It’s a simple question: when you invest in real estate, should you spend your own time doing the labor or hire that work out? I’ve wrestled through this issue for most of my career in real estate; sometimes I’ve done the work, other times I have hired it out. I’ve had good and bad experiences with both and want to share a few stories with you and lessons I’ve learned.
How to Estimate Rehab Costs!
Estimating rehab costs accurately can make or break your real estate business, and it takes years of experience for even the best rehabbers to master the art. However, you can expose yourself to less risk and get more accurate with your projections by learning how the pros think when estimating construction costs.
A Tale of Two Houses
The first house I officially tried to “flip” was a large four-bedroom home right before the housing market began to tank. I purchased the home for, what was then, an incredible deal. I then spent the next nine months remodeling the entire thing with just me, my wife, and some friends when they had time. In those nine months, we:
- Repainted the inside and outside
- Added a new roof
- Refinished the hardwood floors
- Added a brand new bathroom
- Transformed an attic into a bedroom
- Gutted and remodeled the entire kitchen
- and a lot (LOT) more.
In all, we spent close to $50,000.00 in materials and holding costs during those nine months. By the time the house was finished and placed on the MLS, the housing market and credit market had killed any chance of making a good sale. After six months I put renters into the home and refinanced the home pulling out all the money we had put in, but making nothing for the nine months of work (except equity and a cashflow positive property.)
Let me fast-forward a few years and tell you about another flip I purchased last month. I closed on a small house near my own home that needed significant improvements to bring it back up to retail condition. In just under a month, hired contractors went in and remodeled the entire house for a total cost of $15,000.00. The home was just listed for sale this past week and I hope to have it sold before the end of the year.
So Which Experience Was Better?
Most investors would tell you quickly that the second option was better. I didn’t have to put on grungy clothes, cycle through boxes of band-aids, or come home covered in paint. The second story took just a month from start to finish, where the first took almost a year. Clearly, from a monetary standpoint and time standpoint the second example was far superior. I know my back thanks me for choosing to do less of the manual labor.
Even I have written a lot both on the BiggerPockets Blog and on my own blog about hiring others to do work. And while the second deal hasn’t yet sold, I am confident that the second deal will result in a greater ROI.
However, I can’t say the first house was a mistake.
Let me explain why:
Working Isn’t Always Bad
Hard work gets a bad name sometimes.
- Yes, I am all for hiring work out when it’s more efficient or others are better at it.
- Yes, I believe sometimes being cheap is more expensive.
- Yes, I know there are opportunities lost when you spend time working rather than finding deals.
However – sometimes it’s okay to get your hands a little dirty.
This is especially true if you don’t have a lot to bring to the table. Perhaps you are just starting out and want to start flipping homes or remodeling for a buy-n-hold situation. If the list of assets that you are bringing to the table doesn’t include a sizable amount of money – you may need to get your hammer out and start swinging.
Doing your own work, while not always the most efficient way of doing a rehab, does offer significant benefits that shouldn’t be merely discarded because it’s unpopular to do manual labor. Some of those benefits include:
- Saving money by not paying contractors to do certain jobs
- Learning how difficult/easy certain jobs are
- Helps you better grasp the “big picture” for future jobs
- Gives you an asset to bring to a deal when you have none
- Can help speed up completion, fill in a labor gap, or finalize a project.
- The project is done the way you want
- Helps you understand the right way to do things
Doing some or all of your own labor doesn’t mean you are not a good investor. It simply is another way to do a project (that some might not always agree with.) If you enjoy the work or have little to bring to a deal to make it work – by all means, consider doing at least some of your own labor. In the end, you may find it will help get you into the game sooner than normally possible.
Most of the gurus and real estate writers will tell you to hire all the work out. However, I believe they have been in the game for many years and most likely spent the early part of their careers with a hammer and nails before getting to the point where they are at. It’s easy to look back and say “wow, it’s way easier now” and forget that the only reason they are where they are is because of that hammer.
Do you agree with me or disagree? Leave me a comment and lets talk about it!