Rehabbing is one of the major components of the real estate business. A property in need of a rehab is often where the money can be made. But doing a good quality rehab and bringing it to completion is not easy, as there are many potential bumps along the way. You need to know how all of those property pieces fit together, and you will need many different types of contractors to get your job done.
Some contractors are essential due to their knowledge of potentially dangerous systems, such as natural gas or electric. But do you need a general contractor to oversee and coordinate all of this work? Or should you act as your own general contractor? There are pros and cons to each side of this story, and we will go through some of them shortly. First, let’s make sure we all understand what a general contractor is and what they do.
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.
What is a General Contractor?
A general contractor is someone who you hire to manage, coordinate and complete a rehab project. They may or may not be specific tradespeople, but they are often a sort of “jack of all trades” who have detailed knowledge of how to complete the project. They are often responsible for making sure that the project comes in on time and within budget, and they hire and manage sub-contractors, such as electricians or plumbers. Most of the time you will pay and direct the general contractor, who will in turn pay for materials and manage the sub-contractors.
Acting as the General Contractor
As the property owner, most jurisdictions will allow you to act as your own general contractor (this will, however, vary by jurisdiction and scope of the project, so check your local laws). Therefore, you get to ensure that things are completed on time and within budget, and you would hire and manage all of the other sub-contractors. Why might you want to do this? Here are some thoughts.
First, you can save the money that you would pay a general contractor. General contractors are not going to work for free. They will add an up-charge to all of the services they procure and oversee. This up-charge will directly affect your bottom line.
Secondly, being your own general contractor allows you to learn the business. One of the best ways to learn anything is to do it. There is a real advantage in this business to knowing and understanding how a general contractor operates.
Third, being your own general contractor means you will likely get hands on experience with many of the components that go into a rehab job. It is very handy for a real estate investor to have a basic understanding of plumbing, electrical and HVAC systems, as well as all of the other things that make a building function. Knowing and understanding the costs of materials, the time it takes to install them and the prices of labor will be invaluable to your real estate investing career.
Finally, you can watch over things much more closely and perhaps better control the pace of things. If one of your sub-contractors begins to slack off or not do the work to your standards, you can fire that contractor. With a general contractor, you will likely have to go through him or her. It adds another layer.
Why Hire a General Contractor?
Having read this far, you may already have a sense of why you might want to hire a general contractor. A general contractor can be a major asset. Here is why.
First, they know the codes. Hopefully you have hired someone who is recommended and has a good reputation. They will understand what permits need to be pulled and how to get code enforcement to approve the project. If you have never dealt with building codes and inspectors, this can be a major asset.
Second, they know the process to get the job done as efficiently as possible. They should understand which components need to be completed when and know how to schedule their sub-contractors accordingly.
Third, the liability is often transferred to the general contractor if someone gets hurt. Any general contractor worth his salt will have worker’s comp insurance and thus protect you if someone falls off the roof.
Fourth, they likely can get better prices on materials and labor. This is simply the nature of the business. They do more volume and already have good relationships with sub-contractors; thus, they get better prices and may actually save you money in the long run.
Finally, they can warranty their work. If something goes wrong in six months, most folks will come out and try to make it right. After all, they want more business from you, and good ones stand behind their work and reputation.
Should I Hire a General Contractor?
There are good arguments to be made for each side of this coin. Each side presents a different set of benefits, which can be very attractive to different investors.
I think at the beginning of an investor’s career, smaller jobs should be done by the investor. Doing this will help them learn many facets of the business. Note well that I said “smaller jobs.” I am talking paint, carpet, perhaps minor plumbing. An inexperienced investor should not be taking on large rehab jobs.
Bigger and more complicated jobs, like burnouts or additions, may require you to hire a general. These types of jobs can be very complicated, and the money you pay to a general will be well worth it. Still, I suggest you manage the manager and check up on your project frequently.
Finally, using a general will free up your time. After all, you want to be a real estate investor, not a general contractor, right? So do some minor work at first, learn the ropes, then move on and hire a GC and learn how to manage them and free up your time to find more deals and make more money.
[Editor’s Note: We’re republishing this article to help out the investors who have found BiggerPockets more recently. Let us know what you think with a comment!]
What do you think? Should you hire a general contractor or do it yourself?
Please share with your comments.