Sub Contractors Or General Contractors Which to choose!

14 Replies

Hey Everyone,

I wanted to talk about choosing between Sub contractors or General Contractors. When should you hire one or the other? What should be some deciding factors? How does each one affect your business models? Etc--

Business Models vary by region, South Jersey, Central Jersey, Jersey Shore, Philadelphia but the core of the decision process remains the same.

South Jersey Is mostly a residential development area so the rehabs center around single family homes. Where as in Central Jersey you start to get into more populated areas where your now dealing with Town homes, and bigger multi units. Down at the Jersey Shore you are doing more tear down and rebuild, which is the same for Philadelphia.

So that being said, Sub Contractors. They are definitely the best option for keeping you rehab cost down. They give you the benefit of control over time frame and cost. You also get to choose who is working on the property on the important items, like electric, plumbing, HVAC, etc. The down side for subs is they can be very time consuming. Managing all the different moving pieces can be overwhelming, especially for newer investors.  Your budget can also get out of control quick if you don't keep track of what each person is charging.

General contractors are all about leverage. Their main benefit is to New investors who don't know anything about construction and to Seasoned investors who are looking to make the jump from 2-3 properties at a time to 10-12 at a time. While the investor is concentrating on finding deals and money the rehab can be getting done. They would also have their own team of subs that work with them, which means the investor doesn't have to worry about finding them their selves. The down side is they are definitely more costly. There is a bigger level of trust needed with GC's as well. You need to make sure you can count on them to get the job done. Some GC's will take on to much at one time as well which slows them down on your projects. 

There are definitely plusses and minuses to both sides. Like I said it really comes down to your business style and what you want to accomplish in Real Estate investing. Think about your goals and personality. Think about the people you like interacting with and what you favor at your own job. These answers will help you choose Subs or GC's. 

As a General Contractor Myself, I choose Leverage. Please let me know what you chose and why? This will help us all learn and see what choices are out there.

@William Lees I hire subcontractors on my flips. I do this for the cost savings, but I have a background in design and managing construction projects, so to me this business model works. The money a GC would make on my project goes back into my pocket. It gives me total control over who is on my job and when.

With that said, there are a lot of investors with no experience in this, and as you said, are looking for large growth or doing a lot of jobs at once. In that arena, hiring a good GC is the right move.

@William Lees regarding suggestions for those REIs going the subcontractor route, here is my thought process:

Ask for referrals/recommendations from others in your circle of family, friends and contacts. I found an awesome roofer, awesome plumber and a great tile guy this way. Not every referral is going to be an investor friendly sub, however you might be surprised at who your family and friends have worked with and had good results with in the past.

Get multiple bids. Of course this is touted throughout the REI world, but it holds true. Bring in a minimum of 2 subs, and I usually try to bring in more, 3-4 if I have the time. I will say though, as much as you might save money doing so, if you have only done a couple jobs and have used the same sub and he does good solid work, I would recommend keeping with a good thing. Even if you could save a little trying out a new sub, once you have a relationship, keep building off that. I had a roofer, plumber, carpenter, floor guy, tile guy (for the few jobs I chose not to do my own), mason, tree guy and maybe a couple others that I used on most if not all of my jobs. Once I vetted their pricing on project 1 and 2, and they continued to do the job, on the budget they proposed and on my timeline (usually faster with the roofer and the plumber), why would I not keep them getting my business? If I had more than a couple jobs going at once, I would be using multiple subs of the same trade, however I would keep with the same subs that treat me right.

Pay on time. I found subs love it when you have cash or a check ready to go as soon as the job is done, or exactly when agreed to. I have had subs shocked about it believe it or not.

Have a good solid SOW and contract. I actually end up using the subs contracts, with tweaks if need be, however always have them review the scope of work you want done, agree to it and make it part of the contract.

There are more, but this is some of the basics.

@William Lees

I have done my rehabs 3 ways:

1) did a lot of the work myself and subbed out some others (electrical, plumbing, HVAC)

2) acted as the GC and subbed out the majority of the work while only doing smaller tasks myself. I also made lots of material runs

3) hired a GC and now only manage him while still being the designer and having final say.

For #1 if I wasn't there onsite work was not getting done. I was putting in about 50 hours a week for one house.

For #2 I was putting in about 20-25 hours per week per house. The rehabs took longer than I had hoped for.

For #3 I am putting about 10 hours per week per house. I currently have three rehabs in progress and all are moving along at a very good pace. 

I like #3 the best because it allows me so much more freedom. I am now spending a lot more time at home with my family which makes the cost of hiring a GC so worth it. 

Hi @Doug W.

Thanks for the insight. For me my family time was important to me as well and thats one of the reasons I use a GC too. How long have you been investing?

@William Lees - I have sort of "unique" way of doing things now.  I don't have a GC in the way you are describing but rather a "point person" or on site manager who is there most every day, and does all my electrical, and alot of other skilled work like tile etc.  He is very knowledgeable and is an electrician by trade, but grew up and has worked 20+ years in the construction trades.   So, my deal with him is that we both share the responsibility of finding subs and getting quotes, he manages them onsite and as far as timing, I do all the design work and decisions about finishes, etc.   He's gotten to know me well enough to know what my expectation level is, and we have both learned alot about the trials of managing subs.  I do a detailed SOW, as well as a contract outlining the legal stuff, for the subs, and I also get lien waivers and W-9's before they get paid.  It's my money funding the project, so I ultimately have the final authority, but I trust him enough to make on the spot decisions and keep things moving.   For doing this, I pay him an hourly rate (varies per the work he is doing) and hehe earns a bonus- varying from 10-20% of the pre-tax profit.  The variance in percent has to do with whether we are able to stick to the timeline he and I agreed upon.  It really works for both of us. I know the real costs of the subs, and he knows he gets paid extra as long as we make a profit.   He also has to have some trust in me, obviously, that I am not going to overspend.  I give him full access to all receipts and even give him a printout of the budget/ spending when I produce his bonus payment.   When I figure his bonus, it's pre-tax as I said (because I report it on his 1099), and I subtract all my costs including holding and taxes etc. before his bonus is calculated.   Works for us, might work for you if you find the right person.  He also still has the ability to go do other jobs while working on my flips if he isn't needed there, and in between, such as right now when I don't have a house to flip).

Hi @Shannon S. ,

That is a good go between. I have actually heard of one or two investors doing it this way. Another version that some High producers will do is have Full time sub contractors on the payroll. Because they have so much work they save a lot of money. But they also have to keep that volume going to sustain the model. 

As the owner/builder, I am my own GC and have my own crews plus hire out a few subs for specific tasks we don't do in-house such as plumbing, major stucco, landscape, etc.

By having my own crews plus hiring individual subs, I can save the 15%-20% GC markups and pay my project manager with the savings and still keep more profit for myself. This is how I run my business and I have anywhere from 4-8 projects going at one time. More specifically, each project has well over $150k in renovations/additions and most well over $200k. I would guess that my average is around $250k so I am saving about $40k-$50k per project which really adds up when you are doing the amount I am.

Hey @Will Barnard

Thanks for the input. how would you say having a mixture of some on staff subs and some freelance works compared to some guys who have everyone on staff? Would you say there would need to be more volume?

I am in the process of doing one major project now (a 6 figure renovation) and for me stress and timing are uber important. 

Originally posted by @William Lees :

Hey @Will Barnard

Thanks for the input. how would you say having a mixture of some on staff subs and some freelance works compared to some guys who have everyone on staff? Would you say there would need to be more volume?

 Basically you need to do volume to support having a full time staff so if you are not at that level, you simply can not have crews for everything. That said, you don't need to in order to be successful, simply sub out what you don't have on staff and grow and scale as you can.

Even with my volume, it is not enough to warrant a full staff for every service nor would I ever want to. You can scale without taking on such responsibility.