WHY YOU SHOULD NEVER HIRE A CONTRACTOR TO RENOVATE YOUR INVESTMENT PROPERTY

general contractors

I have nothing against general contractors.  My dad was one, and he was my first (and last) general contractor that I hired when I began investing in real estate.  

When I say “hired”, I mean I had him on a full-time salary managing a crew of 14.  This was not a side gig.  It couldn’t be; my business partner and I were buying a property every three weeks.  

In my case, I imagined having a general contractor was necessary because I had no prior experience renovating properties.  I was wrong.

How to do the job of a general contractor with no experience and no license

Now, I’m really going to upset some contractors by suggesting that someone with no experience could do their job, but that’s not exactly what I’m saying or implying.

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I want to be clear here.  In this post, I’m talking about renovating a property just to the point where it can be flipped or rented for profit.  

I’m NOT talking about new construction, room additions, or making other major structural changes to a property.  I’m talking about putting lipstick on a pig.

You don’t need a general contractor to put lipstick on a pig, at least in my opinion.

Furthermore, in many cities and counties you won’t need a license to act as your own general contractor to renovate a property.  You’ll want to verify what the local laws are for your area.  Here’s a great resource for looking up contractor license requirements by state.

Now, when you’re first starting out, you’re not going to have an eye for whether or not a property is a good buy, but frankly, a general contractor may not either.  

A general contractor is in the business of doing work you ask them to do for an agreed upon price.  They are not your business adviser.  

Developing a keen eye is something you’ll just have to learn as you go.  That’s just the way it is.  This is why it’s best to research and learn as much as you can before diving into real estate investing.  

If you think hiring a general contractor is your safeguard against losing money on a property, look in the mirror, slap yourself in the face, and say “stop it.”

Apart from not needing a general contractor, you likely won’t be able to afford one anyway. Forget what HGTV tells you.

So, now that you’re steering the ship solo, let’s discuss what you need to do.

Know where your money will be spent

In the vast majority of cases, the costs to renovate a house will be broken down into the following 5 categories:

  • Cosmetic
  • Roofing
  • Plumbing
  • HVAC
  • Electrical

Much of the cosmetic work will be obvious.  If the floor is missing, you’ll need to replace it.  If there are holes in the walls, you’ll need to fix them.  We’ll discuss determining your costs in a bit.

When it comes to roofing, plumbing, HVAC, & electrical, find good, reliable, and licensed people in these trades and build a relationship with them.  Much of your success as a real estate investor will hinge on these relationships.  

Do your due diligence by reading reviews, asking for referrals, and make sure they have someone on staff who can pull permits when needed.  Not all these guys can pull permits which can cause issues for you if the work required necessitates a permit.  

Are there other items to be mindful of?  Sure, but these 5 items will be where most of your money goes in most cases.  Foundation would be another biggie.  However, if the foundation is compromised, I recommend just walking away.  

Check out this blog post for what to look for when touring an investment property.  

Determining Your Costs

When you identify a property that you feel might make a good buy, forego the property inspector, and instead do this: have your roofer, plumber, electrician, and HVAC technician do their own inspections and provide you with a list of recommended repairs along with an estimate.  

Some of these guys may not charge you anything to do an inspection, and if they do charge, it will likely be somewhere around $100.  So, let’s just assume each one of them charges you $100.  That’s $400.  Now, a property inspector will charge $400-$600.  

Why forego the property inspector?

I have nothing against property inspectors.  The reason to forego the property inspector has nothing to do with them being bad people or saving money.  As I just mentioned, my recommended alternative costs about the same.

The reason for hiring guys in the trades vs. a property inspector is two-fold: thoroughness and estimates.

A property inspector is likely not a licensed plumber, electrician, or HVAC technician.  While they know enough to inspect these items, they won’t inspect as thoroughly as someone in the trade.  

For instance, a property inspector will inspect the plumbing, but they are not going to run a camera down the sewer line, so you know whether or not you’ll need to spend $3,000 replacing the sewer line in a month.

Finally, a property inspector will not provide you with an estimate to complete needed repairs.

Now, on the flip side, while a property inspector is a disinterested 3rd party, subcontractors are not.  You want to make sure your subs aren’t trying to sell you everything under the sun either.  

What about cosmetic repairs?  

As I mentioned earlier, a lot of these will be obvious, and you’re just going to have to decide what you’re going to fix and what you’re not going to fix.  

This is why having a budget in place and sticking with it, is going to be imperative to not losing your shirt on the deal.  I’ll discuss budgeting in a minute.

Understanding your costs to sell

If you’re flipping the property, you need to know that you’re going to pay 7-9% of the sale price in closing costs.  Here’s another post I’ve written that covers house flipping costs.    

It’s not the Taj Mahal

I’ll tell you this right now – and I’m speaking from experience – when you buy an investment property, it becomes like your baby.  The problem is the baby looks really ugly.  So, what do you want to do?  Make the baby look pretty.  

So, you start renovating one thing, then another, and another, and before you know it you’ve renovated the hole house, and completely sabotaged any opportunity to profit from the property.

Whether you’re strategy is to buy and flip or buy and hold (rent), going over budget should be your biggest fear.  

In the world of real estate investing, once you start on a house, you’ve got to finish…even if you start going over budget.  I mean, what else are you going to do – just leave it there unfinished?  I guess you could, but then what?  Sell it at a loss?  You don’t want to end up in that position.

This is why you need to start with the end in mind and move backwards.  Follow these steps:

  1. Hire a Realtor (won’t cost you anything).  Tell the Realtor what work you’ll be doing to the house, and have them pull what’s called a CMA.  A CMA is a market analysis that will give you an idea of what you can reasonably expect to sell the property for once you’ve completed your repairs.
  2. With that amount in mind, subtract your closings costs, costs to purchase the property, and add an amount for what you would like to profit from the deal once you sell.  You’ll also want to consider capital gains tax.  The amount that is left is your renovation budget.
  3. With your renovation budget in hand, gather your estimates from your sub-contractors that I mentioned earlier, subtract those amounts from your renovation budget, and what’s left is what you can use for cosmetic repairs and other miscellaneous costs like utilities, travel, etc.  Here’s a great budgeting spreadsheet.

 

Conclusion

Hiring a general contractor when you’re rehabbing a flipper or a rental house is a cost you can’t afford if you want to make any money.  The great thing is you can serve as your own general contractor by following the steps I’ve laid out in this post.  

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