Investor Payroll, who's in your wallet?
Mark UpdegraffBusiness Member
Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 689 votes
Updegraff Group Realty4.745 Reviews
Investor Payroll, who's in your wallet?
Most Popular Reply
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
14yOriginally posted by Mark Updegraff:
John S. - So, if they quote you a weekly labor rate, what checks and balances do you use to make sure they are working the full 120 hours? Do they provide you with a project completion date? Does your construction manager handle all the supplies & delivery?
This is the reason I would never (and would never recommend) paying contractors hours/weekly/monthly. You want your contractors to have their incentives aligned with yours, and by paying based on time, their incentives are then diametrically opposed to yours (the longer the project takes, the more money they make).
If the contractors say it will take 4 weeks and are charging $2250 per week, I'd much rather set a fixed fee of $9000, which would encourage them to finish sooner -- thereby increasing their hourly earn. Doing it that way aligns incentives.
Unless you plan to be on-site 100% of the time, hourly payments will most likely hurt you in the long-run, not help you. There are a very specific exceptions to this in my experience (punch work is the best example), but those are few and far between.
29 Replies
- Investor · Southlake, TX · Member since 2009 · 950 posts · 338 votes14y
Hey Mark Updegraff, I've never hired employees for me personally, but whenever you consider this, you need to factor in workers comp insurance, and about 8% of payroll taxes. Youll have to process payroll taxes (state and fed) as well. Not that any of this is a deal killer but it is more than just writing a check. Having said that, you are correct in that these costs are in the cost of the contractors you pay. Another issue is that you're stuck with the one you hire, at least until you can find a replacement, rather than just hiring another contractor.
- Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 689 votes14y
Tod Radford - yes, I'm aware of the up-charge associated with going to payroll, and the potential of them trying to get on unemployment etc... I'm feeling like I may stay away from an employee, at least for the current time. How has your experience with contractors been? I've been getting labor rate quotes that seem high (last one was 35). With a highly specialized Master's Degree in Imaging I was just making that much!!
Anyway, there are so many flavors of RE investor, I'm hoping some more people chime in. I'm thinking majority is going to be employee-less
Thanks for your input!
MarkUpdegraff Group Realty4.745 Reviews - Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes14y
I have one full-time employee (my project manager) and am getting ready to hire another, probably part-time (personal assistant).
Personally, I'd rather have no employees at all, but based on their job descriptions, I have no choice. It's nice having full access to someone (you ont get that with contractors), but the responsibility that comes along with employees is great.
As an example, summers are generally pretty slow for us, so we considered taking the summer off and traveling for a few months...but having employees who need the paycheck (my project manager makes 80% of his salary as commission) that's impossible.
- Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 689 votes14y
J Scott Thanks for the input! Can you elaborate on how you structure the commission? I apologize if you've already outlined it on another thread. Also, what does a typical day look like for your PM? Being buy hold I've never considered the commission aspect. But it seems like a perfect incentive for the position. What is a ballpark salary for your PM? How do you use him on your hold projects?
Thanks again!
MarkUpdegraff Group Realty4.745 Reviews - Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes14y
Originally posted by Mark Updegraff:
J Scott Thanks for the input! Can you elaborate on how you structure the commission? I apologize if you've already outlined it on another thread. Also, what does a typical day look like for your PM? Being buy hold I've never considered the commission aspect. But it seems like a perfect incentive for the position. What is a ballpark salary for your PM? How do you use him on your hold projects?Basically, in additional to a monthly salary, my PM gets a fixed percentage of the profit on every rehab -- this ensures that his efforts and decisions are 100% aligned with trying to generate the most profit in the business (though he shares my perspective that doing the right thing trumps $$$ any day).
His duties mostly consist of:
- Putting together scope of work for new projects
- Getting bids and interviewing contractors when we need new contractors
- Managing contractors day-to-day and making on-site decisions during rehab
- Paying contractors
- Buying materials
- Dealing with inspectors/appraisers
- Opening houses for showings
- Dealing with alarms that go off at houses
- Keeping me abreast of any issues that ariseHe's basically the on-site guy who my contractors and vendors deal with on a daily basis, and as far as they know, he's in charge (and other than when my wife or I over-rule him, he *IS* in charge).
For my buy-and-hold properties, his responsibilities include everything above, plus he is also the guy that my tenants know as the property manager. He takes phone calls and plays the face of the company to our tenants. He gets paid 10% of collected rents for this role as well.
In terms of salary, the past several years, he's consistently made between $50,000 and $60,000 per year, though this also includes side projects during our slow periods where I basically hire him out to other investors to manage their rehabs -- for those, he does 95% of the work and gets 50% of whatever I charge.
- Investor · Virginia Beach, VA · Member since 2011 · 68 posts · 12 votes14y
I don't have enough properties to warrant full-time employees. I do all my own property management too, so there's not even that expense on the books.
What I strongly recommend, though, is to get a home warranty for each of your places. This is basically my one-stop-shop for any contracting work I need in case of breakage or property emergencies. It's very inexpensive for the convenience and peace of mind. If you have a realtor license, you can even get a discount on the yearly fee.
For situations that are not related to actual breakages, I do work with several different smaller people located close by. A lawn guy, a handyman, a carpet guy, all are great to have on speed-dial. As things come up, I ask my current people for recommendations and build my network that way.
During vacancies and new purchases, I usually do the cleanup, painting, and other small refurbs myself.
Hope that helps
- Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 689 votes14y
Thanks Guys!
J Scott, can you give a ballpark on the salary & % split? I'm considering trying a few flips.
Jason Kosowan I'm getting really burnt out trying to convince myself that I can do it all myself. I'm on you're path currently, but I'm spread too thin. I have to be careful with that because certain things must be dealt with and cannot wait... I actually miss the days when I had the time to do things like clean up, painting etc... not that I miss actually doing those things...
if you can't tell, today has been a LONG day. Corrupt Contractor, and retarded tenants that are destroying my property. Served paper work for court and locked out the contractor. Now contractor is threatening lawsuit, and the tenants are refusing to pay while running train on a home we spent a lot of time and money to make look sharp.
The school of hard knocks sucks, maybe one day I'll finally graduate!
:D
MarkUpdegraff Group Realty4.745 Reviews - Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes14y
Originally posted by Mark Updegraff:
J Scott, can you give a ballpark on the salary & % split? I'm considering trying a few flips.For our flip business, he gets $1000 per month in salary plus 15% of the profit in commission.
For property management tasks, he gets 10% of collected rents.
For managing rehabs for other investors, he gets 50% of income.
For other jobs he helps with where we generate income (like helping my wife stage another investor's property), we'll generally give him a small percentage of the profit off that job.
And then we generally give a bonus at the end of the year if we exceed our profit goals.
I should also add that he saves us some money on some simple handyman type stuff, as he will do things like put up mini-blinds, replace outlets/switches, do minor punch list work, etc, while he is on-site.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
Hey Mark it's good for landlords to have a support system.I have 20 which for some is small but it is enough for me right now !
With tenants it will be like a roller coaster.Some really good highs and some really low,lows. Some days all the tenants are paying and no items are broken. Other days they are paying late,a storm rolls in with weather,and you get multiple calls for repairs at the same time,and oh yeah the tenant you thought was coming in they don't qualify for the check you run as you find out they were lying.
As for the contractor.J Scott's situation is different in that the cost of living is way higher in New York than in Georgia.
So a project manager getting 60k in New York you would pay is not the same as in Georgia.My brother in law got offered 25,000 more per year for a job in New Jersey to move from Georgia.After he factored in all the costs he was breaking even to losing money plus the weather was harsher up there affecting quality of life.
I don't know if your flips up there would allow you to pay an amount comparable to what J Scott pays here.
Interesting comparison here:
http://www.bestplaces.net/col/?salary=250000&city1=51304000&city2=53651000
- FL · Member since 2009 · 2k+ posts · 357 votes14y
Joel Owens,
Linked for you:http://www.bestplaces.net/col/?salary=250000&city1=51304000&city2=53651000
Raymond
- Specialist · Cleveland, OH · Member since 2011 · 1k+ posts · 852 votes14y
I have employees and I use a lot of subs. I would not recommend using employees for offsite work. Employees are fine for office personal, but if you use them to work on properties, you will end up on the loosing end of the deal.
- Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 689 votes14y
Thanks Everyone!
Joel Owens That makes sense. I'm definitely on the roller coaster you speak of. I'm trying to ensure I have adequate systems in place, but it seems with every day things are refined more and more. My biggest problem is my trusting nature. If I've learned anything since starting in RE investing. It is Trust but VERIFY. :DRob Gillespie - I agree 100% with the off site. If I can't baby sit someone, it is a loosing proposition. Unless that person is trustworthy. Which they are few and far between. I had a contractor last year who put in the hours. Though I may have lost a few $ due to mistakes, or work performed incorrectly that needed corrected. He was a quick learner and fast worker. I know I got my money's worth in that situation. He has since moved, and I'm on the hunt. Replacing him is going to be difficult if not impossible. That is why I like J Scott's method of commission. That keeps the person aligned with what I'm doing. And if their base is low enough, it will keep them from what I'm seeing. Namely, not working when the boss is not around. I would imagine even in the office there is a element of "when the cat's away, the mice will play"....
Still up in the air on contractor versus employee...
MarkUpdegraff Group Realty4.745 Reviews - Chicago, IL · Member since 2012 · 24 posts · 6 votes14y
I sub out. Employees are a waste of money unless there is no other way. Payroll,taxes,benefits,and paying salary during slow periods is all wasted resources.
1 Virtual assistants in the Philippines for all back office -$3.13/person/hr no taxes or benefits or payroll to worry about.
2. One in town assistant to run around the city, research not available over the internet, and coordinate my virtual ones - $12/hr
3.Experienced gc/labor crew(s) of 3 - $2250/wk/crew
4. Construction management 10% of Materials and Labor cost. I also let her list the properties as she has a brokers license and is very competent and shrewd.
5. Property Management - 6% of gross rents plus monthly cleaning fees. - Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 689 votes14y
John S. Thanks for the reply. Do you have trouble with #3? That works out to 18.75/hr for 120 man hours. How do you keep them honest & motivated to work at a weekly rate? I would expect if they thought they were worth 30-35/ hr / man, they wouldn't be super motivated to get things done if it was weekly. How do you handle that aspect?
Thanks much!
MarkUpdegraff Group Realty4.745 Reviews - Chicago, IL · Member since 2012 · 24 posts · 6 votes14y
That's just their asking rate and I think they are very content with the current situation. If they did crap work they would be getting paid 0 dollars an hour to sit on their couch. Higher $/hour doesn't always mean more quality work; I've had much lazier contractors charge me more. I did start out with some sub standard and overpriced contractors in the beginning, I just kept switching them up until I found a construction model that worked.
My go to guys are non-union and very experienced. Between myself and a few other property owners/managers they have steady work that keeps them going full-time. They also have a strong work relationship with my construction manager who I trust very much. I don't know what keeps them personally motivated but their work is solid quality and they have a strong work ethic. You have a take some chances on people and if it doesn't work find someone new until the fit it good, another benefit of the sub contractor model.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes14y
Originally posted by John S.:
Employees are a waste of money unless there is no other way. Payroll,taxes,benefits,and paying salary during slow periods is all wasted resources.I definitely agree with this sentiment, but keep in mind that if you're looking to hire a project manager / right-hand-man type person, it's unlikely the IRS would allow you to pay him like a contractor, as he would almost certainly be treated as an employee.
But, as John and Rob said, employees are something you should hire only when necessary and not without serious consideration -- lots of overhead, management effort and costs are involved.
As an example, I used to manage a 150 person organization for a Fortune 50 company, and the time and overhead spent on management wasn't that much more than what I spend now on a single employee in a small, family-owned business. When done right, managing one person takes a lot of time and effort and isn't easy; if it is easy, you're not doing it right... :)
- Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 689 votes14y
Thanks again everyone. This has been a huge help to me. I'm interviewing contractors like mad. I don't think I'm going to find any willing to accept the terms from John S's #3 above, but I'm going to try like hell! Everyone so far has been at the 30 or above mark. I haven't found any crews bigger than 5 (yet). The 5 crew claimed they could pass some savings on to me, but their quote was a single number with no breakdown whatsoever... I keep trying to explain that I can provide steady work but I need a wholesale price. So far everyone has been pretty close to each other price wise. I want to get the ball rolling, but am hoping to find a better fit before putting through the paces.
John S. - So, if they quote you a weekly labor rate, what checks and balances do you use to make sure they are working the full 120 hours? Do they provide you with a project completion date? Does your construction manager handle all the supplies & delivery?
Thanks again,
MarkUpdegraff Group Realty4.745 Reviews - Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes14y
Originally posted by Mark Updegraff:
John S. - So, if they quote you a weekly labor rate, what checks and balances do you use to make sure they are working the full 120 hours? Do they provide you with a project completion date? Does your construction manager handle all the supplies & delivery?This is the reason I would never (and would never recommend) paying contractors hours/weekly/monthly. You want your contractors to have their incentives aligned with yours, and by paying based on time, their incentives are then diametrically opposed to yours (the longer the project takes, the more money they make).
If the contractors say it will take 4 weeks and are charging $2250 per week, I'd much rather set a fixed fee of $9000, which would encourage them to finish sooner -- thereby increasing their hourly earn. Doing it that way aligns incentives.
Unless you plan to be on-site 100% of the time, hourly payments will most likely hurt you in the long-run, not help you. There are a very specific exceptions to this in my experience (punch work is the best example), but those are few and far between.
- Chicago, IL · Member since 2012 · 24 posts · 6 votes14y
@Mark Updegraff - This isn't a rate I am quoted. It's what I pay them. I stop by from time to time and check progress on rehab work, but mainly the contruction manager is monitoring the crew and worrying about supplies. You have to reliquish a certain degree of control to expand, and trust your team. An experienced rehabber knows how long certain jobs take and what they should cost.
@ J Scott - This is more of a contract vs. time and materials billing question. Each model has its merits depending on what needs to be accomplished, and we can swap examples on merits of each until we are blue in the face. There are some jobs that are better on a contract basis. Time and materials tends to be more flexible than a contract. For instance when you are renovating one apartment in a building and a pipe bursts in another, you can redirect the crew to the emergency. In a contract suituation the emergency wouldn't be the contractors problem.
In my case I am comfortable paying my primary crew on their time for the majority of their work. They have proven themselves over and consistently come in cheaper than third party contractor bids when I occasionally get them. I'm sure everyone trusts their attorney and accountants to bill proper hours and work in good faith. Why not your labor team? How do you expand if you can't delegate the more detailed work?
- Dallas, TX · Member since 2011 · 308 posts · 59 votes14y
@ J Scott - This may be a stupid question, but are you worried about your project manager quitting and becoming your competitor? It seems like he has most of the tools (minus access to capital and deals, etc.) to succeed, and the monetary upside is significantly higher.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes14y
Originally posted by Bryce Y.:
@ J Scott - This may be a stupid question, but are you worried about your project manager quitting and becoming your competitor? It seems like he has most of the tools (minus access to capital and deals, etc.) to succeed, and the monetary upside is significantly higher.I was having this conversation last night with another experienced rehabber I know who runs his business very similar to me. We both agree that we want our Project Managers to grow to the point where they are doing their own deals and if they eventually leave, that's a risk I'm willing to take, as I'd rather have someone highly qualified who may leave me than someone not as qualified.
There are two other mitigating factors as well:
1. If my PM did leave, I would hope that he'd want to figure out a mutually beneficial type of partnership where we both profit off the split.
2. Many people don't have the desire, the cash, the risk tolerance or the commitment to want to start their own business, and prefer the stability of a steady paycheck. Currently, my PM falls into this category.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes14y
Originally posted by John S.:
@ J Scott ....There are some jobs that are better on a contract basis. Time and materials tends to be more flexible than a contract. For instance when you are renovating one apartment in a building and a pipe bursts in another, you can redirect the crew to the emergency. In a contract suituation the emergency wouldn't be the contractors problem.So, you pay a whole job on T&M just to mitigate the potential for an emergency not getting fixed? Doesn't seem like a very good reason in my opinion. And while I don't know you and I'm not saying this directed towards you, most people I know who prefer T&M work in the real estate world are not very detailed-oriented, and this is their way of avoiding having to plan well upfront. Again, not saying this is the reason you do it, but thisms a common theme among many of the investors I know who prefer T&M contracts.
Btw, If an emergency like you mentioned happened on one of my fixed priced jobs, my contractors would take care of the emergency first (even if it meant calling one of my contractors on their crew) and get the issue fixed. We'd sort out payment later.
When in doubt, if my PM is not on site, my contractors have the authority to do any extra work they think we'd want them to do (emergency fixes, surprise issues, cosmetic repairs we didn't discuss, etc).
Do they sometimes do things I wouldn't have asked them to do? Absolutely! Last year, I probably spent $2000 on work my crew did that I wouldn't have wanted done, but in return, I got contractors who took it upon themselves to make sure that things were done right, a project manager who was freed up to not have to be every site at all times, contractors who never any lost time waiting to get approval for little things, and contractors who felt empowered. Well worth the $2000.
Btw, I pay both my CPA and attorney on a fixed-price annual basis as well, for this same reason. If their scope of work increases and they spend more hours than agreed upon, we renegotiate and they get paid more. If there is an on-going issue that doesn't have a clear scope of work, I'll happily pay by he hour. But, it's very rare that I'll encounter a rehab project that doesn't have a well-defined scope of work.
All that said, I'm currently working on a big project where I have my GC on a T&M contract. The reason -- I'm too busy and too lazy to fully dig into the scope of work and really flesh it out prior to starting work. Of course, I'll pay a tax for that laziness in the form of over-paying for this job...I try not to make a habit of it.
T&M generally results in over-paying, at least in my experience.
EDIT: One more VERY important thing -- if your contractors are doing a lot of work for you and you always pay T&M, you're putting yourself at great risk of the IRS determining that they are actually employees as opposed to independent contractors. And that will greatly increase your costs across the board.
- Real Estate Investor · Atlanta, GA · Member since 2009 · 339 posts · 126 votes14y
In an age where everyone has a cell phone and there are virtual assistants and such I find it very hard to justify the need to hire an employee. There are a dozen different ways that a work agreement can be structures that would avoid hiring an employee.
I have talked to more senior investors that have moved away from having employees, one of the reasons being that when you employ people now you HAVE TO do a deal so that you can make
payroll.I have no interest in having employees since I have seen how much can be accomplished just by having your sh*t together in how you run your business. Although my operation is very small the model is scalable.
- Real Estate Investor · Salem, OR · Member since 2011 · 422 posts · 149 votes14y
Mark
Have you considered looking into getting a "handy man" instead of a contractor? I work with 4 different guys. None of them are contractors, but they all do good work. Its a lot cheaper than if I hired a contractor
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