Please Help!!! Expanding fast and need some guidence

11 Replies

Hi everyone. Let me give you a brief background of myself. I am a full time sheriff deputy but have been flipping houses and holding rentals for the past 10 years. I currently have 20 rental units and have flipped 20+ homes in a small community. I live in Covington Indiana in a small town of around 3,000 people. Without any marketing, just word of mouth, my flipping business has taken off. I have negotiated great rates with local contractors, and have around 5 guys that have worked for me over the years that due the majority of my work. They are not employees but I have given consistent work and I'm now at the point of using them 30-40 hours a week. Because of the rates around 12-15 per hour and the quality work I'm getting we are basically on a trust system. They tell me how many hours they worked for the week and I pay them. I understand this isn't the best plan, I do a lot of babysitting, and overseeing, but the trust is there. I'm in the process of hiring a few new guys to take on the general contractor role, who also have more of a skillset to do the finer finishing work that needs done. The guys I have can do all the grunt work, paint, trim, light framing, ect... but not the guy I want to build a house from scratch. I also have negotiated great rates with licensed plumber 25hr, electrician 15hr, and a licensed hvac 25hr that do all the work on all my flips and rentals. I have one individual who owns his own company and I've negotiated a rate of 20hr for him to do the finish work. I trust him completely and he would be ideal to run a flipping crew. He only has one guy that works with him, but using all of my guys and subs would allow for a flipping team with all the trades being covered.

 I currently have 4 or 5 private investors with access to capital of 500,000 or so. I also have 5 projects in process. Purchased 2 small rental houses on same lot cosmetic rehab hold for rental, remodeling a downtown building with a complete upstairs gut job and conforming bottom to fitness studio, small 3 bedroom house cosmetic rehab for a flip. I'm seriously considering quitting my job and go into investing full time. I currently make 36,000 as a sheriff, my rental properties bring in a cash flow after all expenses of 4,000 a month, and the flips I currently due while holding a full time job are around 30,000-40,000 per year. I am seriously considering quitting the sheriff's department and going full time. I know if I've accomplished what I have while holding a full time job of 50hrs per week, the drive and determination I have to succeed with all of my attention being given to real estate is unlimited.

The question I have are the following?

Would you start your own contracting company and keep all of my subs and pay as employees?

I'm a little worried of how to structure my business if I quit my job and continue with flips and then be taxed as a dealer.

Where would you start with systems and people to transfer from where I'm now to full time investing?

Any advice on where to go from here would be great.  

Hey @Dusty Bowling  I'm not sure I'm the best to answer your question but wanted to say: congrats on your success so far! That's great. 

My thoughts: 

The contracting business is ANNOYING. Like, all the taxes, paperwork, liability, insurance, babysitting, HR work, etc. I did it for a short time, hated it. So personally I wouldn't do it, but that's just me! 

As for the dealer thing - I'll let someone else like @J Scott or @Brian Burke  answer that one! 

Keep rocking it Dusty! And don't forget a photo if you get a moment :) 

Medium fbprofileBrandon Turner, BiggerPockets | http://www.BiggerPockets.com | Podcast Guest on Show #92

Starting a construction business is tremendously challenging. What most people find is that doing only their own work can be (eventually) not enough to keep the pipe full, and they have to start dealing with sales, marketing, and customers.

Additionally, as a contractor, you are constantly fighting a variety of federal and state alphabet agencies that will take any and every chance to take a bite out of you. 

Your customers will also do everything they can to take a bite out of you. This is especially true if you work with investors. 

And, like it or not, no matter how much you like or think you can trust the people who work for you... eventually, one of them will decide that they can take a big, fat bite out of you. 

In other words, you will become a big, fat, target.

IF you really want to start down this path, my first advice is that you need to START with getting a GOOD accountant who UNDERSTANDS WELL your business model and has experience with investors who are contractors as well. If you do not, you will have a mess on your hands that will cost you thousands (or maybe tens of thousands) of dollars to straighten out. Do NOT try and run the books yourself. 

If you aren't prepared for the legal side of things, get a lawyer who understands construction and real estate and have him draft up a contract to use with your customers, your subs, etc.... this is a huge deal and it's easy to make a mis-step.

If you need to get licensed by the state to do what you're doing, DO IT. If your subs need to be licensed, make sure that they are. Also make sure that all your employees (and your sub's employees) are INS-safe and are I9'd. Doing it any other way is tempting, but the potential liability and operational weakness will eventually bite you in ways you do not want to be bit.

Make sure that you're licensed up, lawyer'd up, and insured up. Understand that it is a question of when, not if, you get sued by a customer... and when that happens, having all of your paperwork straight can mean the difference between life and death for your business.

If you choose to make people W2 instead of 1099, understand the legal can of worms you're opening up and understand what it means from an insurance standpoint. Different states have different requirements for having worker's comp, and once you have worker's comp you need to be fully aware of what a total game-changer it is.

If you choose to work with outside customers, make sure that you can estimate correctly and accurately and that your contract is as air-tight as you can make it. Handshake deals are a giant No-No.

If you're relying on hand-written hourly logs for employee pay, understand that your system is crap and you need to plan on getting a better system forthwith. The solutions that are applicable for this are costly, but the problems of having hourly workers without air-tight reporting systems are legion and far more expensive than you might think.

Understand beyond a shadow of a doubt that putting someone in a position of control over your employees, materials, or process flow is giving away a position that could financially wreck you. A good project manager is worth their weight in gold, and a bad one can sink you almost overnight.

I like what you're doing right now, as far as the contractors go - you negotiated very favorable rates, hire them when needed, and pay them as individual contractors (not employees).

I'm not sure that there are enough benefits to be gained by turning that into a company.

Most investors I know have good contractor partners, and they rarely try to BE the contractor as well as the investor.

Another thing you might consider, given your excellent reputation (I assume ;-) as a deputy sheriff... get your RE license and play that side of the game as well.  Half the leads I get are really listings, not investment opportunities.  You might could replace your sheriff's salary pretty fast with commissions that come from simply working your investor leads...

Best of luck to you as you pursue this ramping up of your business!

“Pick battles big enough to matter, small enough to win.” ~ Jonathan Kozol

Medium wbh square logoDev Horn, We Buy Houses® | [email protected] | 877‑932‑8946 | http://webuyhouses.com/profile/arlington

I came to read as a newbie because you said you're expanding fast. Congratulations! I have no words of advice as I am quite new to REI however I love to read about others success.

It sounds to me like @Aaron McGinnis  is pointing you in the right direction.

Also... I always get very excited when I see @Brandon Turner   commenting on a forum I'm involved in because I know what his voice sounds like. I have a lot of catching up to do, but I listen to your podcasts daily and am a huge fan. You are like a superstar in my household.

"Well honey, Brandon Turner said..."

@Dusty Bowling  your story sounds very similar to mine.  I was working at a city P.D. when I started my investment business and was right about where you are when I finally hung it up and went full time.  The evidence now shows it was the best move I ever made (700 properties later) but at the time it was a little scary!

I did what you are thinking of doing...when I was at the point of doing over 100 flips per year I started my own construction company (not to do outside work, just my own stuff) and did that for 4 years or so.  Now I've gone back to my old system of using outside contractors for 90% of it and independent contractors for the remaining 10%.  Having seen it from both directions, I really do prefer having it done by outsiders.  I have more flexibility to bulk up when I have a lot of rehabs going at once and can slim down when I don't.  I have a couple of primary contractors and a few backups and it works great.  I'm in no hurry to go back to having all of those employees again.

As for your question about taxation as a dealer, forget about it.  You are a dealer already if you are doing a lot of flips.  But so what?  Flip income is taxed as ordinary active income anyway so it can't get any worse than that.  When selling investment property (rentals) I've never had a problem with being a career flipper jeopardizing my capital gain treatment when it was applicable.  There are plenty of tax experts on BP that can disagree with me or provide more specific advice, but my personal experience hasn't revealed any issue with being a dealer.  In fact, the opposite has been true...as a full time real estate professional, I qualify for deductions that I previously did not.

Where would I start with systems and people to transition from part time to full time?  You don't need advice on that, you're already doing it.  If you quit your job at the SO, you'll quickly fill that time looking for deals, looking for investors, and signing escrow documents.  You are in a natural growth pattern, going full time is just the next step in that growth.

Congrats on your success, and thanks for the trip down memory lane...reading your story was like reading the first chapter of my own biography.

Medium praxis capital logo cmyk stacked 900pxBrian Burke, Praxis Capital, Inc. | [email protected] | http://www.PraxCap.com | Podcast Guest on Show #152

Thanks Brian for the info, exactly what I was looking for.  I've always been an action first kind of guy. One of my favorite quotes has always been, "A fear of failure will make a failure of us all." So applicable in this business, failure is a necessity to learn. Knowing how you turned out just makes me want it more. 

How would you go about the process of turning all my subs into a crew that I can bid our jobs completely to. Right now I have 6 or 7 individuals that move from project to project and I'm finding it hard to bid out when priorities change on a daily basis. The day starts out on a rehab then someone moves out of a rental and I need to switch 3 of the workers over to a rental to not lose out on rent. I think the years of penny pinching and negotiating such good labor prices my mind won't let me switch from paying guys that I molded for the last 10 years to automatically go from 15hr to 25hr just because they are bidding out instead of working by the hour. I realize I need to get away from being a GC if I'm ever going to see significant growth and stop worrying about saving pennies and start making dollars. Would you take the most knowledgeable guy I've had with some prior experience of running his own crew and let him bid out full rehabs. The problem I see is I have very loyal guys who love to work for me and don't want to screw up the dedication they have to me by now taking orders from someone else. Sorry I'm rambling but any thoughts would be appreciated.

By the way loved your podcast.

Originally posted by @Dev Horn :

I like what you're doing right now, as far as the contractors go - you negotiated very favorable rates, hire them when needed, and pay them as individual contractors (not employees).

I'm not sure that there are enough benefits to be gained by turning that into a company.

Most investors I know have good contractor partners, and they rarely try to BE the contractor as well as the investor.

Another thing you might consider, given your excellent reputation (I assume ;-) as a deputy sheriff... get your RE license and play that side of the game as well.  Half the leads I get are really listings, not investment opportunities.  You might could replace your sheriff's salary pretty fast with commissions that come from simply working your investor leads...

Best of luck to you as you pursue this ramping up of your business!

“Pick battles big enough to matter, small enough to win.” ~ Jonathan Kozol

Thanks for the info. I actually thought about getting my license but couldn't justify talking to someone trying to get them to sell to me for 70 cents on the dollar then  switch over and convince them I can sell their property for full price. I do agree that the contacts and reputation I've gained would definitely help in this field. I guess it's always a back up ;)

@Dusty Bowling  if you have a first-class group of workers, all you need to grow is a project manager to supervise the day-to-day details of running multiple jobs and managing troop deployment.  You don't need them to bid if you are confident that they work hard and aren't slacking off because they charge by the hour. 

If you try to get them to a bid system, you might find that they are great tradespeople but lousy business people. They might overbid jobs and that hurts you, or they underbid and that hurts them (and ultimately you too).  You might lose these guys if you switch them from hourly to fixed price.

On the other hand you might find that using GCs is easier to manage and gives you more flexibility, but it may or may not be more expensive. A good experiment is to use your guys as a core crew and use outside contractors when you have a lot of projects at once. Doing so will give you exposure to both strategies so you can decide what works best for you and allow you to grow organically.

Medium praxis capital logo cmyk stacked 900pxBrian Burke, Praxis Capital, Inc. | [email protected] | http://www.PraxCap.com | Podcast Guest on Show #152

@Dusty Bowling   congratulations.  If you have not already done so you need to investigate other nearby markets.  With a town of only 3,000 it wont take long to saturate it.  I admire your drive.  I am a prosecutor again so I admire an officer with drive.  Good luck in the future.