Maximizing Real Estate Investments: The Strategic Use of General Contractors

Maximizing Real Estate Investments: The Strategic Use of General Contractors

One of the most effective strategies for increasing profit on a real estate investment is purchasing a distressed property—one that requires varying degrees of renovation. Whether it's a complete overhaul or simply a bit of TLC, such properties often present opportunities to add significant value.

The Role of a General Contractor in Real Estate Investment

Once you've committed to a renovation project, the next critical decision is determining who will perform the work. You have three primary options:

  1. DIY Approach: Undertake all the work yourself, which is feasible only for very small projects.

  2. Owner-Builder: Act as your own general contractor, managing and contracting with various subcontractors such as electricians, plumbers, and framers.

  3. Hire a General Contractor (GC): Engage a professional GC to oversee the entire project. GCs typically have their own teams, trusted subcontractors, and established relationships with vendors and suppliers.

When to Opt for a General Contractor Over Self-Management

Not every renovation project warrants a GC's oversight. Smaller projects or simple updates might be manageable for a seasoned investor. However, it's generally unwise for a novice to manage their first renovation project alone, particularly without the necessary skills to ensure timely and budget-friendly completion.

Be aware that some states restrict investors from working on their investment properties, permitting renovations only on their primary residences. Always verify local regulations.

An experienced GC brings a wealth of completed projects and expertise in handling subcontractors, building inspectors, vendors, and suppliers. This proficiency helps keep your project on schedule and within budget. Achieving this level of efficiency as an owner-builder demands years of experience and numerous successful projects.

Financial Considerations: The Added Value of a General Contractor

A GC usually adds a markup to subcontractor fees and some materials, typically around 20%. For instance, if a plumber charges $5,000, the GC might bill you $6,000 for plumbing, covering their overhead and ensuring a modest profit for their project management.

Although it may seem costly to pay someone to manage tasks you could potentially handle, consider that a competent GC can offset their fees. Their established relationships with reliable subcontractors often yield lower prices than those available to an individual investor. Furthermore, their streamlined coordination can prevent costly delays.

Selecting the Right General Contractor

Choosing among the many available GCs can be daunting, especially for newcomers to real estate investment or renovation. Despite their advantage in experience, you can level the playing field through thorough research—similar to how you would select a physician without a medical background.

Here are steps to help you choose the right contractor:

  • Research: Look for GCs with strong reputations and substantial portfolios of completed projects.

  • References and Reviews: Check references and online reviews to gauge client satisfaction and reliability.

  • Interviews: Conduct interviews to assess their experience, approach to project management, and communication style.

  • Licensing and Insurance: Verify that they are properly licensed and insured to protect yourself and your investment.

Tips for Choosing a General Contractor for Your Project:

  1. Get Multiple Bids: Obtain at least three bids for your project. If possible, seek referrals from friends and colleagues to ensure you receive reliable recommendations.

  2. Check Licensing: Verify that the contractors are licensed in their municipality if required. Consult the State’s Registrar of Contractors to confirm that their license is in good standing and free of any black marks.

  3. Verify Liability Insurance: Ensure that the contractor has adequate liability insurance and request to be named as an additional insured on the project. Ask to see proof of a valid policy to avoid any potential issues.

  4. Worker’s Compensation Insurance: This is crucial. Confirm that the contractor has worker’s compensation insurance and ask for proof. Do not simply ask if they are insured. If they or their subcontractors lack this insurance, any worker injury could lead to legal action against you, the homeowner.

  5. Review Proposals and Contracts: Request to see a proposal and contract from another job. These documents should be well-worded and comprehensive.

  6. Inspect Previous and Current Projects: Ask to see other projects that the contractor has completed or is currently working on. A walk-through of a current project can reveal much about their operation and job site management. Observe whether their sites are neat and clean, and inquire about customer satisfaction.

  7. Define the Scope of Work: Obtain a detailed scope of work that lists everything included (and not included) in your project. Clarity from the beginning will prevent misunderstandings and headaches as the project progresses. The most common causes of delays and cost overruns are unclear expectations and communication failures.

  8. Limit Advance Payments: Never pay more than 10% upfront, regardless of what the contractor requests. Many states have laws limiting advance payments to 10% or $1,000, whichever is smaller. Contractors can start receiving draws once they are on-site and making verifiable progress. Avoid contractors who resist this approach.

  9. Insist on Lien Releases: Before making payments for subcontractors, such as the electrician, insist on obtaining an unconditional lien release through the general contractor. This ensures that all parties have been paid and you are protected from future claims.

  10. Include a Schedule in the Contract: Make sure to include a project schedule in the contract, even if it is challenging to stick to it. An estimated completion date provides a reference point for managing progress.

Conclusion:

Although investors or homeowners might think they can save money by managing a construction project themselves, it's often not the case. The combination of lost time, budget disputes with subcontractors, and missed opportunities for savings that general contractors can secure makes a compelling case for hiring a trustworthy GC.

The best way to advance your project and maximize your profit is to find a skilled general contractor. Once they fully understand your goals and vision, allow them to leverage their expertise to bring your project to fruition.

 
SCOTT JACOBS
(703) 346-5855
scottjacobsbroker.jacobsandco.com


 
JACOBS & CO. REAL ESTATE, LLC.
12923 Fitzwater Dr. Nokesville, VA 20155 
(703) 594-3800 | jacobsandco.com

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