Bonus Operations is a series hosted by apartment owner/operator and Best Ever Show host, Slocomb Reed. In each five- to ten-minute episode, Slocomb provides his top takes for executing your business plan and maintaining cash flow.
In this episode, Slocomb shares various options for bringing construction management in-house as you scale your portfolio and four of the reasons he chose to do so, including reducing overall expenses and adding a valuable skill to his resume.
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TRANSCRIPTION
Slocomb Reed: Best Ever listeners, welcome to a Bonus Operations Episode. I'm Slocomb Reed, and in these bonus episodes I give you my top tips for executing on your business plans and maintaining cash flow in 10 to 15 minutes. You likely know me by now as one of the hosts of the Best Ever podcast and as an apartment owner-operator in Cincinnati, Ohio. Our topic for today is bringing construction management in-house. For you active investors out there, this is something you should seriously be considering, depending on your business model, of course. If construction management is highly critical to your business model or a particular deal that you're doing, you should seriously consider it.
Typically speaking, the greater the distress the property is under when you acquire it, whether that is physical distress or economic distress, the more important construction management will be to the execution of your business plan. And the reason why I say economic distress as well is that if you have a lot of downed units, or you have a lot of tenants who aren't paying or who are falling behind in rent, you're gonna see high turnover, and the speed, efficiency and affordability with which you can get those apartments turned is going to do a lot for your NOI, especially in years one and two.
This is not going to be a comprehensive crash course on all things construction management and bringing it in-house, but I do want to speak largely from my own experience. First, I want to explain two pretty simple, clear-cut options for bringing construction management in house in your deals. The first is to add to your general partnership an experienced and trustworthy construction manager who has the skills already that you need. Effectively, you'll be exchanging an ownership stake in the property or the portfolio of properties handled by the GP for the expertise of a seasoned construction manager, the responsibility of managing construction on that person, and ideally there's some sort of exchange for reduced construction costs at the same time, the idea being that the construction manager makes less on the renovation than they would as a traditional general contractor. However, they have a larger payout as the property performs, meaning that they're receiving cash flows from the property on a perpetual residual basis, and/or as a part of the general partnership they're going to participate in the gains from liquidity events like refinancing and selling on the backend of a deal.
If you're looking for a plug and play option for bringing that kind of vertical integration into your general partnership, especially if you already know someone who is good at construction management who can partner with you on your deals - this may be the best bet. Add a construction manager, make sure your construction manager is well compensated with the proportion of ownership of the property or the proportion of the general partnership that you are offering, and also making sure that if they are serving in a general contractor role, that they are being compensated fairly for the work that they are doing. And if they are purely a construction manager and the contractors that they coordinate are being paid directly, make sure you are still paying a construction management fee similar at least to something like your asset management fee.
Now, the second option is what I'm in the throes of right now, and it's where I'm going to spend the majority of this conversation. I'm in the process of learning and doing construction management for my management portfolio myself, and I want to talk you through the reasons why I am doing this. I will say, the biggest most important reason is at the end of this list, so please listen through to get to it.
First, frankly, is the scale of my portfolio. I'm responsible for managing still under 200 units, which means that I have a consistent need for at least one rehab apartment turn crew; there are always maintenance work orders coming in, but not enough work orders for me to keep one maintenance technician busy full-time exclusively with work orders. So I have a consistent need for work, but also, I'm not at 2000 units or 20,000 units, where I'd have to learn from scratch how to build something that needs to have a handful of backend employees, and tens if not hundreds of contractors and other skilled laborers and technicians just to handle my portfolio. So being under 200 doors currently is still a good place for me to get into this, and it is a skill that will be invaluable as my property portfolio does scale. Having figured out the things I've needed to figure out to have the success I'm having now, as the portfolio 10x-es in the coming years, it's going to be invaluable when I have that much more construction that needs to be managed.
Next - and again, these reasons are in reverse order of importance, with the most important being last... The next reason is that it creates an income stream for me personally. And not necessarily in the management of my own portfolio, but in my limited third party management activities, and in some construction management activities I'm doing for friends in the Cincinnati area and other investors there is a potential to earn income as a construction manager. It's kind of a balance, too; I want to know that I can put together crews of good quality people, doing good quality work, and that they can rely on me for all of the work that they need, in order to have that for them and also have them available for my portfolio whenever I need it currently. And also, as I scale, there are likely to be times that I need to take on a third party project or two just to know that I can keep my crews busy when the workload within my own portfolio is light. And there is some income in there. Again, not one of the major reasons why I'm doing this, or a major reason why I would recommend it for other investors, but it is a potential income stream.
Break: [00:08:40.21]
Slocomb Reed: Next, and more important than the income stream, is the reduced expenses. Because doing my own construction management gets me that much closer to the people who are performing the labor at my properties - I'll get to some other benefits about that in a moment, but because it's getting me so much closer, and I'm cutting out some middlemen, there's some savings there for me and for my partners and investors. My investors and partners and clients, for that matter, are paying much closer to the actual cost of getting rehab done than they would be if there were multiple middlemen or a general contractor looking to make a fee or a significant margin on all of the work that is happening. So having construction management in-house and having rehabbers and coordinators, foremen who are reporting directly to me brings us significant cost savings.
The next reason, and I hope this is relatable to most of you, if not all of you, but bringing construction management in house is also within my zone of personal strengths. Now, I say that; I am not handy. You do not want me to paint or do anything that has to look good when I'm done. Those of you who've met me in person may laugh when I say this, but I'm really good at demo, tearing things down and hauling them away in my wheelhouse. I could be one of the best. But anything that has to look nice when I'm done, I'm not your guy. Anything that has to function with electricity or water or whatever, don't call me.
What I am willing to claim for myself is that I am pretty good with people, and I'm good at gauging when someone is keeping my best interests in mind, when they know that I'm keeping their best interest in mind, who among contractors is looking out for mutual benefit, making sure I'm picking the right people who have the skills, the expertise, the knowledge base, the experience that I need, that I don't have personally, making sure they know that I'm going to take good care of them as long as they're continuing to take good care of me. That is within my zone of strengths, and that is one of the biggest assets that I bring to real estate investing in general, but especially construction management.
Another thing that cannot go without saying is that in a market like Cincinnati, Ohio, the fact that I speak Spanish fairly fluently and have extensive experience with Latin America and Latin American culture, particularly how to make sure that I am demonstrating respect with the Hispanic people that I am working with, is going a long way in handling my construction management. Not only the language understanding, but the cultural understanding, I have to say, is giving me access to a quality labor force that a lot of real estate investors just aren't as able to tap into, as I am. Best Ever listeners. I hope you speak Spanish, and if you don't, I hope that or another skill that will help you connect with contractors and tradespeople is something on your horizons for 2023.
Last, and most importantly, the number one reason that I brought construction management in-house as my portfolio scaled is control. Because my rehab crews work for me, my maintenance people, my HVAC technician, because they work for me, I know where they're going to be and I know when my projects are going to get done. I no longer have to wait on a third-party contractor or call the friendly neighborhood maintenance man to get things taken care of. I know that I have someone right now who can drop what they're doing and handle my emergency if I need them to. And I know that the moment my apartments go vacant, I can get in there and figure out what they need, and I know exactly when I can get a crew in that apartment to get it rent ready and turned around and reduce my vacancy.
The level of control in my portfolio that comes from having construction management in-house is immense. Speaking not as a construction manager, but just a real estate investor here, having construction management in-house and the control that it gives you over your vacancy, over your renovation expenses, your CapEx, your repairs or maintenance, it has an immense impact on the bottom line, the NOI, and therefore the value of the properties that I manage. By far, the biggest reason to bring construction management in-house is to have more control over the timing, the quality, all aspects of such a critical component of real estate investing.
Best Ever listeners, if you are active investors who engage in any sort of value add or distressed property business plan, regardless of scale, I highly encourage that you consider bringing construction management in-house, do the general contracting yourself, put together your own crew, if possible, get a renovation coordinator to help you. The level of control that brings, the expense reduction, the possibility of a new income stream, and the ability to scale with your portfolio as your portfolio scales, and keep it performing the way that it has when it was smaller and you were more able to do everything yourself - these are all reasons that I would encourage you to look into bringing on construction management.
Again, if diving into something like this is not in your wheelhouse, I highly encourage you to look into bringing a construction manager, an experienced, skilled person that you know, like and trust into your general partnership, so that you know you have that level of control in the condition and the renovation of your properties.
Best Ever listeners, thank you for tuning in to this Bonus Operations Episode. If you've gained value from this conversation about bringing construction management in-house, please do subscribe to our show, leave us a five star review and share this episode with a friend that you know has been considering construction management themselves. Thank you, and have a best ever day.
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