regarding your last few comments about crews, a good PM should have crews relieving the investor of that problem. If your PM doesn't have crews available to them within a reasonable lead time I would question why not. It sounds though like your are considering starting your own construction business which is somewhat outside the scope of the post. If you have enough volume on your own or through other avenues then it probably makes sense. My post was focused more on the part-time or lower volume investor who is active, but not active enough to justify a full fledged construction business while understanding the advantages of using a PM.

What you might consider is expanding your business by partnering with someone who is already in construction or providing project management services. It may reduce your risk while allowing you to build your business even quicker. This brings up another point about the stories you hear about getting rich in real estate. None of them did it alone.

I hope the above helps and good luck in your business!

OP

Investor · Spring, TX · Member since 2015 · 15 posts · 18 votes

9y

@Engelo Rumora

You are welcome and thank you as well!

Same here. You hit the nail right on the head. It has been a process and taken some time to build the right team.

Best of luck!

Cheers!!

Mike D.

Investor · Indianapolis, IN · Member since 2014 · 208 posts · 137 votes

9y

Agreed. Also, many people working with a property manager may want to bring in their own maintenance (project manager) as it reduces the incentive for property managers to overcharge you or find unnecessary maintenance tasks to do - provided you find a good project manager who is interested in your long-term success.

Rental Property Investor · Knoxville, TN · Member since 2011 · 701 posts · 531 votes

9y

@Stacy G. Thank you for bringing quality insight to the forums. This topic has been on my mind frequently lately as managing my projects has become a task I don't enjoy any longer and honestly it's not one of my core competencies. I do what I consider medium to large rehabs, for example the budgets for our rehabs this year have been $50k, $60k, $180k, $75k, $70k, and $55k. I am effective and knowledgeable enough to get the jobs done operating as my own PM but see that it is holding my business back. I was in a bad accident last year that easily could have cost me my life and then my arm. It resulted in 2 surgeries and a lot of bed rest, fortunately my father is semi-retired from his own business and stepped in to help with the day to day site management for a bit.I also had a friend that works construction that worked for me for about a year to help keep projects moving forward. This event opened my eyes on many things and has been the catalyst for me to change how my business operates.

I used to pull all of my own permits as a homeowner with my subs pulling theirs off mine but there has been a change of guard in my local municipality and the city no longer will let me pull permits unless it is my permanent residence. I've had a GC pulling permits for me for my last couple of projects and even though he is doing all the framing and trim work and the fact I use properly insured subs he doesn't like having the liability for my jobs and I don't think he'll do anymore for me. Which brings me to my current situation. I can't find a company or person locally that operates like you mention. They may very well be out there but I just haven't been able to locate them. I'd love to find an independent PM/CM to work with and I've even debated putting a PM on staff to streamline things. I would be happy to pay this person handsomely as well but I get back to the dilemma of who is going to pull that permit for me. I'm now asking myself if I should just become a licensed GC to pull permits and then hire a good PM to manage the subs or if I should just hire my own crew with a strong crew leader to handle the day to days of each project.

My goal has always been to maintain flexibility and have as few employees as possible but I am now wondering if hiring my own PM and/or crew will be less hassle than trying to manage contractors/subs and the challenges that come with them.

Mike Garrett

Architect & Investor · Bothell, WA · Member since 2015 · 102 posts · 78 votes

9y

Stacy G! Thanks for posting this. Our business provides PM services in the Seattle area and it has been a struggle to really explain the separation of duties between what we do and why it is sometimes (many times) beneficial to have us and a GC. I always get the question "why don't you just handle it?" and I have tried explaining it from the stance of liability as well as expertise, but your post is amazing for clarifying what answer I need to be giving!

2 Reply

OP

Investor · Spring, TX · Member since 2015 · 15 posts · 18 votes

9y

Thanks @Mike Garrett! I understand where you are coming from as well. Explaining is the hardest part. I still struggle with it myself. Chasing that 90 sec elevator speech version that everyone understands! The cool thing though is once an investor gets it, they are sold on the model. What's unfortunate is many of those come to us after being burnt by a bad GC. Thanks again for your comments and good luck in Bothell!

Ritch Bonisa

Specialist · Indianapolis, IN · Member since 2016 · 841 posts · 480 votes

9y

Alot of very valuable info in this thread!

Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes

9y

Christopher B. I think that is the best thing that you could move forward with. Having employees are very beneficial for those rehab amounts. You could certainly get the full time gig, and even if holding costs will kill you, you can pace yourself and have jobs year round. What I suggest is get your own license and have 1 foreman that can do almost everything, then 1 guy specializing in plumbing and electrical, then two apprentice laborers that can catch up quick and has a lot of common sense, setup your material ordering by Home Depot's text to confirm or similar, setup your payroll through Paychex, get an insurance broker (not agent) specializing in construction (very important) and have a pay as you go (monthly) type of worker's comp. You can bring in a drafter or an architectural student to pull permits for you as well as develop a Company Operations Plan. This will give you full control and documentation, it will also do clockwork job in case something happens (like you're on vacation), the point is, everyone knows what's next. This will also avoid poor workmanship and all the sub headaches.

Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes

9y

Stacy G. There are a couple out there of being a GC that have working employees, our company self-performs 80% of the work, and I know of a company that does General Engineering for the state that self performs 80% of the work with their 2000 employees. Point is, not all systems work the same, it's not as general as you think, typical maybe, but there's always that chunk that don't go with it. I agree that BP has too many terms interchanged and is very loosely used, for example, one guy starting out wanted to be his own GC, because he will be hiring subs, pulling the permit as owner-builder, and managing the project, there was no mention of any licensing, to me the very basic requirements of a GC is being licensed and eating up liability. If you ask me the real position of the guy is simply a person cutting corners to make a deal work, unprofessional project manager at best.

OP

Investor · Spring, TX · Member since 2015 · 15 posts · 18 votes

9y

@Manolo D. Thank you for your comments. You might recall towards the beginning of my post I qualified it as being based on doing business in Texas. I also mentioned the same when replying to @Christopher B. when I addressed his questions.

"NOTE: this is post should not be considered legal advice and is written from the perspective of conducting business in Texas. Rules & regulations in your state may be different and you should seek appropriate counsel on how to address state or local requirements for acting as your own general contractor."

The fact is doing business state to state as well as city to city can be different. Unfortunately many novice investors are not always aware of the fact which can lead them to incorporate bad processes into their investing strategies.

An example is the way construction is managed in Texas versus California. Having been CFO for a Top 10 production homebuilder in Houston with divisions outside of the city it was something we knew very well. In addition, our owner and my direct boss had been Division President of a national homebuilder before starting his own company. What works perfectly in one area, might not work at all in another. Something you have to take into account when deciding what model is best for your area.

GC licensing is not a requirement nor it is done in Texas. Therefore reading something on BP or taking advice from someone outside Texas on that subject would be invalid if not erroneous in same regards. What is considered a GC in Texas is not the same as California as we do not hire labor or specialists directly as employees as you do there, but they are hired as subcontractors with their own insurance, payroll, etc.

Again, thanks for your comments and I hope the above helps.

OP

Investor · Spring, TX · Member since 2015 · 15 posts · 18 votes

9y

thank you for your comments @Ritch Bonisa!

Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes

9y

@Stacy G. Ah yes, I stand corrected. My posts stands in CA or similar state that look at licensing differently. We have a small PM section actually for selected commercial clients. The flexibility of being a PM and a GC under one roof with tradesman gives us the most profit and way less risk than just being a PM. I don't play big on the construction field but I know how to scale it. Paper contracting is something I have in mind when we hit 20M gross revenue, for now, we are happy with fatter margins. Paper contracting or just doing PM work is simply pushing paper, and it is something that we don't enjoy enough, if we need a more laid back job, ok - that qualifies. You are correct, investors need a PM and not a GC, unfortunately, they are not willing to pay the fee and would rather be their own PM and most want to hire subs directly and even purchase their own materials to save a few bucks. I do believe that some builders (maybe not top 10 in Texas), run their own crew and keep a tight margin even being a GC aside (since there is no GC licensing). To me, I have more control over production, time, efficiency, liability, and most of all, profits. What I am saying is, each company has their own structure and not one runs exactly the same as others.

Rental Property Investor · Knoxville, TN · Member since 2011 · 701 posts · 531 votes

9y

Originally posted by @Account Closed:

How much volume are you doing that you can guarantee full employment year round? Thats easy to do in July but hard to do in January. I have run big construction crews before and it is great when the work is plentiful but workflow isnt a steady stream. I did my own projects as well as did subcontracting gigs. Eventually, if you have a big crew, you find yourself working for them instead of them working for you. You end up taking jobs that you might otherwise pass on just to keep them busy. These jobs tend to end up being the pita jobs and the money losers. if subcontracting out the work is costing you that much then maybe you are using the wrong subs. If you are doing a high volune business and have a well organized job and pay promptly, subs will be eager to work for you and give you their best pricing. Even in a busy time, smart subs will give you great service and pricing because they know its about a long term relationship.

Thanks for the feedback Tim

I'll do 7-8 projects this year but only because I'm choosing to not take more. A lot of my projects have rehab budgets over $100k, with the rest over $50k. So not huge volume but decent sized projects. I calculate that at Just 12 projects per year it makes financial sense to have a four man crew. I've never wanted employees and am concerned about keeping up with them, managing them, etc like you mention. I have a lot of good subs except a solid carpentry crew/gc, the one crew I can't seem to build a long-term relationship with. I provide consistent business, work to stay organized and ahead of my crews, and always pay promptly. I 'm working with a good GC now on a couple projects but am still handling the other subs myself. He wants 40% of my profit to take over full management of my jobs though. It's either hire my own crew or an in-house PM and let them manage the subs but I still face the issues of getting my permits pulled.

I just don't enjoy managing projects anymore and am looking for the best way to remove myself from that role. If I can do it without a bunch of employees I'll be all over it.

Rental Property Investor · Knoxville, TN · Member since 2011 · 701 posts · 531 votes

9y

@Manolo D. Awesome info and feedback. Your suggestion makes a lot of sense and reinforces what I've been thinking as well. The only downfall is I'll have employees. I've really wanted to structure my business to not have a bunch of employees and maybe that's just not in the cards. In your response to Stacy you mention most investors should have a PM. For someone like me that wants to be around 15-20 rehabs per year what's your take on just getting my GC license to pull permits and then hiring an in-house PM to manage the projects and subs? I know it wont eliminate sub headaches, costs will be higher, etc but I wouldn't have multiple employees. It sounds nice but I wonder if I'm missing something.

Elbert D.

Real Estate Entrepreneur / Investor · Chicago, IL · Member since 2016 · 688 posts · 367 votes

9y

for anyone trying to become a real

Estate investor I would agree with @Stacy G. you need to know how to estimate rehab cost....it's actually a very good skill to have because it doesn't matter what your doing, flipping, wholesaling or fixing up a potential buy and hold to rent out, you need to know if the numbers will work and you won't know unless you are good at rehab estimation. Also just overseeing and managing the process of the electrician and plumber can be a pain in the you know what as well. Everyone doesn't do good work. Or something may come over them and they decide to just do a decent job instead of a fanatasic job. In summary, Rehabbing can go wrong in multiple ways. I'm still looking for a new GC myself.