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?
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!
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!