How I Manage My Rehabs
One of the most common questions I get these days is: “How do you get your rehabs done? Do you use a General Contractor or do you sub-contract out the work directly to individual contractors?”
First, I’m happy to share how I do things, but don’t assume that this is the only way to get things done — or even the best way! Every rehabber is going to be in a different situation, and what’s best and most beneficial for one investor may not be for another investor. So, always consider what’s best for you when deciding how to handle your rehabs and don’t let anyone tell you what you should or shouldn’t be doing.
Second, let me tell you how I did things on my first couple rehabs, before I had ANY construction experience whatsoever. On the early projects, I hired a General Contractor (GC) to come in and handle everything from beginning to end. He hired the individual sub-contractors, managed the schedule, budget, etc. Of course, I had to trust him to do everything correctly (not always the case) and it cost me a good bit more, as he got paid for all this extra management work he was doing.
Ultimately, I didn’t have a whole lot of control over the project — I didn’t pick the sub-contractors, I didn’t make the schedule, I didn’t negotiate the prices for the sub-contracts, etc. Given my type-A personality, this system didn’t suit me…but doing it this way for the first few projects certainly gave me the insight into how a rehab should be scheduled, the major concerns I should be looking out for, and the big questions I needed to ask throughout the process.
Once my first couple projects were completed, I radically switched my rehab process to what it is today. Here is how I approach the two major areas associated with rehabbing properties — Management and Hiring Contractors (and even if you can’t implement my management techniques, you can probably implement my contractor techniques if you want to):
MANAGEMENT
Every rehab is going to require some level of day-to-day management. The two most common ways to handle management are to hire a GC — who in turn deals with all the management issues — or to manage the project yourself — in which case you are responsible for dealing with all issues.
The benefits of the GC route is that you won’t need to be on-site all-day, every-day to handle the issues, you won’t have to hire and oversee the sub-contractors yourself and you know that the person in charge has construction background and experience. The downsides to using a GC are that you WILL pay more than if you manage the project yourself and you don’t have nearly as much control over the sub-contractors and their prices.
I actually went a third route for management — I hired a full-time project manager to be my eyes and ears for all my rehabs. His job is to interview contractors, get bids, negotiate prices, schedule work, verify that quality is maintained, ensure that we stay on budget, write checks for completed work, procure materials and basically keep me informed about everything that I might need to know without me having to visit the property every day (I tend to see every project about once per week these days).
My project manager is probably just as expensive as a GC (so I’m not saving money), but because I know and trust him, and because much of his salary is based on commission, I can be sure that the right decisions are being made for the project (as opposed to what will put the most money in my GC’s pocket). Also, because he is only working on our projects, he is always accessible and he knows how we do everything, right down to the paint colors we use and the materials we choose.
Now that he’s been with us for nearly three years, he knows as much about our business as I do, and I can trust him to make the right decisions (or consult me if he’s not sure) every time there is an issue. Because he has authority to write check and hire/fire contractors, the contractors we use have a lot of respect for him, and treat him like “the boss.”
While the option of having a full-time project manager may not be feasible for investors who aren’t rehabbing full-time, for those who are, you may find it costs about the same as hiring a GC on every project, but offers MANY benefits. Of course, you have the overhead of having to manage and deal with a full-time employee, but the benefits highly outweigh the downsides, at least in my experience.
Btw, if you can’t or don’t want to hire a full-time employee to project manage for you, another option is to find someone who will do the job as an independent contractor and work strictly on commission. Lastly, if you have the time and knowledge, perhaps you can put yourself in the project management role for the first few flips until you have the volume to hire an independent contractor or employee.
CONTRACTORS
Because I don’t have a GC to provide all the sub-contractors for our jobs (and I wouldn’t want that anyway), I have the opportunity to hire the specific sub-contractors I want to handle the various aspects of the renovations.
One of the big decisions we’ve made that has made our lives much easier in this business is to hire much of our rehab work out to one company, who is responsible for most aspects of the renovations. Specifically, they handle all of the following for us:
– Basic Carpentry (Handrails, Decks, Subfloor, Doors, Basic Framing & Repairs, etc)
– Painting (Interior/Exterior)
– Sheetrock Repair & Replacement
– Basic Electrical
– Basic Plumbing
– Installing Carpet/Vinyl
– Installing Flooring Trim
– Exterior Repairs (Siding Replacement, Soffits, Fascia, Trim, etc)
– Pressure Washing
– Gutters
We call them our “main crew,” and in general, they handle all aspects of the project that don’t require state licensed contractors, permits or highly specific repair work.
Here is the list of other contractors that we bring in as needed:
– Licensed HVAC Contractor
– Licensed Plumber
– Licensed Electrician
– Roofer
– Expert Carpenter / Deck Builder (for big/intricate jobs)
– Cabinet Supplier/Installer
– Window Company (Supplier/Installer)
– Countertop/Tub Refinisher
– Sheetrock Installers (for very large jobs)
– Hardwood Floor Installer
For a typical project, our main crew will do about 75% of the work. They are the first on the job (they do demo), the last on the job (punch list) and are there almost every day in between.
While the main crew definitely have a scope of work for each job (and get paid by the job), they know that their job is to ultimately make the house look perfect, whatever it takes. For example, if they’re hanging drywall and notice that some framing has rotted or has termite damage and my project manager and I can’t be reached, they won’t wait around for us to tell them what to do — they will fix it, let us know about it at the earliest convenience and, if it was more than a $50 fix or so, they charge it to us at the end (if it’s a cheap fix, they may not even tell us about it until it comes up in conversation later). Also, if they notice something needs to be fixed that we didn’t initially ask them to fix, they’ll just do it, as they know it has to be done eventually.
Most people are probably thinking, “I wish I could find contractors who are willing to do more than necessary and will go out of their way to fix things they haven’t been asked to fix!” but this is one of the perks of using the same crew over and over again (and also recommending them out to everyone we know).
Another nice thing about having a general crew that does most of the work is that you don’t need to deal with a lot of scheduling issues. Not only do they know what to do and in what order, but there are always little nuances to scheduling that now take care of themselves. For example, if you repair sheetrock and paint early in the project, you will find that there’s often a lot of touch-up needed after the flooring goes in, the cabinets go in, the light fixtures go in, etc. But, if you hold off to repair sheetrock and paint until later in the project, you need to be a lot more careful about not screwing up the stuff you’ve already done.
Our main crew of guys are doing touch-ups (sheetrock, paint, trim, etc) throughout the project, and there’s always at least one guy with a paintbrush in his hand at all times just touching-up as necessary (and as we point things out).
Obviously, it takes a while to find a crew that you can trust like this (I would trust most of my contractors to babysit my 1 year old son), but once you do, this business becomes about 100 times easier.
We learned early on that you shouldn’t be scared to go through 100 contractors to find 3 or 4 good ones. Don’t settle for mediocre. If someone does a decent (but not spectacular) job on a project, it’s tempting to keep him around as you know you’ll at least get decent performance on future jobs; but in my opinion, I’d rather cut him loose and try to find someone who is better than decent.
Last thing I’ll say on this topic: When you find a great contractor, treat him/them like gold. It’s taken us about 2.5 years to find a great group of subs, and all the effort that went into it was well worth it and — unless there is something really out of whack — we don’t even negotiate with most of our guys anymore. They know that as long as they give us fair prices and do great work, it will be a long-term win/win from both sides. This is the sign of a great long-term relationship, which should be the ultimately goal for all your contractors.
J Scott,
You mentioned that your Project Manager is on a salary plus commission schedule. Can you shed some insight as to how you arrived at this arrangement? Since we know you are a numbers guy, is it based on the profit, meeting a the deadline you have established, etc? Have you had to modify it over the past couple of years or has it always been the same?
Finally, I would think that having a full-time employee could force you into trying to make a property purchase work in order to keep them busy during a slow stretch even though it might not meet your ideal requirements. Have you run into this or has it even been an issue?
I’d also be interested in more info on the numbers involved with having a full time project manager. Seems like it could really reduce my workload.
Hey Ryan –
Very good questions!
1. We’ve actually been on the same salary/commission schedule for the past 2.5 years, and it’s working very well. Basically, he gets a monthly salary (which ensures that he gets a check every month, even if we haven’t sold a house that month), plus he gets 15% of the profit on every house. So, his goals are aligned with our own (keeping budgets down, keeping schedules short, negotiating low contractor bids, etc). While I could probably get a GC for less money, there are several reasons why this arrangement is MUCH better for me:
– I trust him more than any non-employee I’d ever have;
– He is full-time, so I can have him do much more than just the rehab stuff (help with looking at new acquisitions, help with staging, help with marketing, etc). Ultimately, he’s become my wife and my right-hand-man in all aspects of the business;
– He only focuses on our projects, so he’s never off working somewhere “more important”.
2. There have certainly been times that we’ve been slow where I’ve been concerned that he wasn’t keeping busy or getting a good opportunity to make commissions. He understands that this is part of the business (things can be very cyclical) and plans for it. Plus, during those times, my wife and I are probably focused on other aspects of the business that generate some income (like staging or doing rehabs for other investors), and he gets a percentage of that profit as well. Worst case, he gets a week or two of rest when we’re slow, which he doesn’t seem to mind too much. 🙂
Great article. I have been working along the same lines without a employee. But helps to have reassurance!!
Hi Josh –
See my response to Ryan above…
In general, here is what you need to expect in terms of costs/issues of having a full-time project manager:
– Total salary for the year will reduce your income by the same amount, so if you’re paying someone $40,000 per year, expect your income to be reduced by the same amount;
– You’re going to pay payroll taxes on your employee’s salary and commission. This ultimately ends up being about another 15%.
– You’ll probably want to provide some tools so that your PM can do some work while on the job. For example, my PM does all the door-knob replacements, mini-blind installation, installing all new outlets/switches in every house, plus lots of the minor handyman stuff (installing shower doors, replacing cabinet hardware, installing mirrors, etc). The cost of the tools is EASILY offset by the labor savings of having the PM do this extra work.
– I always offer to pay for my PM’s lunches, but he doesn’t tend to eat during the day, so he saves me money there… 🙂
All of these things are tax deductible to the business, so the cost is somewhat less.
Another option, btw, is to hire an independent contractor to do this for you. You’ll save on payroll taxes and some other expenses, but you have to be careful that the person really is acting as a IC and not an employee, or the IRS won’t be very happy.
Once you hire an employee, don’t you then also have to get Workers Compensation Insurance coverage as well?
Hi TK,
Great point!
It depends on the laws in your state. Generally, once you have a specific minimum number of employees, workers comp is going to be required. In some states, this minimum number may be one, so certainly be aware of your state laws…
Can you have him hired as independent contractor, or do you have him as employee? I assume the first one. I found your concept intriguing, but perhaps hard to replicate without high volume of business.
Jason,
I spoke with Will Barnard, recently. I asked him which Bigger Pockets members he thought highly of. Your name was the first one off his lips. After reading quality posts like this, I see why.
Kudos for a great post. I learned a ton.
All the best,
Anthony Russell
Fellow BP’er
Vic –
Using an independent contractor instead of a full-time employee is a great in-between step! In fact, my full-time project manager started as an independent contractor for the first 6 months or so, until he came on full-time. The nice thing about an IC is that you can pay him strictly on commission, so, as you point out, if you don’t have the volume for a full-time employee, you may still have someone to manage for you part-time.
Thanks Anthony! I really appreciate that…
Another great article J Scott. Question: How many guys are on your main crew?
beatifull man god bless a lot people doing rehab job dont unterdestand that thank you
i want if you can tell me how can i whrite a real estate rehabbing business plan that can bi good direction for my company and acepte by the bank thank you wakal07@hotmail.com you can email here, have a good one
Thanks J
As always I enjoy your writing.
Billy
Hi J,
I always like to read your articles because I want to get into the rehabbing business. I have been a new home builder general contractor for many years and we always employed all of the subcontractors for the specific jobs of building a house.
I am intrigued as to how you went about finding ONE company to do all of the activities that you described in your article. I don’t know of companies that will do all of that under one roof.
How did you find them? Please reply to my email since I don’t know how to come back and get your answer here if you would please. I would appreciate it…
Thanks again for sharing!
Chris
chrisbarry1313@gmail.com
Hi Chris –
There are lots of companies in my area that do “general repairs” like this. Most of them are primarily painting companies, but they have the ability to do other related work, like sheetrock, siding, basic carpentry, etc — all the stuff that is required for many painting jobs.
The company we found is also primarily a painting company, and that’s what we originally hired them to do. During their first job for us, they saw some other handymen and subs we used and asked if they could bid that work in the future as well. Ultimately, they bid all the exterior repairs, all the sheetrock work, all the basic electrical, basic plumbing, basic carpentry, etc, and because they could manage it all themselves, we were happy to give them a try. Turns out that they have different guys with different sets of skills, so they could do it all very well. They also introduced us to their flooring and gutter guys, and now we hire those guys right through the same company as well.
Thanks J,
There are some companies in my area that advertise in small newspapers under the home improvement category as “home remodel and repair.” I always think of these companies as working with homeowners that live in their homes and don’t think of them working for re-modelers. I guess I think of them as wanting to make as much profit as possible and would not be economically feasible.
I have started a new category in my phone book for handymen thinking these guys are small companies that handle a couple of the items you need taken care of. I will have to contact some of them when I am ready and find out the specifics.
Good idea!
Thanks again
Chris
Chris –
I recommend starting with the mid-sized painting companies. You don’t want the one- or two-guy companies and you also don’t want the big franchise companies, but the ones in-between. These are the independent guys who probably have 5-10 people working for them, and among those 5-10 painters, they probably have a bunch of related skills (drywall, trim work, siding work, etc).
In fact, you can probably call these companies and ask directly, “Do you do any other work besides painting?” You’ll probably be surprised how many of them do!
Cool!
That would be perfect to be able to consolidate all of those activities.
I gutted and redid that home that I live in and hired one of our carpenters that was a jack of all trades to help me. He did drywall, electrical, plumbing, cabinet and counter installation, and so forth. To find a company that you could rely on to do all of those and a few more would be great!
I assume that you get a permit when doing a home remodel. Where I live, you can get an integrated permit that covers carpentry, electrical, plumbing, and HVAC. In your article you mention the handyman company doing basic plumbing and electrical. I guess you have to make a decision upfront as to when plumbing and electrical goes from basic to major and requires a licensed professional and permit.
If you have the handyman do the plumbing, electrical, or HVAC and the inspector notices that, doesn’t that present a problem?
Chris
All great tips here on managing rehab projects.
What are some of the largest properties you’ve managed with this system? I see you flip a lot of properties but I’m wondering if you’ve also flipped multifamily unit or commercial properties with this same approach and if so where there additional items that tend to also work well to incorporate in to the project management plan when working on larger projects?
As always, thanks for all the great insight and for helping others in the real estate industry learn and grow with you as you master the business we’re all in.
Hi Sebastian –
At this point, we’ve only flipped single family homes, but if/when we start working on larger projects, I expect the process to be relatively similar. There will be some additional management overhead and we may need to get multiple contractor crews in, but unless it were a very large project (more than one apartment building), I don’t imagine it would be too drastically different.
Hopefully we’ll find out soon… 🙂
I’ve been working these past two week calling GC non-stop. It really is difficult finding the right one.
Fernando –
See my response to your previous comment — consider managing the subs yourself or try asking another successful investor for a GC recommendation.
Scott,
How would you pay your IC on a commission basis, what % or amount would be fair?
Alternatively, do you include or separate his pay into the bid? How would you show it?
Hi Coho –
I never liked the idea of paying contractors on a commission basis. And I don’t think most of them would like it either. They’d probably like it if they made more money that way, but then I wouldn’t like it. And I’d probably like it if I had to pay less that way, but then they wouldn’t like it. All in all, I don’t see much value in paying contractors anything other than a fixed price per job.
J Scott:
I see you pay salary plus 15% to the pm on a flip.
If you hired an ic to manage the flip and only paid commission on a per job basis, what % would you pay?
Thanks,
Doug
Hi Doug,
If I were to hire a GC to manage my rehabs, I’d likely pay between 7-10% of the rehab costs to the GC. Typically, GC costs will run 10-20% of rehab costs, but since I’m doing a relatively large volume, the GCs I’ve spoken with have offered that lower amount.
Not sure if you’re trying to compare which pricing is better, but keep in mind that my PM is getting 15% of the profit (not rehab costs), so it’s difficult to make an apples-to-apples comparison. Also, the scope of my PM’s responsibilities is MUCH greater than a GC — he’s involved in the process from the very beginning (including acquisition of houses) to the very end (including marketing, sales, inspections, appraisals, etc) and everything in-between. A GC is only going to be involved in the rehab.
Ultimately, it would probably be a little bit cheaper to hire a GC, but my PM does about 3x as much work as a GC would do…so financially it works out in my favor.
Hi J,
I was wondering if your Project Manager has his PMP certification. If not, what are his credentials to be considered a Project Manager?
Thank you!
Hi Landon,
My PM has no certifications. His only credentials are that he is great at his job and he makes me (and himself) lots of money, which is more important than any coursework or certificate he could have… 🙂
Hi,
I really enjoy reading your posts. Very informational. I was wondering if it made sense to offer my realtor (I can’t get my realtor license b/c I’m Canadian) a salary for project manager duties.. I trust him enough to be able to do the task, but I was wondering if I could offer him salary, along with a small portion of the profits to keep his interest aligned with mine. If I were to do 12 flips a year around 200k on average he is making over 10k per property on commissions to buy and sell it. Do you think this is reasonable? Thanks…
Hi Taylor,
You can certainly make this offer and see what he says. A couple things to consider though:
1. If he’s a full-time agent and good at his job, he probably won’t have the time to devote to other tasks (being a full-time agent takes a LOT of work to be successful);
2. You may be able to find someone who specializes in project management of rehabs who has better skills in this area than your agent does;
Hi J,
I was wondering if you think you’ll ever get to the point to where you can step away from the business and let your project manager essentially run your business for you?
Thanks.
Taylor
Hey Taylor,
The way the business is currently run, I believe that I can be 80% uninvolved and the business will keep running as it currently is. But, that last 20% will be difficult to automate, as those are the tasks that I find very difficult to outsource (finding deals, finding funding, making design decisions, etc). I’m not saying it’s impossible, but I’d probably need to rework the business if I ever wanted to be 100% uninvolved.
J Scott,
What did this PM do to catch your attention? It seems that with a guy as detailed and as organized as you, it would be difficult to find someone to trust. Moreover, if this guy is that good, why wouldn’t he be doing this kind of thing for himself?
Hey Todd –
My Atlanta PM is my brother…which certainly helps with the trust… 🙂
My Milwaukee PM we work a little bit differently…I’m actually planning to write a blog post about that in the very near future…stay tuned!
great stuff THANK YOU!
J Scott
Very informatory and good blog. I hope as much as i get information from this many other can also. Awesome work keep it up.
When using the PM, who pulls all the permits?
Hey Bill –
If we need permits, we use licensed contractors who can pull them. In cases where the owner is allowed to pull permits (some jurisdictions), I will generally have my PM pull them in my name.