Success in fix & flip investing is relative to the amount of time and personal sweat equity the investor wants to put into the property. There are four primary ways in which the investor can complete a fix & flip project when it comes to use of contractors.
Few or No Contractors – Sweat Equity
This is the sweat equity approach, often the way people who love to get their hands on the work do their projects. Usually the rehab work on the house is cosmetic and light electrical, plumbing and other work. However, even when the renovation and repair work isn’t extensive, it’s a time-consuming approach to fix & flip. Two to four projects each year are probably the norm.
Using contractor discounts at builders’ supply stores also increases the profit on each job, as the investor isn’t paying a marked-up price to contractors. While profit margins increase with sweat equity, time invested reduces the number of projects that can be completed in a given time frame. However, if an investor enjoys the hands-on approach and their ROI and overall income are acceptable, then it’s the right approach for them.
Investor as the General Contractor
Depending on local regulations and codes, in many areas the investor can be the general contractor, pull permits and order inspections. On projects with extensive repair and rehab, sub-contractors are necessary. More than one project at a time can be in the pipeline, but care must be taken to spend enough time with each job to:
- Shop, purchase and schedule materials and delivery.
- Coordinate jobsite security, waste disposal and cleanup.
- Hire and supervise all sub-contractors.
- Contract with, schedule and coordinate the work of subs.
- Pull permits and coordinate inspections.
- Regularly inspect the jobsite for quality and meeting schedules.
- Procure releases and pay subs per the contact.
With multiple simultaneous projects, all those activities will be sharing time with marketing, negotiating, evaluating, buying and selling activities as well. Fix & flip investors taking this approach may be able to effectively manage two or three projects at a time depending on locations. However, losing control or scheduling/coordination problems can be expensive problems.
Hiring a Project Manager
This approach allows the fix & flip investor to control the selection of materials and sub-contractors, increasing profits with sharp buying and negotiation skills. Either the investor or the project manager will pull permits and coordinate inspections, depending on the local regulations.
The project manager takes over all the items related to project inspections, scheduling, coordination, supervision, security, etc. Incentivizing the PM based on efficient completion of the project helps to get their buy-in for success. As the investor is selecting materials and subs and contracting them, job profitability incentives don’t work well with a project manager who has no control over those cost intensive job factors.
This approach is a good blend of control for higher profits and minimizing investor time on each project. The investor can spend more time in the activities necessary to get more properties into their pipeline.
Using a General Contractor
This is the hands-off approach. Using a general contractor, the investor hands over all project oversight to the general. Permits, inspections and quality of work is the responsibility of the general contractor as specified in the contract with the investor. While some negotiations can involve the investor selecting materials, usually it’s specifying them for the bid with the general doing the shopping and buying as a part of their contract.
In this arrangement, incentivizing the contractor based on project completion on time and under budget works well. A percentage of the amount under the budgeted overall job cost is split with the general. However, this works best when only the items and activities in the control of the general contractor are part of the calculation.
These are all acceptable approaches. Which approach is used is up to the investor and their individual goals and time available for fix & flip activities.
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