Real Estate Investing: Want It Done Right? Don’t Do Everything Yourself!

by FI Fighter on December 18, 2013

in Real Estate Thoughts

contractor

We all can’t be masters of everything. In fact, most people work in specialized jobs, spending an entire career building up skills that are only a subset of a more vast discipline of study. There just simply isn’t enough time or energy in a lifetime to be good at everything. So, ask yourself this – Do you really want a critical task to be performed by an expert in the field, or you yourself, a jack of all trades (but perhaps master of none)?

Rely on Experts

Albert Einstein was a genius, perhaps the greatest physicist of all time. But even he resisted the quantifiably accurate empirical data of Quantum Mechanics. “God does not throw dice,” Einstein argued. Yet here we are today, making use of transistors, lasers, and this new thing called Quantum Computing. Are you as bright and gifted as Einstein? Even he did not know everything! What makes you think you’re the best candidate to perform every task that needs to be done?

Outsourcing

Relying too heavily on yourself is also a waste of time. Even if you did know how to do EVERYTHING, would it be worthwhile for you to do it? This especially rings true for busy real estate investors who are already operating with a full time day job. If working for the man already earns you a hefty salary, would it really be the wisest use of your time to spend hours driving around the block collecting paychecks? Or, screening every tenant application and doing background checks? Don’t forget, your time is money!

You are only as good as your weakest link. Going back to the idea that one person probably doesn’t know everything, you really owe it to yourself (and your financial well being) to hire experts to back you up. Even if you have pay more, you’ll get your money’s worth by insuring you get it done right.

Here are some things you might want to consider outsourcing:

1) Real Estate Agent

When starting out, you must make sure to hire a good real estate agent. I won my first deal in 2012, competing against 20+ bidders. It was a complete seller’s market, so I knew my odds of winning were not good (especially against all cash buyers).

How did I end up winning? I hired a shark for a real estate agent. This guy has a Type A personality, responds to e-mails within minutes, and regularly works until the wee hours of the morning to get things done. Originally, I was the backup offer, but my agent still wouldn’t give up.

Through continued persistence, I was able to get another crack when the financing fell through for the original buyer. My agent was the first agent to find out. As soon as he relayed the message over to me, we submitted our offer within one hour of learning the news. Before midnight that night, we had secured the deal. The contract was signed and delivered before any of the other agents even knew that a second chance was made available.

2) Mortgage Lender

Before getting into contract, you must first decide if you want to purchase using a loan, or all cash. If you wanted to “do it yourself”, you would win with cash and bypass the middlemen (lenders) entirely. However, interest rates are extremely low these days, so run the numbers before deciding. If you did decide to take out a loan, you would have to pay additional fees and expenses. Still, the cash-on-cash returns may far exceed what you would get if you bought all cash.

For instance, if you had $120,000 in cash, you could buy a SINGLE property outright. With a Cap Rate of 10% (very good, these days), your annual return would yield $12,000/year, or $1000/month. On the other hand, if you decided to go with financing, you could take out FOUR loans ($30,000/each on 25% downpayment) with that same capital. Plugging in a cash-on-cash return of 15% (made possible by low interest rates), your annual return would now yield $18,000/year, or $1500/month. By not doing it yourself, you could potentially be adding an extra $500/month in cash flow.

3) Home Inspector

Home inspection is probably the most overlooked but important process of buying a home. Sure, you walked around and toured the place yourself… From the surface, the hardwood floors look clean, the walls are freshly painted, and the stainless steel appliances pop, but is that enough to get you to deposit your hard-earned savings into escrow? What really lies beneath? How’s the foundation? Are the pipes old and corroded? Is the electrical up to date and capable of delivering heavy loads? What about the roof, furnace, and water heaters? Oh, and don’t forget about termite inspection (usually a separate inspection) and to check for proper seismic bracing support (if you live in an earthquake prone area like California).

That’s a long list of things to check. For a fee of $300-$600, it’s well worth it to hire a trained expert who won’t overlook these critical items. Some of the biggest expenses for new homeowners are for items that the untrained eye cannot detect. Don’t be one of the many who makes the mistake of buying a home and then finds out they need to drop an additional $20,000 to fix a foundation problem.

4) Leasing Agent

After winning a property, you have to lease it out to a tenant if you want to make any money. This step takes up a lot more time than most people realize. You have place an ad on Craigslist, or market the property through Zillow, Redfin, Trulia, etc. Then, you have to screen the tenant and do background checks, crime checks. Further, you have to verify the potential tenant’s employment and earned income. Lastly, you have to schedule a showing and negotiate the rent/concessions. After all that, the deal may still yet fall through. If it does, you have to repeat the entire process all over again. Make life simple for yourself and hire a professional company/agent to do all this work for you instead.

5) Property Manager

If you own rental property and don’t want to take those 3:00 AM phone calls concerning broken toilets, consider outsourcing the work. The key is to focus on acquiring cash flow properties that still deliver solid returns, even after factoring in the PM fee. Most PM’s charge 8% or 10% of gross rent each month. This fee isn’t outrageous, and is well worth it, especially if you own multiple properties.

As an example, I own a few out-of-state properties that cash flow more than 15%. There’s enough room in the budget to add a PM and not worry about going cash flow negative. Always work with a cushion, and budget enough room for a PM, even if you don’t have intentions on using one at first. You just never know. By hiring a PM, I don’t have to do anything… I simply collect the rent checks.

6) Real Estate Attorney

Buying property isn’t the same across all 50 states. Each state has its own rules and customs. I didn’t know this when I first looked into out-of-state investing. Initially, I was going to try and close my first property in Chicago myself. I did my research and realized this probably wasn’t going to be a good idea. I decided to hire a real estate attorney to be safe. Since I’m busy most of the day at work, I really don’t have the time (or energy) to read through all the fine print. I’m familiar with the laws in California, but my no means does that make me an expert in other markets.

Further, if this is your first time buying out-of-state, you need to make sure the title and contract are free of errors, and accurate. Don’t just trust the seller, and be extra cautious about being scammed. There are a lot of dishonest people out there looking to make a quick buck. The attorney fee for my Chicago purchase was a flat rate of $600. As part of the service, the attorney also went to the title company to sign on my behalf (power of attorney) on the day of closing. This action alone made the entire deal worth doing. $600 isn’t much money to spend for peace of mind.

7) Tax Consultant

One of the major perks of buying real estate are the tax deductions you can get back come tax season. For whatever reason, a lot of people would rather do taxes themselves than to hire a professional. I can’t for the life of me figure out why? Taxes aren’t exactly the most exciting thing in the world, and they are extremely time-consuming to complete. In addition, there are so many rules/loopholes/tricks available, that unless you study this stuff 24/7, you wouldn’t even know about most of them. As an investor, you can be certain that I want to maximize my returns. So, find me an expert and let’s deduct as much as possible.

There are so many things you can deduct – depreciation, mortgage interest, property taxes, insurance, CAPEX, etc. I don’t want to make a mistake and miss anything. Throughout the year, I make sure to save every receipt on rental property expenses. This includes things like: air fare, hotels, gasoline, taxis, car rentals, maintenance items, etc. That’s right, if you own properties out-of-state, you are allowed to make two trips out each year, and you may deduct your travel expenses.

If you own multiple properties, going through and itemizing each and every item is a total time drain. It’s just not worth your effort… let someone else do it. Just remember to save receipts for EVERYTHING!

8) Contractor/Handyman

Everyone seems to think they are a handyman these days. Thanks to youtube and the many home improvement shows on air, suddenly everyone is a do-it-yourself expert. I understand that people like to take pride in being able to fix something themselves, so for the minor items, go ahead and get your fill. Put up the new blinds, or install the GFCI outlets yourself.

Anything else that takes more than a few hours, or days, be sure to outsource to a local expert instead. For the big jobs, not only will you save time, but it’s very likely that your contractor/handyman can procure materials for cheaper than you can. They can reuse materials from their previous jobs, network to get wholesale prices, or buy in bulk to get deep discounts.

9) Turnkey Companies

Turnkey companies are kind of a new concept in real estate investing. In the past, most everyone who bought real estate completed each of the phases themselves:

  • Hire an agent. Bid and win on the property.
  • Hire an inspector, verify, then close the property (Loan or all cash.)
  • Hire contractor/handyman to handle repairs.
  • Market the property, do background/criminal checks, and lease to a tenant.
  • Run the property management.

As you might imagine, handling all these tasks yourself can consume a lot of time. Thanks to turnkey companies, there are providers out there who take care of every step of the process for you. They will sell you the property directly, so you don’t need to hire an agent. Also, the property you purchase will have been fully rehabbed (hence the term turnkey), most likely by a construction crew that is also owned by the turnkey company.

Further, a lot of turnkeys will lease out the property for you and run the property management. As a matter of fact, a lot of these deals are structured so that a condition to close requires that not only the rehab be fully completed (and free of any defects), but that a tenant be in place and signed to a 1 year lease. Extra incentives commonly offered are 1 year rent guarantees and 1 year maintenance-free guarantees.

Does it sound too good to be true? Well, of course there is a catch. Like most things in life, convenience comes with a price. In the case of buying turnkey, you can be certain that you won’t be purchasing the property at a deep discount. Most likely, you’ll be paying close to retail price. However, if you’re an out-of-state investor, buying turnkey may still make the most sense.

For those who live in expensive areas where housing is not affordable (e.g. Bay Area), the returns turnkey properties offer may still trump what you can get locally. Since it’s much more difficult for a local investor to oversee an out-of-state rehab, buying turnkey might be the best (and most logical) option, even if you do have to pay a premium.

Your Time in Precious

Never forget to place an important value on your time! Really, what’s the point of achieving financial freedom if you’re going to be spending every waking minute managing all the minor details? And who’s to say you’ll even come out ahead doing it yourself? Do you not make mistakes? Are you really an EXPERT at everything you do?!? Probably not… So, why not build a strong, competent team around you instead? Let your lawyer focus on the law… and your tax consultant focus on taxes… Hire the right people and trust that the job will get done right.

If you are investing your capital wisely, your cash flow numbers will be great. You’ll have more than enough margins left over to outsource the work to other people. So, please, let the real professionals manage the day-to-day operations for you.

Go out, relax, and enjoy your free time with friends and family, instead. You deserve it! :)

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{ 17 comments… read them below or add one }

ElroyNo Gravatar December 18, 2013 at 7:53 am

My hat is off to you with all this real estate stuff. It makes my head spin!

Reply

FI FighterNo Gravatar December 19, 2013 at 11:17 pm

Elroy,

Yeah, real estate can involve a lot of work… which is why I try and outsource as much as I can.

Cheers!

Reply

moneyconeNo Gravatar December 18, 2013 at 7:53 am

I don’t own rental properties, but if I did, I would just outsource it all for a fee! I can’t see myself stressing over day to day issues of tenants! But glad to see other options around!

Reply

FI FighterNo Gravatar December 19, 2013 at 11:18 pm

moneycone,

If you buy right, you should have enough margin to outsource all the work. After I reach FI, I don’t think I would want to deal with stress/tenants everyday either…

All the best!

Reply

Done by FortyNo Gravatar December 18, 2013 at 9:28 am

I really like the approach you’re proposing here. As you know, I’m a proponent of outsourcing when it makes sense for your finances and personality.

We are looking to invest in property, perhaps out of state in Texas, so we’ll look into a turnkey company and run the numbers. I really don’t want to deal with the headache of trying to do everything from another state, or in flying back and forth all the time. That may be the smartest option if the numbers can work.

Reply

FI FighterNo Gravatar December 19, 2013 at 11:19 pm

Done by Forty,

Yeah, if you look out of state you’ll most likely need to outsource the work since it would be really difficult for you to manage from afar. I also have plans to get into Texas, and just like with my other properties, I would look to go the turnkey route at first.

Take care!

Reply

JC @ Passive-Income-PursuitNo Gravatar December 18, 2013 at 1:03 pm

Out of state and outsourcing is a no-brainer. Even being in-state it’s probably worth it just for the more hands-off approach to outsource as much as you can. As we’ve discussed, I’ll be needing a PM company due to my work situation, but I can’t wait to start moving forward towards REI and diversifying my income sources even further. Taxes will probably getting outsourced for next tax year, especially if we pick up that rental property. Our situation just gets more and more complex and I’m tired of thinking about it. Plus there’s no way a non-professional is going to know the ins and outs of the massive tax code.

Reply

FI FighterNo Gravatar December 19, 2013 at 11:21 pm

JC,

Yeah, if you’re work situation doesn’t allow for it, you should outsource as much of the work as possible. You just have to make sure you hire the right PM, otherwise it will still become a time drain… Easier said than done, of course.

I’m also finding my own tax situation becoming more complicated each year. I stopped doing my own taxes many years ago… Would never consider doing them myself again… just takes far too much time.

Take care!

Reply

Kate SNo Gravatar December 18, 2013 at 1:39 pm

I’ve been trying to buy rentals (primarily multifamilies) in Orange County (where I live). Even in the neighborhoods where there is the highest likelihood that the numbers will work (Santa Ana, Anaheim, Costa Mesa), the numbers still don’t work. Shocker. I am a young attorney at a big law firm, do some real estate litigation and got my real estate brokers license on the side so I’m rather experienced and can handle my own in these transactions. I haven’t been interested in investing out of state until I started reading your blog and now this turnkey thing in today’s posting is something I was completely unaware of. I’d like to know more about both if you don’t mind sharing. I’d love to hear about how you find the properties out of state. I had been nervous about doing so because they aren’t easy to manage or fix if your aren’t in the same town. Also, have you used turnkey companies to help you buy? If so, do you have recommendations and what did you think of the experience?

Reply

FI FighterNo Gravatar December 19, 2013 at 11:24 pm

Kate,

I hear your pain, Orange County is extremely pricey, just like the Bay Area. Please send me a message if you get a chance, and I can discuss with you some more about out of state opportunities, and my own experience.

Yes, I do use turnkeys for my out of state properties. For myself, I was very skeptical at first and didn’t know who to trust, so I made trips out there to meet the local teams. You have to be careful and make sure you perform you due diligence… So far, things have been working out great… probably as good as can be expected (really not trying to hype it up any).

Cheers!

Reply

PullingmyselfupNo Gravatar December 19, 2013 at 4:42 am

Excellent post. Can’t agree enough with your points of getting help. People specialize in their field and its well worth their fees for what you get in return.
Probably above all is your point of your time is important. I see too many people try to do it all themselves with their rental property.
Not only is everything done mediocre but they spend all their time getting half ass results.

Reply

FI FighterNo Gravatar December 19, 2013 at 11:26 pm

Pullingmyselfup,

Thanks! It is important to remember your time is money… So, you can try and do it yourself, but if it takes you much longer to finish the task than if you outsourced, it might not be worth it. And if your quality of work isn’t any better, why bother doing it yourself?

Take care!

Reply

Retire Before DadNo Gravatar December 19, 2013 at 5:22 am

FIF,
I manage my own local property. I did a lot of work upfront before they could go wrong. My tenants are cool so far. If I buy another, I’ll definitely need a good agent, but not sure how I’m going to go about finding the right one. The agent that helped us buy our house is probably not right. I’m going to try Bigger Pockets. Any other suggestions?
-RBD

Reply

FI FighterNo Gravatar December 19, 2013 at 11:28 pm

RBD,

Like you, I also manage my two local properties. Those are doable and don’t require too much work (time) from me, so I don’t mind doing it. If they ever became too time consuming, I wouldn’t hesitate to outsource the work.

I’m not too sure where the best place to look for an agent would be… I tried google search and trulia… redfin might work as well… I was referred to a few local agents, but they weren’t very good so I didn’t stick with them.

Take care!

Reply

ScottNo Gravatar January 26, 2014 at 6:31 pm

Just found your blog today and I’m really enjoying it!

What turnkey companies have you used?

Reply

JimNo Gravatar February 9, 2014 at 7:34 pm

FI, may I add one more important person for your team…A CPA who knows a thing or two about real estate investing. We used to have an accountant who knew nothing about real estate investing and as a result, he wasn’t able to save us anything on our taxes. A couple of years ago we were blessed with meeting a great real estate investor who was also a CPA and he changed our life, literally! Tax help is so important, be sure to use one who shares your same investment strategies.

Reply

Justin @ Root of GoodNo Gravatar February 23, 2014 at 10:27 am

I think this all makes sense to outsource the tedious parts of rental ownership. My problem is I’m a cheap bastard and hate to part with $300-400 here and there when I know I can do it all myself. :)

I guess that’s why you’ll probably be a successful real estate investor owning 10 units and I’ll remain on the sidelines watching others toil, efforts, successes, and failures in the rental real estate world.

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