Rehabilitation is one of the main elements of the real estate business. Properties that need rehab are often places where you can make money. However, there are many potential bumps along the way, so performing and completing a high quality rehab is not easy. You need to know how all those assets are combined and you will need many different types of contractors to get your job done.
Some contractors are essential because they have knowledge of potentially dangerous systems such as natural gas and electricity. But do you need a general contractor to supervise and coordinate all this work? Or should you act as your own general contractor? There are pros and cons on both sides of this story, and I’ll discuss some of them soon. First, make sure we all understand what a general contractor is and what they are doing.
What is a general contractor?
A general contractor is the person you hire to manage, coordinate, and complete a rehab project. They may or may not be a particular merchant, but they are often the sort of “Jack of All Merchants” who have detailed knowledge of how to complete a project. They are often responsible for keeping projects on schedule and on budget, hiring and managing subcontractors such as electricians and plumbers. In most cases, you will pay and instruct the general contractor. The general contractor pays for the materials and manages the subcontracting.
Serve as a general contractor
As a real estate owner, most jurisdictions allow you to act as your own general contractor (although this depends on the jurisdiction and the scope of the project, so check your local law). Therefore, you can be assured that things will be completed on time and on budget, and you will hire and manage all other subcontractors. Why do you want to do this? Here are some ideas.
First, you can save money on the general contractor. General contractors are not going to work for free. They add an additional fee to all services they procure and supervise. This additional charge has a direct impact on your bottom line.
Second, being your own general contractor allows you to learn business. One of the best ways to learn something is to do it. There are real benefits to knowing and understanding how general contractors operate in this business.
Third, being your own general contractor means that you can actually experience the many components that go into a rehab job. It is very useful for real estate investors to have a basic knowledge of plumbing, electricity, HVAC systems, and everything else that makes a building work. Knowing and understanding the cost of materials, the time it takes to install them, and the price of the workforce is invaluable to your real estate investment career.
Finally, you can monitor things more closely and perhaps better control the pace of things. If one of your subcontractors begins to loosen or does not work according to standards, you can dismiss that contractor. At the general contractor, you probably have to go through him or her. Add another layer.
Why hire a general contractor?
By reading this far, you may already understand why you want to hire a general contractor. General contractors can be a major asset. This is the reason.
First, they know the code. Hopefully you hired someone who was recommended and reputable. They understand which permits they need to get and how to get code enforcement to approve the project. If you haven’t dealt with building codes or inspectors, this can be a big asset.
Second, they know the process to get the job done as efficiently as possible. They need to understand which components need to be completed and when, and know how to schedule subcontractors accordingly.
Third, if someone is injured, responsibility is often transferred to the general contractor. His salt-worthy general contractor has workers’ indemnity insurance to protect you if someone falls off the roof.
Fourth, they can probably get better prices for materials and labor. This is just the nature of the business. They run more volumes and already have good relationships with subcontractors. Therefore, they may get a better price and actually save you money in the long run.
Finally, they can guarantee their work. If a problem occurs within 6 months, most people will come out and try to get it right. After all, they want more business from you, and the good ones stand behind their work and reputation.
Should I hire a general contractor?
There is a good debate to be made about each aspect of this coin. Each side offers a different set of benefits, which can be very attractive to different investors.
I think at the beginning of an investor’s career, smaller tasks should be done by the investor. Doing this helps them learn many aspects of the business. Please note that I said “small job”. I’m talking about paint, carpet, and perhaps minor plumbing. Inexperienced investors should not undertake large-scale rehab work.
For larger and more complex tasks such as burnouts and additions, you may need to hire a general. These types of work can be very complex and the money you pay to the general is worth it. Still, it’s a good idea to manage your manager and check your projects often.
Finally, use a general to free your time. After all, you want to be a real estate investor, not a general contractor, right? So you do some minor work first, learn ropes, then go ahead and learn how to hire GCs, manage them, find more deals and make more money Free up your time.
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