Working ON Your Business, Not IN It: A Painful Lesson from My Last Deal

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At the end of every deal, my wife and I write up a little summary of what we did well, what we did poorly and what we can do better on the next deal (I learned this tip from a fellow BiggerPockets blogger, Michael Zuber).   After looking over our last deal, one thing was painfully (literally) obvious, we did TOO MUCH work. Let me give you a little more context.  A few months ago, a local realtor in our market contacted me regarding this REO property ( see pic –> ).  

I recalled seeing this property last year, when it was being sold as a short sale.  Knowing the condition of the property, I immediately put an offer on it.  After going a little back-and-forth on the price, my offer was accepted.

In order to get the property at the discount I was requesting, we needed to purchase the property “as is.”  This is pretty common practice, especially when buying REOs.  However, what was different about this deal compared to others I’ve done was the amount of rehab needed.

Typically, our rehabs are very light and rarely exceed $4K total.  If they require more work than that, we’ll usually pass.  However, after inspecting the property myself, I realized the majority of the work was cosmetic and could be completed by me, if needed.

So we decided to take on the bear of a project.

Prior to closing escrow, we had our usual contractors and handyman provide us with quotes, so we knew exactly how much everything was going to cost us from day one.  After looking over all the quotes, the total was going to be around $9K.   Here’s the problem – I saw that number and I said the following to myself:

Why pay someone else when WE can do it for SO much cheaper? 

You can probably guess what happened next – we worked ourselves to the bone!  Every weekend (even a few times during the week) for about a month, my wife and I were driving the two hours up to our property to paint, re-patch drywall, install toilets, hang light fixtures, etc.  Normally, I don’t mind getting my nails dirty on our rehabs, but this project took the cake.

Here are a few fun facts about this rehab that are not totally related to this post, but were kind of interesting:

* Someone left their crack pipe behind 

* The kitchen was inside the garage

* My handyman likes Pizza (he left boxes everywhere)

* Fans with two only blades can still cool a room down

* A squatter named “Dopey” lived in the property for a brief time

Ok, now back to the post.

After reviewing the summary of this project, we gave ourselves a “C” on this project.  There are a lot of things we could have done better to make this a smoother project that conformed to our business model.  Here are few nuggets of wisdom we learned from this experience:

  1. Talent – Doing the work ourselves saved us money, BUT everything took longer than expected.  Since we are not full-time contractors, we often found ourselves running to the hardware store several times a day to buy the right tools and materials to complete a given task.
  2. Greed – The irony of this whole story is that we DID budget $8K for our repair costs.  The only reason we decided to do the work ourselves was to shave off costs from our bottom line.
  3. TIME – I have a full-time job in a non-real estate related industry.  I typically work 50-60 hours per week.  Working on houses in the hot sun on my weekend is NOT the way I want to spend my free time.

Looking back on this crazy project, the overarching lesson we learned was that the return on our time was best spent working ON the business, not IN it.  What I mean by this is that our core set of skills is NOT pretending to be contractors, or even managing properties for that matter.  Our core set of skills is working our day jobs and earning the capital needed to fund our deals.  Our time outside of our W-2 jobs should be spent networking with RE agents, raising private capital, managing contractors and building systems to minimize our workload.

In the end, the property was still a great deal.  However, if I could do it over, I would have rather stuck to our initial business plan which was to focus on our core skills and outsource non-core skills to capable parties.

Readers, what about you?  What are a few things you do to work on your business, not in it? 

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About Author

Arthur Garcia (Google+) Arthur is a buy and hold investor in Southern California who is buying up dozens of homes while working a full time job. Arthur acquires properties using a combination of hard money, HELOCs, partnerships and private investors.

41 Comments

  1. Arthur, thanks for sharing. I’ve witnessed in many fields that lots of people never learn to delegate — to assign tasks to others who are more proficient and experiences — most often for the same reasons as you state … to save a few bucks. So often those few dollars saved were really lost in longer hours and perhaps lesser quality. Those dollar-saving efforts could prove even more costly if some task is not done correctly or according to regulations.

    • Hi Kevin,

      Thanks for the comment!

      I agree with you completely – delegating is key. I think 2012 has been the year where my business has offically hit the “tipping point”. I have to now create a set of systems to run the business or I will loose all the “passive” benefits of owning rentals.

      What are a few things you do to save time and delegate responsibilities?

  2. Jeff Brown

    Hey Arthur — Been there, learned that, also the hard way. It must be a freakin’ right of passage. :)

    You also shine a light on those who worship the god of DIY. I see it all the time in every aspect, direct and indirect in the brokerage business, both house and investment. This year alone I’ve seen two well respected broker/owners throw in the towel. Both were DIYers to the max, and both refused to admit they were dead wrong. Very few people can prosper doing everything themselves.

    You may not realize it, Arthur, but this one post might’ve done more good than you’ll every know.

    • Hey Jeff,

      I’m glad to hear I am in good company.

      You are right, I can’t do it all myself. When I factored in all the additional expenses – hotels, eating out, buying supplies, it would have been much cheaper to farm out the work. I’m still learning how to evolved from a guy who “tinkers with old houses on the weekends” to real estate entrepreneur. The only way to get there is to leverage other people’s resources.

      Thanks again for the kind words Jeff!

      Best,

      AG

  3. Arthur,

    I had a similiar project. I approached a guy at work who was trying to sell his home for nearly 2 years. He just wanted it done so he could retire. I did a land contract and everything went very smooth on that end which is relatively new for me as well.

    I find myself pretty handy and wanted to do some of the work to get it done for a great price. The house needed everything…
    Remove a back building
    paint entire interior
    bathroom floor
    windows
    strip two layers of siding
    lots of clean up and out
    remove some windows
    redo front porch

    As I was number crunching before I closed I decided to hire out the siding install to save time. I wanted to get it done in 2 months and originally planned to sell. I took over March first and we had a week vacation starting March 9th. I put in close to 200 hours. I would work my days job from 7-3:30 and drive there every single night and stay until 11pm – 1am. I missed lots of sleep and went over budget but nothing serious. I decided to switch to keep the property as a rental about half way through which lead to my budget overages cause I added some niceties and longterm improvements.

    In the end the deal worked out great but my family didn’t enjoy the long hours and of course work offered weekend work everyday so I never had a day off during the whole time. The week after the project was done, no weekend work, go figure…

    I think it was worth it now when I still can but it must pay off in order to save you this in the future. Great post!!!

    • Kyle,

      Thanks for the great insight and the detailed comment. BTW – I completely related to putting in the hours – after hours. In the detailed I outlined above, I literally installed cabinets from 7pm to 11pm and then drove home (2 hours away) – yuck! That doesn’t compare to your 200 hours though – ouch!

      Family time is exactly why I decided to outsource property management. I know many folks on BP manage their own rentals, but for me, it just works out better. When I managed my own units, I was literally working 2 jobs. I would much rather go wine tasting and see a rent deposit hit my bank account without having to drive to my market. That being said, no model is perfect and I guess that is the point. We, as investors, need to constantly revising our model to make the next deal better.

      I’m glad to hear your deal worked out in the end. Thanks again for the detailed post. I enjoyed reading your story.

      best,

      Arthur

  4. Good lesson Arthur,

    I truly think this is one of those lessons that you have to learn yourself. Especially if you are unfamiliar around a tool-box and have a mindset of, “if drunk handymen can do it, I must surely be able to do a better job”.

    Thanks for the transparency in the post too.

    Best,
    John Fedro

    • Thanks John.

      I’m still trying to find balance in my business. It’s in my nature to take on every project that comes across my desk. The difficult part comes in letting go and letting others take over. I don’t think I’ll be painting or installing drywall anytime soon.

      Thanks for the comment!

      AG

  5. Great article Arthur. I loved the squatter’s name…Dopey haha. Delegation and realizing where your strengths and weaknesses lie are great traits to have when running a business. Sometimes it takes a few lessons to learn them, I’m still learning. I’m glad to see it still worked out in the end!

      • Well, most of my work is online. So I’ve learned that a lot of the basic tasks for my business can be done by people on fiverr (fiverr is full of crap people it takes along time to find a quality person on there) or I can outsource a lot bigger projects. I’ve found that it takes interviewing and testing a few people to actually find the one person or company that will work out. Then I will give them bonuses to ensure they make my work a priority. It’s amazing how much a little extra money at the end of a project will make them work even harder for you next time.

        • Brandon,

          Those are some great ideas/suggestions. I agree having a someone else take on the time-sucking less productive tasks definitely frees you up to grow the business and yield a better profit! Spending money can often lead to higher returns/gains, funny how that works.

          Thanks for sharing!

          AG

        • @josh A lot of the stuff I outsource to fiverr are simple things. I would never rely on someone to do the important work for only $5. But, the tasks I do outsource are things like setting up web 2.0 accounts/blogs (which I use for video seo), creating spintaxes for articles (I went through 4-5 people before I found a high quality writer and I still double check the work), and video distribution.

          The setting up accounts fiverr gig is nice because they create an email address, sign up to about 10-12 different sites with that email address (which is a real address and they give you the login for the email), and will even post the content I give them on the blog/web 2.0 and a link to whatever I tell them to. This would take me 1-2 hours to do but I have them do it for $5, it’s pretty nice. They even give me the logins to those blogs/accounts.

          The video distribution I don’t do so much anymore. At the time, I wasn’t producing enough videos to justify paying for my own video distribution account. You can find someone with a video distribution account (tube mogul, traffic geyser, etc) and have them distribute your video for you. The only downside is that it’s under their account and not under your account which kind of hurts your branding efforts.

      • I forgot to mention, having a step by step outline to show them what needs to be done is key (including timelines, expectations, etc). I can’t just tell them sometimes. It needs to be written down, step by step. This may seem pretty basic, but I sent out many projects without this when I was first starting out and it ending up costing me more time and money to have things fixed. BTW, It sounds like you already do a good job of this.

        • Brandon,

          I can always learning from others. I’ve never been afraid to admit that. I could see how writing down a list could be super beneficial to a handyman or contractor. I’ve done most of my lists over email, but I think I need to print it out and tape it somewhere on the door or somewhere else in the property.

          Thanks again!

          AG

  6. Great article!

    I like articles like this where there was a lesson learned that can be shared with others in a way that isn’t abrasive to the readers. I’m sure a lot of us can relate.

    • Hi Nick!

      Thanks for the nice words. I was hoping to come off as very transparent and informative. I’m glad you could relate to the post.

      Thanks again for taking the time to comment!

      Best,

      Arthur

  7. I always think I can do the work on a home I’m about to buy. But I always favor having someone else do the work. I think Robert Kiyosaki said that he would rather focus on new investments than working on his current investment – basically using his TIME for other investments. I believe in that philosophy.

    In my current job in the Army, you either learn delegation quickly or work too many hours and never getting your tasks for you boss done on time.

    Keep investing and soon delegation will become second nature to you.

    Tom

    • Hey Tom,

      I totally agree with you, outsourcing is the only way to scale a business.

      After a month of busting my behind on this project, my wife and I realized that we would just rather NOT be as “active” in the business. We’ve pretty much decided to keep business as usual for the next several acquisitions. We like our free time too much to be running around acting like Jr. Handymen.

      It sounds like you’ve got a good handle on delegation and that will continue to serve you well in the business.

      Thanks for taking the time to post.

      best,

      Arthur

  8. Melodee Lucido on

    Arthur, you are a good writer (this coming from a writer) combining a lesson with amusement ; >

    Hope you GOT it this time. I have said I learned my lesson many times in other businesses I owned—then I’d do it again . . . always learning the hard way what you said in your article. It’s too exhausting to wear everyone’s hats at the same time.

    Thanks for the reminder and the giggles.

    Success to you!

    • Hello Melodee,

      Thanks for the kind words, especially coming from a writer :)

      I think this is one of those lessons you have to continually strive to get better at. My nature is to take on more than I can choose, but after this last rehab, I don’t think I’ll be volunteering to do any of the major work next time. I’m at the “tipping point” in my business where I have too many projects going on to do everything myself. Couple that with my full-time job and I will be on the fast track to burn-out unless I smarten up.

      Glad you enjoyed the article and thank you for the comment!

      best,

      Arthur

  9. Pingback: working on your rental property business, not in it | The Buy and Hold Guys

  10. In highschool I worked as a night shift maintenance man at a local mega church to have some spending money (and be able to fuel my car) and a cleaning service they hired was run by a prior NFL player who had opened up a few detail car washes and a cleaning service. He actually went out and worked right beside all of his co workers, but the reason I’m mentioning this is because he told me something that has stuck with me for years

    “The easiest way to make money is to do the things that no one else wants to do”
    He couldn’t have been more right.

    out sourcing things are so much more effective. I work for an internet marketing company, there are so many things that I do on a daily basis, I just don’t have time to do every little thing. it’s a perfect circle, it helps me out and I can focus on the more important aspects of my job.

  11. Arthur,

    Good stuff.. As you know I am hands on, but we do outsource the major rehabs and are starting to source out the make readys if they look ugly. Don’t beat yourself up too bad for taking on too much though — it’s good to get the hands dirty every once in a while – then when you bring in a handyman or contractor you will at least know if they are doing it right.

    I guess I am old school – I feel if you have not bear hugged a toilet and walked it to the curb, then perhaps full dues have not been paid.

    Good post as usual.

    • Hi Chuck!

      Good to see you (I mean hear from you) lol!

      I’m with you on getting your hands dirty in this business. I think everyone should manage their properties for at least the first year. Like you mentioned, you have to get your arms around a toilet and take a few late night phone calls. Once you have a little seasoning as a landlord, you’ll definitely have a deeper understanding of the day-to-day of this business.

      Thanks again for taking the time to comment!

      All the best,

      AG

  12. Brandon Turner

    Arthur! Great reminder! I feel like I could have written this exact post! It’s good to see I’m not alone in learning this lesson. The only difference- I’ve been learning this lesson for 5 years but continue to make the same mistake every time. Keep the awesome posts coming Arthur!

    • Hi Brandon!

      The funny thing is this is an on-going lesson for me. No matter how many systems I try to create – I still error on the side of taking on too much!

      Thanks for the kind words!

      Best,

      AG

  13. Hi Arthur,

    I got a question about rehab cost. You mentioned that your rehabs rarely exceed 4k, but you also mentioned that you got the cheapest quote for 9k.

    Is your rehab cost of 4k the total cost of material and labor? How come you accept the deal even if the rehab cost is 9k?

    Jason

    • Hi Jason,

      Thanks for your question.

      When I mentioned my rehabs usually cost $4K, I meant that the total cost – materials, labor and other make-ready purchases (stove, cabinets, etc) the property may need. However, while that is my “ideal” buying scenario, my main criteria is the numbers. My target yield for all my rentals is 20% (cash on cash). With this particular property, I will still obtain that return, even factoring in the additional $9K in rehab work.

      The reason I prefer to stay away from these types of deals is they require more work and more of my time. Even if I outsource much of the rehab work, I still have to invest a considerable amount of time double checking the contractors work, scheduling sub-contractors, etc. Houses that need $4K or less usually just need paint and a little TLC.

      The RE market in my farm area is now saturated with other investors and I am having a hard time obtaining rentals that don’t require major TLC. It doesn’t look the like trend is going to stop, so I think I will have to adjust my purchase price and revise my buying criteria to mirror what is happening in the market.

      I hope that helps!

      Arthur

  14. Arthur — Thanks so much for the article! I’m a complete noob and just getting used to the lingo here. You referred to your “system” and others have said that they have developed or purchased systems or are working on their system. What exactly does this mean?

    • Hello Trina,

      What I was referring to is the criteria I use to purchase rental property. I have a set of items a property needs to contain in order for me to consider it as a rental.

      Here are a few:

      * Price: 40-80K
      * Rental amount: must exceed 1.5% of the purchase price
      * layout: 3/1, 3/2, or 2.1
      * SQ Ft: 800-1500
      * Yield: must exceed 20% cash on cash

      There are a bunch more, but hopefully this fills in a few details for you. Before buying rental property or any type of investment, it is best to set your criteria and work backward from there.

      Let me know if you have any other questions.

      Best,

      Arthur

  15. My brother has had his own car business for over 20 years.He is so successful that he constantly turns business away.He could earn much more but enjoys his life and time with the family.

    His advice to me years back was “surround yourself with people that are much better and smarter than you”. Your business will only get better as a result and you will learn a great deal along the way.

    Sadly many businesses are afraid to use people that are smarter for fear they will look bad.So they surround themselves with sub par people to pump up their ego and feeling of importance but the success of the business suffers because of it in addition to the growth of the business owner.

    With the rehab taking time this is why hard money lenders want a professional crew to do the rehab.They want it on the market fast so the HML lender can re-churn the money.The longer it sits half renovated the market could turn bad,the property gets vandalized,the owner loses their residual income to service the HML debt,etc.

    • Joel,

      Thanks for sharing your story with me. Your brother sounds like a smart man. You have some great points. It is harder to create a sustainable business, than ticker with houses on the weekend.

      Thanks again for taking the time to comment!

      Best,

      Arthur

  16. A couple thoughts:

    I totally mystified how a rehab can only cost 9k. Might be a regional thing, but even appliances which don’t vary too much in cost in different regions, are going to cost close to that. Are you not replacing kitchen appliances, not putting in a new boiler?

    I think using language like people need to learn to delegate prescribes a one size fits all approach to real estate investing. The people who say that are usually not open to the idea that sometimes it is best to do some things yourself. The language I see is entirely dismissive of any other viewpoint. A little dangerous to make such blanket statements.

    • Hi Paul,

      Thanks for your comments. I’ve clarified a few of your questions below . . .

      * “I’m totally mystified how a rehab can only cost 9k . . .”

      Perhaps I should have clarified, but I am not trying to resell the property mentioned in the above post. We typically purchase pre-owned appliances (if needed), used stoves cost $150-200, often times those come with with the home. We don’t provide refrigerators or microwaves to our tenants, nor do we offer washer or dyers. Our houses come with central A/C and Heating, usually they need a “tune-up” but that doesn’t cost more than a few hundred dollars. Most of the rehab work we take on is cosmetic – paint, carpet, sanding and repainting cabinets. In short, we try to salvage as much material as we can from each house. Due to our narrow criteria, we don’t usually take on projects that exceed $4-5K. I hope that clears up your first question.

      * “I think using language like people need to learn to delegate prescribes a one size fits all approach to real estate investing. . .The language I see is entirely dismissive of any other viewpoint. . .”

      Thanks for sharing Paul. I actually agree with you. There isn’t a “one size fits all” approach to RE investing. However, the point of the article was to share my experience as an out-of-town investor. Due to my lifestyle choices (keeping my day job) and the location of my market (2 hours away), I have to work on a business model that best suites my objectives. I have no problem if other investors want to manage their properties and do all the repairs themselves, I would just rather focus on finding deals that have a big enough margin to “farm out” those tasks.

      This isn’t a right or wrong post, it is more of a “what works best for me” article.

      Thanks again for bringing up great points.

      Best,

      Arthur/

  17. In your case I think it makes sense to hire out the labor. I was more commenting on the pervasive overconfident bias against doing labor yourself that I see on this site.

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