This week, Ben, John, and Ryan explore the art of understanding new real estate markets -- including what drives appreciation, occupancy, and rent growth.

 

(Transcript below.)

 

Ep. 11 - Location, Location, Location - Deciding Where to Invest

 

Ben Shelley: [00:00:07] Welcome to the Brick x Brick Podcast. I'm Ben and I'm here with John and Ryan for today's episode. We're going to discuss the geographic area of choice for most investors when they're first deciding where they want to make their first real estate investment. We're going to talk about markets in submarkets timing of purchases and how to source those deals and the process itself of narrowing down your search. As an individual investor begin to decide where it is you want to allocate your capital both for your first investment for intermediary investments and for future investments. So guys let's jump right into it maybe we can talk a little bit about our own processes and how we got into the first markets we found and what drew us to those markets I think that might be a good place to start. Ryan you want to take a crack at it.

 

Ryan Goldfarb: [00:00:49] Sure. The way that I break down this discussion is starting at the top we're looking at things on a market level and then beneath that you begin to consider these submarket. And then beneath that you have different neighborhoods or other areas within that submarket. So when I was making my investment decisions locally or at least most recently what I was originally contemplating was which market I wanted to be in which for me was an easy decision because I was pretty limited in that I wanted to do it close to where I was geographically located. And beyond that I was looking at a variety of factors such as the entry point on the on a purchase which limited me or at least precluded me from buying in let's say an area like Manhattan. And then lastly I was looking for neighborhoods that kind of struck a balance between something that had a a little bit of a positive outlook moving forward but that wasn't so saturated it wasn't so competitive nowadays that I felt liked where I got to where I felt future opportunity or future values had kind of passed me by.

 

John Errico: [00:02:05] Yeah I think where to invest is a broad topic.

 

John Errico: [00:02:09] And the way that I got started was just I mean if you listen to the podcast before my investing story is like I just wanted to buy a place near where I was already living. So you know I was living in Manhattan and I wanted my place in the Greater York City area. So I bought a place in New Jersey which was the closest affordable place at the time to where I was living. But the factors that go into where you want to invest I think depend a little bit on your investment thesis. So maybe we can get in a little bit to that. You know I think from a very high level the easiest way to say where I want to invest is I won't invest in a place that makes me the greatest returns. But that may not exactly be the greatest returns monetarily it may not be correlated with your goals in doing real estate investing. So for example if you can make great returns in a city very very far away from where you live that might be nice but if you want to get into doing investing say full time we're going to be a real operator totally outsourcing your investments to a third party in a different city is not going to fulfill the goals that you have of being a real estate operator. I don't Ryan actually started investing not locally right your first deal was in Nashville Memphis Memphis.

 

Ryan Goldfarb: [00:03:25] I wish it was a outflow of appreciated walking and whether it is Memphis.

 

Ben Shelley: [00:03:29] It was it was a turnkey investment right.

 

Ryan Goldfarb: [00:03:31] And it was it was a construction on it was the single family purchased it for right around 50 grand and rented for like six seventy five a month. How did you find that. So that was that was back when I was wrapping up college my brother and I were looking for a turnkey investment to get something under our belts and we had kind of perused a few different markets outside of New York because we were a little bit more capital constrained.

 

John Errico: [00:03:54] And what is peruse exactly, perused, perused. How did you go about it

 

Ben Shelley: [00:03:59] This is why the geography map placed them in New Jersey because if you're outside of New Jersey you don't use the word Peru's center.

 

John Errico: [00:04:05] I mean I mean how how did you peruse I know I'm just certain at the time.

 

Ryan Goldfarb: [00:04:09] Well we were first and foremost looking for something or for an area where we could buy something by a single family house for under K and building it rents that were obviously able to support the investment and yield a decent return but also to know that we're not buying in what we would have considered a war zone or an area where we wouldn't have really felt comfortable owning property especially remotely. So I think at the time we were looking at Memphis I think we had briefly considered some areas of Atlanta. I think there were some I think either Dallas or Houston there were some providers over there that we had explored very briefly but ultimately Memphis was the first one that we it seemed to take all the boxes. It was also easy to get to which for us was kind of important because we figured if if our manager wasn't holding up their end of the bargain and we had to physically go there we wanted somewhere where it wasn't gonna cost us a thousand dollars to take a roundtrip flight to go for two days just to make sure that the house wasn't on fire.

 

Ben Shelley: [00:05:09] Yeah it's funny you guys mention both the geography and familiarity with certain areas because I know while I am not as far in my career as either of you what brought me to Ryan first and then John was the fact that I had an interest in college and was seeking in college. My first investments particularly in the Hudson County area across the water in West New York in Union City in North Bergen and the reason for that was twofold. One of them was that the market was strong there was consistent rental growth and sales growth over a certain period of time which I was tracking and was was excited about as an investor. But there is also a familiarity factor in the sense that the person and partner that I was planning on going into this business with had family and friends who had been contractors in the area for many years. And so I understood that I was going in for myself. Looking at the market and having a familiarity with how to source deals and underwrite deals but had a partner who had experience with construction and understanding how much things cost. So I think it's probably important to also think about how do you know in certain areas. I mean it's natural to want to invest I think close by. And if the numbers can work for you and what are the other mitigating factors that might bring you closer to pulling the trigger on a deal in that neighborhood or maybe making you look a little bit further away.

 

John Errico: [00:06:20] Well yeah I think a really high level the way that I think about geography is so a lot of times I look at an area I'm looking at it for buy and hold purposes at least that's how I've been traditionally doing it I think for flips it's a little bit different we can talk about that but for a buy and hold area I like to come up with a thesis for investing in that area and if I don't have a thesis that I feel comfortable with or if I can't think of one then that's probably a bad sign. So the greatest example for me is then the Tri-State area like the New York City suburb. So the thesis for investing in New York or in New Jersey or in Connecticut anywhere around New York City is New York City. So obviously not everybody who lives in New Jersey or Connecticut or even New York works in New York City but the reason why this region is what it is is because of New York at some point. The reason why it's going to be sustained is because of New York. So when you're betting on when you're buying real estate around New York City you're betting on you know in a sense in New York City you're saying do I think people are going to keep living in New York City traveling a working culture whatever. And for me the answer is yes. Some people might disagree about that but probably a lot of people believe that New York City is going to be a great thing. We also invest in new haven Connecticut which is a little bit of a different market tertiary market not a New York City suburb per say but the reason why invest in new haven is because of Yale. So Yale has a ton of money. It owns a bunch of property in the area and it has the second largest endowment and other university in the entire nation.

 

Ben Shelley: [00:07:50] Here we go.

 

John Errico: [00:07:51] But so investing in real estate in New Haven particularly around Yale is betting on Yale and do I think that Yale is going to be a place where people want to go that's gonna have a lot of money that's going to keep care about the city. Yes I think that's a good that's a good answer. So you can take that analysis and say well you know what's my thesis for investing in a small city in Iowa. I don't know maybe the returns look great on paper but I'm wondering why people live there.

 

Ben Shelley: [00:08:17] Well I think it's going to I think a good example of that is the way that that you John identified and how we as a group are identifying properties in Atlantic City because I think what people would look at as mitigating factors to keep them away from the market things like the environments obviously the fact that the city could be underwater things like a generally I guess maybe you would say some are literally underwater literally underwater figured. So so so a market that is more based on what they deliver in the summertime so vacationers and people come in for maybe weekends or natural parties obviously there's the casinos down there and you found a model the Airbnb which has generated returns well above I think what you would generally get at market rate when you're talking about traditional rentals and so when I like your description of the thesis you bring to the table because that is a perfect example of looking at an area like Atlantic City that to a traditional foot through traditional metrics may maybe you say even if you live further way I don't know about this and turns that into that somewhere that I want to try to source deals and pick things on the cheap.

 

John Errico: [00:09:17] You can also tease out your assumptions and your risk factors that way right. So if you say I would invest in an area and the only reason why people live in the area is because there is this one big thing like there's a big manufacturing plant or there's this big type of industry. Then your sensitivity is well if that industry or manufacturing plant or whatever closes that's it there's no other reason to live in the area. So I'm not saying that's a bad reason to invest somewhere but it's helpful to have the knowledge of saying here's what I'm sensitive to and if any of those things happen then it's gonna be bad for me. And you know Detroit has an example right. So what.

 

Ryan Goldfarb: [00:09:53] Or another example of that today or I mean quite timely as Long Island City and Amazon HQ2. There's a lot of hype and a lot of I think probably a lot of speculation that went on over the the last few weeks the last few months since each Q2 was announced for Long Island City and obviously the sensitivity there is a little bit different than it is in some other locations where you don't have such a diverse subset of industry but nonetheless I'm sure there is plenty of speculative work that was done in advance rather either for developments or for just people who thought Oh the rents are going to go through the roof because people who are coming in are going to have quite a bit of money.

 

Ben Shelley: [00:10:35] To piggyback off that real quick to the L train I think is even a greater example because that was two years in the running and people say new leases and moved businesses and sold homes.

 

Ben Shelley: [00:10:43] I had friends who were involved in the real estate business who were considering going in with partners and buying up homes or along that area at a discount to market. Given what everybody was anticipating so that's it's a great point.

 

Ryan Goldfarb: [00:10:54] Or or the Upper East Side of Manhattan where you've had the Second Avenue subway in the works for I think it's been like 30 40 years since I really like or 60 plus or two. But yes it did.

 

Ryan Goldfarb: [00:11:07] Finally it finally came on line over the last few years from 96 to 72.

 

Ben Shelley: [00:11:12] So it's getting married. So in another 80 years maybe it'll have to have more than three stops but it is amazing and it does do a lot for congestion as well and for pricing along that line. But it's funny because when I was working for a property manager actually we used to rent two homes that were literally right on Second Avenue on 83rd Street where the hub on eighty third was being built and the no and.

 

Ben Shelley: [00:11:35] I hate to say this I probably shouldn't put this on record but we would probably strategically not bring people during the height of working hours because it's unconscionably loud. However. At the same time people were then getting a discount to market and frankly if someone had come to us given how delayed that process was had come to my boss and offered a reasonable price maybe a little bit discounted to market. I wouldn't be shocked if she would have maybe considered something like that given the circumstance so it's all considerations to take into account and it's not just from an investing standpoint.

 

Ryan Goldfarb: [00:12:03] It's interesting to think about how many deals were consummated over the last 20 30 40 years with the assumption that this redevelopment was going to be a success because over the long term that Second Avenue Subway was going to be a boon to the area.

 

John Errico: [00:12:18] And the other thing about it is you can never truly anticipate what's going to happen in a market you know again that the HQ to example is so great because now that you two is not happening in Long Island City police the time is recording so you can reference this was going to happen with the market and that's OK. But I think it's important to at least have the knowledge of the factors that might implicated. So even if you can't control them and don't know what's going to happen it's at least a modicum of control to have knowledge of what the factors are. So for me the first step in thinking about an area to invest in is is the thesis. Can I come up with a thesis that I feel comfortable with. Is there a reason why it's going to happen. And then along to dovetail with that something that we brought up earlier for me is what is my goal in investing is my goal to maximize the amount of money that I'm investing is my goal to learn about investing is my goal to make this one of many projects to two by only this type of asset to buy different types of assets to do buy and hold stuff to flip stuff but that depends on you. My goal Getting Started in real estate was to do more real estate investing. And for me that meant it was conducive to invest near where I was because if I was investing that's the country even if I had to do a lot of that just physically getting there would be very very hard and it would take me a long time to ramp up because even if I got comfortable with an area I would have to get very very very comfortable off sourcing all of that work to a third party living in wherever it might be before I really got started whereas living in New York and investing in new jersey as I started I mean that's a 15 20 minute trip over that I can do it any time. And did many many times before I moved here.

 

Ryan Goldfarb: [00:13:59] There's also some calculus involved with what your risk tolerance is because the Amazon HQ2 example highlights the resiliency of the New York market where frankly that's probably not going to make much of a ding in the economic viability of of those areas. But if you're talking about an area. In if you're talking about you know a 1 manufacturing plant town in rural Pennsylvania and your investing thesis is that there are 5000 jobs in that specific area that are tied to that plant at the moment that plant shuts there are going to be very few things to pick up the slack for you. And so the risk is like it's truly a boom bust is either it's going to go well because you have that or you're going to be. There's going to be no suitors for your for your property as tenants and there will probably be very few end buyers should you decide to liquidate.

 

John Errico: [00:14:54] Yeah it's one of the things that annoys me but sometimes I'll encounter people who say oh man I'm making a killing investing in city I've never heard of in state that is you know among the 10 least populated states in the country and it's like well maybe I mean maybe the returns are great but why do people live there. You know like what what's going on in that. I I don't say that cynically because maybe there is some reason they just don't fully understand. But you know I bet that you could find a multifamily property in small town come a small state that's going to look great on paper but what's going to happen to that property in two five 10 years. I have no idea. I'm probably not sure that market enough nor can I come up with a thesis as to why it's going to do well so that's that's a pretty risk investment to me even if the numbers might bear out as being very conservative.

 

Ryan Goldfarb: [00:15:42] To what extent this is kind of shifting gears a little bit. But John look to what extent if you have vetted a particular market let's say you're talking about New Haven. To what extent do you try to validate some of your assumptions with data you get into some of the demographic data do you get into average incomes. Do you look at home prices like what what's your what's your next step.

 

John Errico: [00:16:03] I don't I haven't really looked at demographic data per say. What I'm most interested in would be the rents versus price of homes for a buy and hold. So that information is extremely readily available it's literally going on Zillow or anything looking at what homes are and then going on Craigslist or rent on Twitter or any of these other Web sites and seeing what the average rents are. That alone is a pretty good starting point. I think crime data is very helpful. I think crime is probably one of the prerequisites to a lot of. I mean you can have great returns on paper but if you can't walk outside your door nobody is going to know it's going to live there. There's a big distinction in my mind between what the returns could be on paper and what they actually are. A lot of areas that have bad crime you look at whatever analytical model you want to look at cap rate cash on cash return or whatever and you say oh my gosh it's so great. Even if you assume vacancy of 10 percent or whatever and then you go in and it's insane because you just can't get anybody to live there you know your vacancy is like 50 percent or 80 percent or whatever you want to say.

 

Ryan Goldfarb: [00:17:10] It's funny you mentioned that because I have a theory that oftentimes the best deals the best returns that you can actually realize fall at that intersection between the areas where people have these preconceptions about maybe there being too much crime or it just being undesirable for one reason or another so that you know it scares out a certain class of person. But at the same time the reality is when you investigate it there are still plenty of people who do live there and the perception of crime perhaps is overblown. And so I think that's really where you can maximize returns and that's where that kind of like artistic or subjective metric of like intuition comes into play where you actually go somewhere and you see it and you understand what the living breathing fabric of that is.

 

John Errico: [00:17:56] Yeah. Davies is a concrete example. So I started investing in Union City New Jersey and I think Union City and Jersey City as well very much had fit that these. So even now there's a perception in parts of Jersey City but certainly 5 10 years ago in many parts of Jersey City and Union City that the area was dangerous and unsafe and it certainly was in the 90s. But if you physically go to the area if you walk around and you talk to people you say do you like living here. You kids like living here if you ever experience bad crime you know whatever. No one says anything at all if you look at the news reports. I mean there's maybe domestic issues or maybe small property crime type stuff but not anything that would really disincentive someone to live there. But there's this widespread perception that the air is not good. And to your point. Absolutely. You can make it you can make a killing.

 

Ryan Goldfarb: [00:18:43] We've also talked about this in the context of comparing certain cities that have the reputation for being kind of like the worst of the worst. But even within that classification there are big differences. I think we were we were talking about with some of the cities up here where people around here may say like What are you doing buying in so-and-so town or so-and-so city. But when we go there we feel pretty comfortable during the day there's you know there's people coming to and from work. People just kind of hanging around and talking and no hostility no obvious. Signs of threats really. But there are other places where where we've been where you go and you'll be. You'll go like two or three blocks and all you see are vacant abandoned houses and just like the absence of life which is perhaps the scariest thing. And as far as that concerns and actual investment my my theory with a lot of these places up here is that while there are certain tiers of desirability at the end of the day there's a shortage of housing and people want to live where there is a safe clean quiet comfortable place to live. And if you can provide them with that even if it might not be an area where you personally would live that doesn't mean there aren't plenty of reasonable nice qualified people who will live there.

 

Ben Shelley: [00:20:00] And I think it's an important point too because you want to try to fight your own biases. As you look at these for an area. So I think it's very easy to fall into this sort of ideal especially if you're coming from outside of the real estate business that somebody says something about maybe Irvington or East Orange. Both places that were either invested in or doing work in and you just say Oh yeah. Why would I go there. Or what could possibly be there and then when you put your boots on the ground you learn that there's actually opportunity whether it be in construction or investment and I think that just actually just the other day I was talking to friends who were from the summit New Jersey area describing work we were doing in some of those municipalities and they were stunned. I mean they were flattered that Irvington and what are you doing there. Obviously there are different areas that have different levels of crime. What have you and all these different cities and townships. But fundamentally if you build as Ryan just alluded to safe good fundamentally sound homes there people will come especially as these towns and areas begin to get younger over time. I think you'll see generally speaking a shift in all of these different areas because at one point or another they did thrive.

 

John Errico: [00:21:02] Yeah I think it's a great point. So something that occurs to me is a lot of what we're talking about is very specific to the northeast and I don't want to gloss over it. There are listeners who are not from the Northeast and I think it's hard to describe exactly how block by block a lot of these neighborhoods are so kind of within that observation is to go back to Ryan's first point something that I really like to look at when I'm looking at cities or blocks or whatever it might be is the build quality of homes because a lot of these homes you know we're not buying new construction in this area. These homes were built 40 50 60 100 plus years ago and by looking at the homes you can say well this area used to be very wealthy or this area was never particularly wealthy or this you know unhealthy area now has become wealthy for some reason. So what a good example for me is East Orange East Orange is a an area New Jersey that has a I would say quite negative perception just in terms of housing and demographics and crime and whatever else you want education the educational system definitely has some problems. However the build quality of a lot of homes any storage is quite nice and there are some areas of East Orange where you look at homes that are on half an acre of land which for this area is a tremendous huge lot. And you say what is a beautiful home. I mean beautiful original woodwork that you could just never reproduce today never would reproduce today. And that gives you some sense to say well this area at one time was wealthy maybe it could be wealthy again. What are the reasons why it became on wealthy. How does that work. And truly I could walk three blocks. I mean the literal blocks in any direction from that and being a totally different area I mean a totally where I live right now where I'm physically located right now literally I could throw a stone across the river and go into an area that is totally demographically economically socially educationally different than where I'm living. That's pretty rare and should inform people that one invest in areas like this that say I need to do my homework to figure out not only that the city not the neighborhood but the block that I'm interested in investing in.

 

Ben Shelley: [00:23:07] Yeah I mean listen we just had that happen with also a property this is a little bit of a different area on the border of Nutley and Clifton and talking about OK on a macro level right you want to just know what's the neighborhood like. So we've talked about crime we've talked about education and we've talked about socioeconomic and cultural history of the area but also within that is OK so what is the designation SEO been in different counties means you might be designated for different public schools in different zones. So these are the kinds of obviously different costs affiliated with mainland so what have you based on the history of the area and the build of the homes in the area. So these are all things that you have to consider and I know when I'm looking at comps even in these areas and I'm used to growing up in New York City where truly I mean it's I mean just block by block it's lot by lot it's building by building the values change coming in New Jersey where a lot sizes tend to be a little bit smaller probably on aggregate than the rest of the country it's still the same way in many respects and looking at at Garfield the other day I mean I was looking near the water I think on River Drive and again in certain areas a lot by lot. I see sales of similar like properties at the same square footage with similar lot sizes going variant ranges of 100 to 150 thousand dollars. So do your due diligence on the specific area the specific building the specific lot. And John hits the nail on the head with that one.

 

Ryan Goldfarb: [00:24:22] And if you're going outside of outside of what you know if you're investing remotely and looking at an area where maybe you didn't grow up or maybe you don't currently live it's also important to take into account some other factors that may may be variable depending on the region. So for example in in northern New Jersey it's it's very common that when you buy a house you'll do an oil tank sweep and confirm that there is not an oil tank on the property or an underground oil underground or oftentimes there you may see them in the basement do. But of bigger concern is the. Underground variety. But if you're you know if you're investing from somewhere where that fuel source was never prevalent you would never even think to. To call someone out to do a tank sweep. Likewise if you're in New Jersey and you're looking to buy something in Florida you should. You're going to be thinking about hurricane preparedness and and whether it is like hurricane compliant. Likewise in. California you're going to be taking into account certain seismic issues and concerns. So there are a lot of nuances to different areas that you should at least know to be aware of or know to ask about.

 

Ryan Goldfarb: [00:25:31] If you are investing from out of town.

 

John Errico: [00:25:32] What you guys think about school districts because that's something that people talk to me about a lot and I have various thoughts on it. New Jersey has a lot of school districts because their municipality by municipality which in some states it's not the case. But what do you guys think about the value importance of that.

 

Ryan Goldfarb: [00:25:48] I mean it's huge. I think they're the way that I think about it is it is quite possibly the most important factor that a particular subset of buyers will consider when making their housing decision. But in a lot of ways I also think that the respectability or the clout of a school district is already embedded in the price of real estate in that area. So just because I'm to I'm looking at one property in one school district and another property in another school district. That are priced the same I'm not immediately going to say I'm going to buy the one in a better school district. There may be other reasons why someone would live in an area that has a less desirable school district. You may be renting to primarily. Seniors or you may be. Looking at something in a vacation community where schools just don't matter as much. So I think it's certainly it's certainly a factor. And it's one that I would weigh considerably. But it also has to be consistent with what your strategy is.

 

John Errico: [00:26:49] The funny thing about school districts is that it's the perception of the school district that cares right now. No there's no like definitive rating of this is the absolute number one best school district in the state or whatever. It's just your perception of it. If it's a good school district right. So vote for me because it's a perception thing. I think that school districts school districts are the best insulator of value positive or negative. If you have a bad school district and you're trying to make the area better I think that's going to be really hard because this is a far afield from real estate. But I think that it's hard to change the quality of the school district and if you're in a good school district or perceived good school district your value is going to maintain that level because for better or for worse people are going to continue to perceive that school district as being good.

 

Ryan Goldfarb: [00:27:36] Yeah. I have two points to make from different ends of the spectrum. On the pro side of why to invest in an area with a good school district no matter what the market is no matter what point in the economic cycle we're at. If you are a young family with kids who are entering your you know who are turning four or five six years old and looking to be are going to be going to school soon. They're going to be they're going to be interested in areas with good school districts and that is going to be more of a guiding light than whether. Whether they're buying at the best time or whether this particular properties ticks every box on their checklist. On the flip side to my point earlier about considering school districts in the context of what your investing strategy is if you look at an area like Jersey City or Hoboken years ago those were not desirable school districts whatsoever. And I think to a large extent at least based on what their property values are they're are still quite poor school districts. But what drove development in those towns was the demographic changes of getting very very young and catering to a class of people that are not necessarily concerned with school districts because they're only living there in their years prior to having kids school age children.

 

Ben Shelley: [00:28:55] I mean I think it's worth noting where we're Jersey City and Hoboken as good examples are concerned is that there is spill over areas though as well. So you know when you're already we're already constantly weighing all these different factors. And I think that's a perfect example of where a lesser school district isn't going to deter you from a certain neighborhood. But I think it's worth noting for new investors or even intermediate investors that when you're looking at these areas you talk about John talked about right at the beginning of this episode the resiliency of the Tri-State area and a lot of why that makes everywhere around this very appealing. And I think that if you're identifying an area just outside a city oftentimes your bias is going to take you towards thinking well look what happened to Long Island City or is happening to Long Island City look at what's happened to Jersey City and you'll extrapolate and say that's going to happen in my area. And just to be careful about that so so to look at the school districts for example if if you're looking at a spillover area in a really good city if the school district is bad now seeing some of these other areas doing your due diligence of like kind cities areas municipalities townships you might be more inclined to take the leap.

 

Ben Shelley: [00:29:57] And looking at an investment like that.

 

John Errico: [00:29:59] I want to frame this too by saying it is the case that there are areas that are not. Not only are they not getting better but they're getting worse. I mean I think we maybe look at real estate a little bit like we being the three of us with rose colored glasses because we've been investing in the longest kind of bull market that has been in a very long time fought for real estate specifically.

 

John Errico: [00:30:22] But there are you know not to pick on Newark but Newark is a city many parts of Newark have been economically depressed since the 60s and are still that way. And I bet you could go back to 1965 and talk to somebody like you know what it's gonna be in five 10 years the city is coming back and we're doing is do that. And you know I don't know. I don't know what's going to happen to Newark in five or 10 years certainly some areas of Newark have gotten better but I would say some mayors have stayed the same or maybe even gotten worse so it's OK to come to conclusion that look I mean statistically Connecticut people are leaving Connecticut people are I'm moving to Connecticut anymore so you could say well I mean some areas of Connecticut like I mentioned New Haven I have a thesis about. But Connecticut broadly I don't really want invest in a place where there's a net outflow of people. There's some reason why people are leaving Connecticut. And that concerns me. So it's OK to say look this is an area that isn't getting better it might be getting worse for some a thesis about why it might get worse. So I mean how do you guys feel about that.

 

Ryan Goldfarb: [00:31:23] Well I think this also comes back to just having a having an investment strategy and choosing a market based on what your strategy is. If your bank. Banking on appreciation I think would be quite unwise to look at a market where all of the demographic factors and shifts are trending in the wrong direction. I don't think I don't think it's wise to assume that your property value is going to skyrocket when all of you know when you're facing all of these headwinds. Having said that if you're looking at an area if you're looking for an area where your primary goal is cash flow and you're making reasonable assumptions on what your vacancy is going to be and you're not assuming 10 percent annual rent growth which would be you know pretty absurd in an area that is an appreciating and isn't trying new blood every year it's it's a matter of being consistent with what your strategy is. If you're looking at an area that's going to appreciate over the long haul you should have a thesis that is consistent with that and you should have some data to back it up.

 

John Errico: [00:32:22] What do you feel about investing in college towns.

 

Ben Shelley: [00:32:25] It's funny junkies because I was actually sent an article about this a couple of years ago even a buddy of mine who I went to the shack program with me him and his program at NYU and we had some very procedures for a notice how I pointedly do not name the school I'm just joking I love NYU love that school in Goshen New York universe I believe in careful and wide I think is the offer but I'm not really sure Bob Gates who when you go to our football team undefeated that's all that matters because we don't have a football team.

 

Ben Shelley: [00:32:54] So it's interesting so I got an article sent to me a couple of years ago by this this buddy of mine and his dad and they were very interested in this concept and again the theory goes well these school towns are young they're generally thriving within the nucleus of where the the school owns buildings. Generally speaking if it's a good academic institution they're going to look to eventually expand because they're all looking to bring profits up so they need to bring in more people who can pay full tuition so they'll expand outwards. And we see a little bit of that in New Haven. And and it's been maybe slow and maybe not expended as far as some people would think. But this is the question because as I now know having been introduced to the neighborhood to John within a certain radius that is true the margins still work out for. For new and intermediate investors but it hasn't come all the way I think within a margin.

 

Ben Shelley: [00:33:42] And when I say margin I mean the geographic margin that I think most people would have predicted giving the prestige and the academic successes that surround a school like Yale and the perception.

 

Ryan Goldfarb: [00:33:50] To me no matter what what your thesis is it's almost impossible to accurately predict appreciation because any appreciation that you are assuming. Okay let's say let's say your thesis is Temple University is expanding here. That's going to catalyze the area and there's going to be a lot of growth it's going to drive property values up. The other thing that can counteract that is if there are 30 other developers who have the same theory that you have and they go snatch up all developable land and they build way and act like an overall excess of supply relative to what the increase in demand will support. So just because things are happening and things are trending in the right direction in that scenario you may actually see a decrease in property values. So I think appreciation is always very difficult to predict. And I think it's foolish to make an investment solely based off of that thesis.

 

John Errico: [00:34:48] What do you think about. So I often have this problem. I think even recently we were talking about this and I run where you'll look at an area and you'll just run the numbers and you'll see these returns like monster returns like 10 percent cap rate ex and sometimes I look at that and it's like why don't I just buy everything in this city you know like why why am I even bothering and other places where you know I'm not getting those returns I can come up with reasons right now like as to why I wouldn't but I wonder how you guys feel about that if you've seen places

 

Ben Shelley: [00:35:17] like that. Well I mean I think diversification is the name of the game I think people talk about this term a lot but to me the first thought I have is Atlantic City is a perfect example. The returns that we see cash on cash the cap rates particularly for our model and our thesis in that area is quite substantial.

 

John Errico: [00:35:34] Of course hurricane cynic everybody's gonna start investing you like I just like your audience just like you can't right now. Just somebody has to go about it.

 

Ryan Goldfarb: [00:35:42] Also keep in mind that a lot of these models that we're running are predicated on an Airbnb model which is highly susceptible to regulatory risk.

 

Ben Shelley: [00:35:49] Do we have right give a disclaimer. Listen you go out you try your best see if you could do in line. We are trained professionals under closed or delay.

 

Ryan Goldfarb: [00:35:57] The reason I bring this up we in in 93 the reason I bring this up is because I actually texted John about this the

 

Ryan Goldfarb: [00:36:05] other day. There's I think there are rumors swirling that Newark is potentially clamping down on Airbnb. I don't if you saw the article that I sent you because. Again John what he's ignored me.

 

John Errico: [00:36:17] No I I didn't ignore you. In fact I've been thinking about it constantly. So that's it. I'm just getting emails.

 

Ben Shelley: [00:36:24] We are always thinking about them.

 

Ryan Goldfarb: [00:36:25] I'm not bitter not ignored means I just like you know doing it. I just I just actively didn't respond.

 

Ben Shelley: [00:36:31] Let me just let me just say because that was that sort of a parlays to the point that I wanted to make I hate to keep bringing up Atlantic City but the reason I do that is look what happened in 2012. Hurricane Sandy hits the entire area was ravaged and destroyed it could happen where Atlantic City or Atlantic County completely clamps down on Airbnb BS and throws the thesis out the window. So the idea is diversification you want to be invested in a number of different areas with a number of different hopefully successful theses so that if in any scenario the worst case risk factor occurs you're hedging and you're able to continue to sustain positive net cash flow throughout

 

John Errico: [00:37:06] your entire portfolio. Yeah I mean.

 

Ryan Goldfarb: [00:37:07] I mean what what other arbitration are you guys why is this I think a lot of that's I think a lot of that is predicated on underwriting to an Airbnb Airbnb context which I would argue is not necessarily as much of a real estate play as it is a quote unquote business play because the end of the day your income is going to be driven by the fact that you are effectively running a hospitality business despite what Airbnb will be lobbyists What.

 

Ben Shelley: [00:37:35] What do you mean by that. Because to me I understand the distinction you're making between an as a true real estate versus just generally business hospitality play but like when I look at different areas underwriting New Haven is different in underwriting Hudson County is different underwriting Bergen County and so still diversification is diversification because it's a cash flow play doesn't get an appreciation.

 

John Errico: [00:37:54] It's really like you. It's not. I see what you look like you could use it right or just depending on how good or bad you are at doing it. I mean to some extent strip management in general. Yeah. Much more so in Airbnb sorry.

 

Ryan Goldfarb: [00:38:06] Well I think what I'm but I was also getting it as I think the baseline underwriting assumption in any real estate deal should be more of a conventional strategy whether it's I would say more of a conventional strategy know if it's a 2-family house underwrite it as to stabilized apartments renting out on twelve month leases and then if you think that there's opportunity to employ a strategy like Airbnb be with one or both of those maybe that's your upside case. But I think it's a super risky investing thesis to have all of your eggs in that one basket. And I think that kind of gets back to our overall investing strategy being a little bit more diversified and not having all of our eggs in that one.

 

Ben Shelley: [00:38:48] It's a good point and I want to be clear that most of what we look at is not for that business model and the idea being that if it works conventionally it's probably going to work with other means.

 

John Errico: [00:38:56] I mean it's an interesting broader topic for me we've been talking about this a lot in the context of our private equity fund which is how to quantify risk. And I I like the idea of baking in risk in an analytical model in a numerical model in some way. But I think that's really difficult to do. Like I so we're talking about say regulatory risk with European bee or maybe we're talking about a risk involved with some industry being the only driver for people to live in a certain city. How do you quantify that. How do you say Well I think there's like a 20 percent chance of this happening or 10 percent or higher. I mean it's hard for me to do that. And so it can be hard to build a portfolio so you have you know you're trying to buy 10 homes and you want to have a risk adjusted diversified kind of portfolio. I think it's really difficult to come up with the right allocation.

 

Ryan Goldfarb: [00:39:47] Well I think the mitigant to that is on the portfolio level and it's on the strategy side. I don't know that even the smartest quantitative minds I think would struggle to come up with a model that accurately depicts the risk associated with that but I think the beauty of working in the space where we work where our assets are smaller and you know we're talking about maybe a portfolio of 100 different properties in 15, 10 different markets versus another fund that is working on a portfolio with a similar asset size. But that is tied to one physical property with you know one hundred and fifty units. I think the benefit to being in our shoes is that we can we can diversify risk across that portfolio and say OK to mitigate the risk like the regulatory risk of the Airbnb model we're going to only allocate 15 percent of our portfolio to properties whose cash flow is tied to that strategy. We're also going to mitigate risk. We're going to mitigate the risk of let's say Amazon HQ to influence on our on our portfolio and on our returns by only limiting exposure to 10 percent of our portfolio in Long Island Cityetc.

 

John Errico: [00:41:03] Yeah I'm glad that we got here. I think because even if you don't have the answers to these questions I think it's it's fair to consider them. You know I think there are a lot of investors that start out and you know the one might have like don't worry but all these things because then you'll never do anything on the other hand. I'm like Well don't you know don't invest in a place just because your buddy says it's a cool place to invest right. Like we think because it's just that our level of experience and what we do professionally with being the three of us here are more analytical about it than I think a beginning investor should be or could be. But even even knowing you even having this thought process I think it is novel for a lot of investors just getting started because they're not thinking about risk and investing theses and things like that in

 

Ryan Goldfarb: [00:41:53] an area. I think under Understanding risk is a difficult topic but I think there is or maybe quantifying risk is next to impossible but Understanding risk is a little bit different. And I think that is a goal that every investor should strive towards when like prior to making a significant investment decision. And what I mean by that is you may say you may be looking at something in New Haven and you may be looking at something next to another town that is heavily driven by like a smaller university. You may say oh like college towns are great as an overlying thesis but I think to understand the risk of hitching your wagon to an institution like Yale versus the University of Phoenix which is you know a quasi education a quasi educational institution.

 

John Errico: [00:42:45] No I totally agree.

 

John Errico: [00:42:46] I think the reason why I brought up investing in college towns and not to go everywhere but what I wanted to say about it was that there's a big difference in investing in a established university than a community college even if they're both might be in a college town not there's anything wrong with the community college at all but in terms of your long term idea is this place going to be around. I mean I've a pretty good idea that you know the second oldest university in the country that has the scholars now is gonna be around.

 

John Errico: [00:43:15] I don't know that about a school that was maybe started three years ago that has no money that is just trying to make a quick buck or something like I don't I mean it's.

 

Ryan Goldfarb: [00:43:23] I think it's also worth worth at least throwing out there the fact that maybe education down the road won't look like what it looks like today. So I think an institution like Yale it's prestigious enough that they will probably find a way to stay relevant and to live on. But you know if in 20 30 years down the road education may not take the same form that it does today we may I think we kind of take for granted the assumption that four year colleges are kind of the norm these days. But that wasn't always the case and it may not always be the case in the future. And it's interesting to contemplate a world in which that is not the case especially if you are especially your hitching your wagon to investing in quote unquote college town.

 

John Errico: [00:44:07] It's a really exciting point and I want to actually touch on one thing very related which is that there's so many things like this that are going on that that are limited perspective having invest in real estate only for a few years. Can't really observe it but one thing that always blows my mind is the influence of ride sharing Uber and Lyft that they have had on suburban America I think is is tremendous. I mean it's changed a lot. What it means to live in a suburb and still be able to go out and say drink or do whatever else that you maybe couldn't do if you had to drive and imagine what say we you know someday soon maybe we'll have autonomous vehicles what might that change for people living in a suburb or people that have to commute you know what if we have the Elon Musk you know Hyperloop dream or we can get from San Francisco to New York in an hour or something like what what how might that change.

 

Ben Shelley: [00:45:02] I am just so inspired right.

 

Ryan Goldfarb: [00:45:03] It's funny that it's funny that you brought these up because I had if we could live on Mars.

 

Ryan Goldfarb: [00:45:07] I got I had those same two thoughts running through my head as winter as this conversation was evolving and I don't know the extent to which either of you are familiar with like Black Swan Theory Black Swan investing.

 

John Errico: [00:45:19] But it's a great film. I've actually surprise surprise.

 

Ryan Goldfarb: [00:45:27] But the I think as human beings we are we are uniquely poor at quantifying the risk of outlier events. And there are a lot of things that in our minds are probably perceived as impossible that are really just improbable which means there are enough of these improbabilities that eventually something is going to stick and that's going to be something transformative and it's going to be something that turns on its head. All of these things that we take for granted like something like a Yale falling off the face of the earth or something like you know Washington DC ceasing to be the political capital of the United States or New York ceasing to be the most relevant city in the state here in the country.

 

Ben Shelley: [00:46:13] And this is kind of a diversion from where we're going because these two are inspiring me with the words of wisdom about the future. But I do want to also address to newer investors kind of like myself as well and go back to a point about not necessarily being overly cautious but but understanding sort of where you're at in terms of your equity means and in terms of the amount of research and experience you have in certain areas. Even looking beyond what the future holds because one of the things I come back to because I think about all of these potential changes that are going to occur in society and cities and suburbs etc which will affect markets and I would just encourage I think investors when you're identifying the geographic location are going to to just be real with yourself within your means and not to necessarily extrapolate beyond what the numbers and area and people who are on the ground are telling you because you may believe in a lot of these things that are coming to these areas but it's very easy to fall into the confirmation bias cycle of saying of believing a certain ARV for a flip or believing a 2-family is going to generate you know X Y Z market when really it's rent control or rent stabilized and I realize this seems like a huge diversion from from where we work. But I do want to get back to sort of this idea that when you're looking at some of these areas to be that maybe that first project isn't always saying well this this and this is going to happen so I'm going to be super aggressive and invest in you know a 5000 square foot commercial space station in for example the multi-family market might be the best idea for you as you're analyzing the geographic area that you want to invest in for the first time.

 

John Errico: [00:47:45] Yeah it's all for me it's a it's a risk reward sort of calculation right. I mean it goes back to one of the first things that we were talking about for me which is just to define your goals you know if your goal is to learn more than that dictates where you are going to invest if your goal is to make as much money as you can then that's a very different goal. If your goal is to make as much money as you can in a year versus in 10 years in a hundred years that's a very different goal to make your goal is just to house hack and not have to pay rent to try and get a little ancillary income on the side.

 

John Errico: [00:48:17] That's a different thesis that I mean and honestly if your thesis is law if you're investing horizon is long you can make some pretty fantastic investments I mean there are families in New York that have generational investing theses. So I mean they literally bought property in World War 2 that only now are they really cashing in on. And good for them. You know I mean that's you know probably in 1950 buying a very large piece of land in Times Square might have been very speculative and it probably looked like a horrible investment until you imagine you know the Giuliani administration let's be honest no it looked like a bad investment or pretty recently and and now it's it's really pay dividends.

 

John Errico: [00:49:04] I don't know what the return on investment might be but it's substantial it's probably not.

 

John Errico: [00:49:08] So you know but if your thesis is I want to do a flip and sell it in three months then you know don't invest in Manhattan but I mean there are different categories of things that you should buy.

 

Ben Shelley: [00:49:20] I think the word that I was looking for the phrase I was looking forward to to sort of tie in all these different points is as been as a as a newer investor or even an intermediate investor a cautiously aggressive both in actually allocating your capital in your equity and also how you analyze these deals don't be aggressively cautious though don't be aggressive. Alan let me try to figure out that pretzel in my head. Don't be aggressively coy. I like that. Yes I agree. Yeah I learned some new from these guys every day.

 

Ryan Goldfarb: [00:49:47] Yeah I guess the way that I would frame this in my mind is before you look at a specific deal and before you decide they're going to make an investment first understand what you are investing in you're investing in market you're investing in maybe that school system you're investing in that economy and it's not just is this property going to on paper show that it's going to be profitable there. There are a variety of inputs and there are a variety of factors that are going to contribute to whether those rents are going to stay the same over the next 20 years whether they're going to maybe increase or decrease whether your vacancy is going to increase or decrease or stay stable and and whether the appreciation on the property is going to be what you hope it will be whether it's going to be stable or whether it's whether you're going to be stuck down the line with a property that there just aren't as many buyers for it as what you were expecting.

 

Ben Shelley: [00:50:44] Yeah I think to that point and that's what we talked about the fact that the three of us look at things perhaps more analytically than your your most common investor which makes sense because this is what we do for a living. But I think kind of moving into the next episode. That's where I get excited about talking with our listeners and everyday investors about both from a basic intermediate and expert level. What are the best ways to analyze the numbers that you're seeing in front of you. Because like we said there are a million outside factors that affect whether or not an investment is good both forward looking backward looking and in the present. So just sort of understanding. You know we say cash on cash when we say cap rate not just what those means but how to get those numbers and whether and how that will inform your decisions. After you've decided on which geographic location you want to invest in.

 

John Errico: [00:51:33] Yeah. And one thing I mean as I've said in many many podcast episodes are that we have very many but something that I've said several times as I still think it's very important just to do it and get started. So what I hope people would take away from this is not that I need to be sucked into this analysis vortex of numbers and thoughts and risk and everything else but that these are important things to consider. I don't have the answers we don't have the answers to many the questions that we posed. But it's important to answer to them. However the end of the day if you want to get started just get started and do it. So that's how I got started with not any of this analysis or thought process that I've backed into it and it's been fortunate for me but I wouldn't have had been in that position been in this position if it didn't just start.

 

Ryan Goldfarb: [00:52:16] I would also just think about the risk that you are taking. I think a lot of the reason why this kind of analysis paralysis or the these kind of these kinds of mental models are there for quote unquote market analysis those are in large part driven by developers who are looking at building 600 units in an area and where at the margins the difference between. Two percent population growth and two and a half percent population growth are going to be the difference between whether they have enough people to live in their building or not. If you're talking about a two or three unit building in a town that's been around for hundreds of years and where there are dozens and dozens of large employers chances are the landscape is not going to change that much. So if you've got a decent deal which will discuss how to find in the next episode you can pretty safely pull the trigger knowing that the variables that are outside of your control are likely not going to move the needle too much.

 

Ben Shelley: [00:53:16] Guys. Thank you for your time and your expertise as always I appreciate it. For the folks listening at home make sure you subscribe to us wherever you get your podcast reach out to us on the brick by brick. That's brick X brick Facebook and make sure to listen to us on iTunes and Spotify. Thanks for listening.

 

Ben, John, and Ryan peel back the curtain on the ugly side of entrepreneurship. What is it really like to be your own boss? 

 

(Transcript below.)

 

Ep 10 - The Joys (and Pitfalls) of Real Estate Entrepreneurship

 

Ben Shelley: [00:00:06] Welcome back to the Brick x Brick Podcast. I'm Ben and I'm here with John and Ryan today and we're going to talk about being an entrepreneur. Probably a little bit more broad than some of the topics we've gone into in recent weeks. But I think that this is something that can be both really interesting for listeners and also frankly a lot of fun because we are all entrepreneurs. And not just talking about I think what it takes to be an entrepreneur because there's a lot obviously that goes into it but also sort of identifying maybe what what is it about you and what kind of personality types tend to thrive I think in in this sort of free for all culture that both has a ton of chaos but also I guess maybe the phrase is controlled chaos so I think that's kind of the life of an entrepreneur. I guess we could start maybe by talking about our own individual experiences as entrepreneurs.

 

John Errico: [00:00:51] Yeah I mean I have a lot a lot to say. So much good and bad so much wisdom. It's strange I don't even know if I really consider myself to be an entrepreneur per se although I think if from a distance one would look at my career and life and say that I would fit that category. I think that being an entrepreneur can mean a lot of different things. But the substantiation that it is in my life I think in our life our lives means that we are running either our own we're working for herself and or running our own businesses. And that carries with it a lot of prerequisites and a lot of personality types and traits and tolerances that I don't think are necessarily for everyone. So maybe we can jump in the air that way. I think that my personality type is maybe not even that well situated to be an entrepreneur to be totally frank.

 

Ben Shelley: [00:01:50] But it's funny.

 

Ben Shelley: [00:01:51] I was given to say knowing you I actually feel totally different and I want to hear why you speak at first. Glad you guys think that really we're here we're just here to build John our love of yourself. I'm curious why why do you think you're not well suited for it.

 

John Errico: [00:02:04] So I think in my experience one thing that I think you have to totally throw to the wind is your interest in doing something that is prestigious. I think being an entrepreneur has no, there is a prestige in this sort of way that you look at a startup guy and you're like oh man he's you know building the next Facebook or whatever it is and it's so cool that he's working for himself blah blah blah. But the flip side is that to do that whether it be in real estate that we operate in or in technology or whatever you have to do a lot of really crappy things and get paid no money to do it.

 

John Errico: [00:02:40] And if you're the sort of person that's drawn to procedures think I mean let's be I went to Yale you know let's be I know let's be honest right now I mean I was believable actually right. It's three Ivy League Degrees. Really I have two degrees from Cornell Law School I'm basking in your great I know just one arena but you know but but you've got two degrees from law school. I had two degrees from Moscow right. Doesn't everyone know I JDL. Fact Check. Yeah. And l l m l l am. Can you tell me what the differences between these two. Yes one is a doctor and one's a master's. So if you're a doctor or I'm a doctor of law I like your attend a doctor.

 

Ben Shelley: [00:03:15] My mom would be a shame to me that I called a doctorate the equivalent of a doctor.

 

John Errico: [00:03:18] I mean I bring it up only because I'm so awesome but also because.

 

John Errico: [00:03:23] Also because I'm obviously if you looked at that you'd say this guy really likes procedures. I mean I went to Yale because it's a prestigious school right. I mean I went to Cornell because it's a prestigious school. I mean also it's a good education but it's very helpful. So my career path before I went off to do entrepreneur or ship things was very much seeking prestige and I like that I like people looking at my resume and me personally being like wow that guys is a great you know background a great education. If you value that, don't be an entrepreneur because you're not going to receive a lot of that doesn't. Nobody cares about that in the construction world nobody's buying a house for me because I went to Yale.

 

Ryan Goldfarb: [00:03:59] I mean maybe I think maybe I might not buy a house because you went to Yale.

 

Ben Shelley: [00:04:04] Well you know it's funny.

 

Ben Shelley: [00:04:06] I don't want to get sidetracked before we've even got other stories in here but it reminds you something I told John recently where I was having a conversation with an old academic mentor of mine and I told them about the fact that I'm working with John and Ryan now and she comes from a very structured environment and I think it's we're gonna note on this a lot but you talk about the difference in let's say personality types of some people who enjoy prestige and structure they get up in the morning they know exactly what they're going to do they got a paycheck every two weeks and eccentric natural life is good and easy easy is the wrong word.

 

Ben Shelley: [00:04:37] But but good and and instructor and consistent that's the word I was having a conversation with her. And we're talking about what we were doing together and in the real estate business and oh yeah that's great that's great and then at the end she goes what schools do they go to. I said oh University of Maryland and Yale. And then she goes Oh good good.

 

Ben Shelley: [00:04:55] And it's really in Maryland. That's what she said after I think to think about that you talk about the different even.

 

Ben Shelley: [00:05:03] Not this is not disparaging by the way this person is wonderful and and successful in her own right. But it just tells you maybe a little bit of the personality differences between people who sometimes seek structure and the quote unquote traditional maybe entrepreneur archetype and that manifests in different ways.

 

Ryan Goldfarb: [00:05:17] Well it's funny it's funny that you touched on the topic of prestige because I think we're in a day and age now where particularly with the Silicon Valley tech stuff there is a lot of prestige associated with being a quote unquote entrepreneur.

 

Ryan Goldfarb: [00:05:29] And I think that's something that's feedback I get often where people think it's so cool that I do my own thing. But what they don't see is all the ugly stuff that you alluded to earlier and they don't see the the days are like the stuff that you've been dealing with on our way in here where a pipe froze and you guys have to troubleshoot it to figure out how there's going to be heat how the water is going to get out of there. I see John's more SEO check I just see his spirit just like dying right now as these things.

 

Ryan Goldfarb: [00:05:57] This is supposed to be the brick by brick Comedy Hour and we're where we escape real life. But but there really is a lot of crap that goes along with it. And that is both figurative and literal crap like we almost stepped in a bunch earlier the last place we were looking at and we looked at and we said that's a metaphor. We love the play. We also said you know that.

 

Ryan Goldfarb: [00:06:16] But there's prestige associated with the idea of being an entrepreneur entrepreneur. But the actual practice of it I think is far less desirable and as John alluded to far less far less suitable for most personality types. I agree with a lot of things you said there.

 

Ryan Goldfarb: [00:06:34] There's a constant there's a constant like internal dialogue of hey this is this is beneath me I don't want to be doing this while also knowing that if you don't do something it's not going to get done and there are business things to consider too like is this the best use of my time. But this game is certainly not for the faint of heart especially in the you know residential real estate construction space where things can get dirty yeah.

 

John Errico: [00:07:00] There is a to use an Ivy League word a fetishization if you're not careful.

 

Ben Shelley: [00:07:05] People are going to come away from this episode with the wrong perception of you know it's the very thing right.

 

Ben Shelley: [00:07:10] There were no judgments.

 

John Errico: [00:07:12] Yeah I I I mean before one one delves into this I think it's probably valuable to know the struggle and so maybe we can talk about that because for both Ryan and I to get to where we are right now there's been a lot of I was having a conversation with somebody recently about our private equity fund which if you don't know about it please please feel free to review other episodes in Episode 6 reach out to us on Facebook.

 

Ben Shelley: [00:07:41] It's a great idea so listen to us and I didn't write it at that. Tweet us at Liberty Hudson. Absolutely please.

 

John Errico: [00:07:49] But I was having conversation with them and they they wanted to help us do something fun raise money. Something like that and they were sort of saying like oh well if if I help you a lot you know can I have a big share of the fun. Like can I can I get you know carry. Can I get equity in this country that could do that. And my response I very rarely get offended or are upset but my response was like Dude I've spent thousands of hours of my life doing the worst stuff ever. This is the culmination of that effort and you coming out of nowhere to ask me to give you something that I've built and right also. But right at the same story to you for me to give that to you for free because you might help me.

 

John Errico: [00:08:36] It's insane. It's crazy to me and it's it's actually offensive to me it's actually offensive that you'd even ask because you don't know what I had to do to get there right.

 

Ryan Goldfarb: [00:08:45] That's how I felt. And beyond that people don't understand the costs associated with this. I think that's this is part of the glamour of the perception or this is part of the misunderstanding. Broadly speaking about real estate people think oh I mean this is a claim that both of us could make. We could say oh we we sold five million dollars worth of property last year. So people people take that to mean we pocketed five million dollars. That's certainly not the case. I mean between debt and partners and all that. The margins are quite quite thinner than they would appear. And there are as John alluded to earlier so many inputs that just get glossed over and there's so much crap that you deal with that oftentimes they're like there are deals that we've looked at in the past or deals that I think we've discussed between the two of us that you know where we're projecting maybe a a 30 thousand other profit at the end of the day when all is said when all is said and done and to an outside observer it may seem like a no brainer. But when you think about the fact that there is going to be a lot of time there's gonna be a lot of headache. There are going to be cost overruns if that 30000 turns into a ten thousand dollar profit then both on a per hour basis and in terms of opportunity cost that is just an objectively bad deal.

 

John Errico: [00:10:04] Absolutely. And I think underlying it too is the stress. I think even even among us we don't really talk about it too. But it's very stressful to do this stuff I mean there there are times. I mean I I love it. So it's not an existential stress. It's not like what am I doing with my life. But it's an operational stress. It's like putting out fires and emergencies and you can take a take a step back and say look I'm doing what I love and everything's gonna be okay. But in the moment you're stressed I mean you're you're great. I'm like grinding my teeth. I'm like staying awake. My mind is racing you know that I experience that a lot. And for some these projects where I might make five grand off of it 10 grand off of it for months of work and stress and sleepless nights I mean you could work at any other job and make that money without that stress.

 

Ben Shelley: [00:10:51] So I think there's a there's a grid and I apologize if I misquote this here but as a great Steve Jobs quote where he says when you look very closely you know all of these overnight successes actually took a lot of work right. You only see the finished product. And to John's point I mean anyone who has lived their life in any entrepreneurial fashion or has taken that leap knows kind of that reaction you had to talking to that potential private equity investor.

 

Ben Shelley: [00:11:17] But I think it's it's it's interesting because because you also you don't always appreciate the fact that until you scale up which for 99 percent of businesses takes a lot of work and a lot of time you're also going back to this phrase that Ryan always uses this idea on whether or not you're working on your business excuse me working on your business versus working in your business and the amount of opportunity cost it takes when you're an entrepreneur especially when you're getting started in doing all of these nitty gritty things they just need to get done that people say oh like if you're doing real estate I get best you have you have this person new business they just they don't even think about they don't understand the idea of like even if something is as seems as simple as like you know coordinating permits with as a general contractor or with general contractors or just even like scheduling an inspection.

 

Ben Shelley: [00:12:05] I mean this it takes work it takes time.

 

John Errico: [00:12:08] Or the like buying a piece of real estate and buying complex that. My gosh it's very complex very complex.

 

Ryan Goldfarb: [00:12:13] It's also interesting to contrast this with my previous life working in essentially corporate America and having a very I guess I would say normal stable secure job. I admittedly was not a very good employee and I certainly didn't work my tail off there but I know I did enough and I think I did some good work. But the emotional toll of that or the emotional weight that that carried was so vastly minuscule compared to what we face today and it's not just because of the nature of the work but it's it's because of the nature of being essentially on call 24 24/7 and the fact that you know the beauty of this is that we are ultimately in control of our own destiny which is great. And this is not to say that I wouldn't want it any other way but what that carries with it is this constant burden of could I be doing more. And for me that manifests in I think a similar way to John where it'll be seven o'clock and I've just eaten dinner and I want to mail it in and I know that for my own sanity and for my own health the best thing would be to turn on the TV or talk to him and talk to my girlfriend or talk to a friend and take my mind off of work. But I also know that I have this lingering lingering anxiety about all of the things that I that I need to do and need to get done and this is time when I could be accomplishing that. And that also kind of feeds feeds unto itself because if I you know if I do start doing work at that time I might not stop doing work until 10 or 11 or midnight or one and then falling asleep becomes that much harder. And then you're sitting there at 1:00 in the morning saying crap what did I do with my night. I have to be up at 7:00 to start this whole cycle all over again.

 

Ben Shelley: [00:14:03] Yeah I mean I think again when you talk about your guy's individual experience it also reminds me or makes me want to say also to the listeners out there that there are also a lot of different classes and a lot different ways to be more so both of your experiences while they were very different and getting to to the end game had certain parallel lines.

 

Ben Shelley: [00:14:20] I think it's the same.

 

Ben Shelley: [00:14:21] I'm much earlier in my career than than the two of these guys but I work in property management right off the bat and that was more of a structured environment and I found that even within that scope I enjoyed sort of taking the initiative and going out and trying to be on my own which is why I transition to becoming a broker and and that's I think again it's important to recognize the fact that there's all these different classes in the real estate world.

 

Ben Shelley: [00:14:40] If you want to be an entrepreneur right you can be a broker you can be an investor you can be just a contractor you'll be just a property manager you can be just a lender you could be just a consultant. Yes I did write these down I don't I'm not just saying these off the top of my head.

 

John Errico: [00:14:51] Wow he's really smart did he go to Yale to bring about an inspector.

 

Ben Shelley: [00:14:55] Inspector Yeah I mean what worries an appraiser a couple other things that they estimated are two men and missions here in engineering so I mean engineering consulting environments just there's just a million things that you can do and so I think that taking that leap is very difficult but it's also important to remember there's a lot of different paths.

 

Ryan Goldfarb: [00:15:12] And within a lot of those paths you know there are a lot of people who have a proclivity towards entrepreneurship or towards independence but maybe don't feel comfortable because of where they are in their life or where they are in their career or they don't feel comfortable taking a full on leap of faith and and becoming a true entrepreneur and you know only having that or not having anything else to fall back on. There are other opportunities that you can cultivate that allow you to achieve a similar level of independence whether it's being a consultant or being a finding yourself in a position with a particular company where you do have a fair amount of autonomy and maybe you're in charge of a group or maybe they allow you to work from home or they compensate you for business that you bring in. It doesn't have to be a black or white equation. It's not it's not you're either an entrepreneur or you're not there are plenty of things that fall in between in that are I think important to highlight for the people who may not be cut out for or interested in the extreme.

 

John Errico: [00:16:10] I almost disagree I don't know. I I've thought about this a fair amount and I think that I think there's something to be said of really going all in as an entrepreneur to to see that there's nothing like having no backstop as a motivator.

 

[00:16:24] I I agree with that. What what I'm saying is I think there are people who think most people if you ask them would say Oh yeah it would be great not to have a boss or I'm bringing in all this business for my company but I get paid the same as Joe Schmo over there who brings in nothing. And you know it doesn't work nearly as hard as I do. So what I'm saying is like there's a spectrum and there's there are other roles that you can cultivate to satisfy certain urges or a certain itch that you may have without being like I'm speaking more so to the type of person who truly does not want to be an entrepreneur but who may think they do because of one reasoni.e. I don't have a boss or I want to have some more incentive to you know perform better at my job. I

 

John Errico: [00:17:13] don't know. I mean it's an open question for me like our people sort of intrinsically entrepreneurs or do people become entrepreneurs or can people learn to be more of a entrepreneur or something I don't know.

 

Ben Shelley: [00:17:24] I don't know. Nature versus nurture.

 

Ryan Goldfarb: [00:17:27] I think a lot of this is this this could go in so many different reactions now but I think there is a whole conversation to be had about the systems primarily academic that are in place today and the fact that I think in a lot of ways they they reward the type of behavior that leads you to be a good corporate employee as opposed to being a kind of rebellious entrepreneur. Well

 

Ben Shelley: [00:17:51] I think I think another important thing which all ties into this which I've always tried to ask myself before I took any leap in direction whether that be as an entrepreneur in my professional career or in academics because I also transferred specifically to study real estate and I kind of was all in at 20 years old and I think it's it's understanding yourself. I mean what are

 

Ben Shelley: [00:18:10] your strengths and weaknesses. The favorite my favorite note I've ever written for the show is underneath understand yourself strengths and weaknesses as Ryan and Eric exclamation point which is Ryan and his brother and I think like you guys are both the perfect example of doing not only what you really enjoy but playing to your strengths and then you know when I see this partnership and we talked about this I think a little bit in the networking episode this idea of identifying people who fill your gaps and understanding within yourself. What am I good

 

Ben Shelley: [00:18:34] at. And one of my bad. And how can I help my move my business forward. And this also good comes into this idea of looking at it from a tactical standpoint understand what your short and long term goals are. I think it's really important to you to ask yourself your question. I do agree that there's a lot of sort of these a lot of these intrinsic characteristics and be an entrepreneur but nevertheless I think oftentimes those same characteristics can lead to things like carelessness over aggression you know in terms of jumping into a business and so checking yourself and understanding what do I want to achieve today in a month from now in six months from now a year from now Ryan actually pings me with this email once in a while two years from now where do you want to be. And that's an important question to ask yourself when you're thinking about taking the leap as an entrepreneur.

 

John Errico: [00:19:14] But it's a great point.

 

John Errico: [00:19:15] I think you're prefigured in this idea of self-awareness and self identity and that's something that I find is can be very challenging. I have thought of myself as a very self-aware person but recently I have been reconsidering that and thinking that I could be a lot more self-aware. Self-aware about my own skills and capabilities and also my own goals and sort of what I'm achieving at what I'm doing. I mean I had a I have coffee with people a lot in the real estate space because they want to talk about real estate and I run a meetup. In fact we had one last night that Ben was I was a big success and if you then if you're in the northern New Jersey area feel free to check it out at meetup it's Hudson County real estate investors. But notwithstanding that I talked to people a lot and I tell them my story and tell them what I'm doing right now with with Ryan and the fund and construction other stuff and a lot of times people respond and they say wow I I'm so impressed I really want to be like you I wish I could be you I wish I could do this and I don't say that to to toot my own horn bit but almost every time someone says it my response is like really? Like, I'm surprised because the way that I see my path in entrepreneurship or real estate what they're going to say is like I'm not even getting started I mean I've just begun right. So and I have so much more that I want to do. And so it's like when people say like you've done so much you've accomplished so much it's like go I guess I mean I mean it's weird when you're in your own mind and you're working in your hustling and doing stuff that I think we are doing all the time. You don't have the perspective of being like well maybe I have accomplished some things that people would would value.

 

Ryan Goldfarb: [00:20:54] I think we were actually talking about that the other day because there's there's plenty of stress and anxiety come that comes along with the nature of what we're doing. And one of the things we harped on is one of the things that we touched on the other day was the fact that we probably don't celebrate our wins as much as we should because there's always a fire to put out and there's always a new challenge or a new problem that we're faced with. So I think to that end I think it's it's in our nature to just look at the next task at hand and to focus on that rather than dwelling on whatever happened in the past. Both good and bad. But I think it is also important to sit back and maybe appreciate and count our blessings while we have them because there are plenty of people who would like to be in our shoes.

 

John Errico: [00:21:36] And yeah I think even on a personal level it's okay to say I'm good at this.

 

John Errico: [00:21:43] This is a this is something that I excel at that I'm better than other people and I think personally I don't do that almost at all. I don't ever sit back and I try to focus a lot on things that I'm not good at. But I very rarely sit down and say I'm actually good at this type of thing and in fact what I was doing real estate alone which was you know all of my real estate quote unquote career except for the past eight months or whatever you know six eight months when right and I started working together and Ben a little bit later I see something that you guys told me was it was really a revelation to me which was when we would SEO something that we do as we own a or primarily or exclusively Ryan runs a tax lean portfolio in East Orange and you it's kind of become our group project as well. But you know we we have to break into houses that Ryan's has foreclosed on or through his company has foreclosed on and something that I enjoy doing is physically breaking into houses.

 

John Errico: [00:22:43] And I didn't think anything of it because I had done that also for other contexts but I think you guys mentioned it to me or something like like you're very resourceful or like you're doing well you're uniquely good at it right and.

 

Ryan Goldfarb: [00:22:54] It must have been the resourcefulness class you took at Yale.

 

Ben Shelley: [00:22:57] And like this is the guy I'm investing with I'm going to break into my house.

 

John Errico: [00:23:03] You said something to me about it and it just never occurred to me. It's something that's something that I that was unique or different about me just never. And and so when you said I was like OK like that I appreciated that right. I mean that that was great.

 

Ryan Goldfarb: [00:23:17] We'll be sure to shower you with combat in the next few weeks. I don't say this is let me down not seeking out of it.

 

John Errico: [00:23:25] I'm just saying that sometimes to get self-awareness if they ask other people.

 

Ryan Goldfarb: [00:23:29] Yeah I think it was ironically because we actually have a SO similar to how I've been pinging Ben about his goals. I had actually ping John somewhat recently about feedback and just to kind of and didn't respond at all.

 

John Errico: [00:23:43] Right. Right. So. So both of these guys I have sent separate emails to about things like this you know guys and I've gotten zero. I think about that e-mail almost every day. I seriously do. I was like I should respond to that. We're giving it you that we bring it up on this podcast even though we haven't responded yet. I do think about that this morning I woke I was like I should just like to write about that because I think it's so.

 

Ryan Goldfarb: [00:24:08] So for context the email was essentially a instructions or a request that like John and I sit down and just kind of be honest with each other about kind of evaluating the other person. So the idea was for John to get a better sense of his strengths and weaknesses obviously like somewhat carefully worded but also honest enough for it to be effective. And likewise for him to do that to me because our intention is as we scale this thing up we want to be both focusing on our strengths working on our weaknesses but also figuring out how to allocate the resources that we do have. So if it becomes abundantly clear that John is very good at one thing that I may potentially not be as good at then that's obviously a task that is better suited to John than to me.

 

Ryan Goldfarb: [00:24:59] And if there's something that neither of us are good at then it's something we when I do it is something we need to seek outside help for or put on but if I don't like this I just get that it's okay.

 

Ben Shelley: [00:25:12] There's no resentment.

 

John Errico: [00:25:14] Or Michael Gomez la Michael number one now I like what we have. Who's gentlemen. That's right. Exactly right.

 

Ben Shelley: [00:25:20] No I appreciate this and I'll tell you it like it you know. I don't want it. I don't wanna get too emotional here. But it's one of the things you do is when when guys like John and Ryan bring you into the fold you don't want to let them down. I think also one of the things I love about being an entrepreneur generally is you are uniquely reliant on the people around you. Those people who you do work with I think because you are on one hand completely alone in the sense that you are your own security blanket. But on the other hand you are also seeking out either partnerships whether by partnership. I don't just mean like like a John Ryan partnership I also mean partnerships like professional relationships and networking relationships that can help guide your individual effort forward. I mean everything I think is worth looking in a holistic context. And it comes back again to these questions that Ryan e-mails us to is is also understanding who are the people in your life both personally and professionally by the way personally.

 

Ben Shelley: [00:26:09] Being something we don't talk about as much that will help drive you not only you forward professionally from a worker standpoint but also your business overall as you begin to scale up your business and think about more of your long term goals and I think maybe it's important to recognize that it is important too to address and focus on your short term goals sometimes before you can dream big.

 

Ryan Goldfarb: [00:26:29] Because we all dream of that and that's actually interesting when I'm sure John can opine on this too. But one thing that is very difficult to balance is these short term goals or short term needs with long term goals. I don't like to be brutally honest with you. This is a space real estate in particular that is particularly capital intensive and I don't know that I can speak for John on this front. But for for me I know that there are oftentimes where I have most cash or a lot of cash tied up in one or two deals and I may be cash poor property rich at any point in time which you know is not a necessarily bad position to be in but it might be a little less dire or it might be a little less stressful if I had some more of these like short term wins or if I had another source of income that was a little more stable and you know we're we're building these things out but it is it is a very tough dynamic to balance.

 

John Errico: [00:27:24] Absolutely. I mean I think right now both have been on every spectrum of finances personally financial issues and I've been lucky that my my wife has a great job has had a great job making a stable income but but I think it underlines this idea of one thing that I see a lot something that I've struggled with and I see it a ton of times and other people is that people oftentimes will not even talk about their goals like what they want to do and sometimes it's I think that there are a lot of reasons for that could be because they're embarrassed about it because I think sharing your goals is a very personal thing. It could be that they're they're scared you know kind of related to embarrassment but they're scared of not succeeding in it because if they say hey I'm going to whatever I want to make a million dollars this year whatever if I don't do that well people look at me and say you didn't make a million dollars so you know that's foolish. These are just voices in my head that I'm verbalizing let me just say that maybe maybe other people don't think this way. But another reason some that you wouldn't talk about goals is because they're afraid maybe that other people are going to steal their thunder or steal their you know whatever in the startup world tech startup world is still your idea or whatever it might be. And all those things are so destructive because talking about your goals and sharing with other people is in my experience the only way for it to happen. I mean I had a goal personally to do this private equity fund that was a personal goal that I had as far back as like two or three years ago and I never did anything really tell me anything about it. When I told Ryan that I want to do it and now we're doing it together. It's actually happening and that I mean there's there's no easier thing that I can say than just share what you're doing what you want to do.

 

Ryan Goldfarb: [00:29:02] Oftentimes the fear is so unfounded because nobody when you have an idea you think it's the greatest idea in the world and so naturally you think that everyone is going to want to take your idea and run with it but oftentimes that is just unfounded. There's so much operational complexity or logistic complexity to achieving that goal that if somebody hears that idea even if they think it's the greatest idea in the world the chances of them actually acting upon it anyway are virtually zero.

 

John Errico: [00:29:30] It's a cliché but ideas are valueless and so they're only a prerequisite right.

 

Ryan Goldfarb: [00:29:35] So oftentimes what you are doing is foreclosing on the opportunity to have a discussion that may ultimately be beneficial to you. And separately it's also valuable at least in my experience to talk about these things because I find that when I talk about something I feel like I have a duty to hold up my end of the bargain and I don't want to be known as somebody who just talks talks talks and doesn't act. So if I say something and I start talking to something if I start talking to people about something then I am that much more empowered and motivated to go and attack as we're doing.

 

Ben Shelley: [00:30:06] Yeah I mean. And I think I've heard you both say this John.

 

Ben Shelley: [00:30:08] I think I heard this you also say this specifically to some of the people that we've worked with which is don't be afraid of your own ambition right I understand that that as we've alluded to there is a personal aspect of this where you can be embarrassed about this but by sharing some of those goals and some both long term and short term you can get partnerships like this forming.

 

Ryan Goldfarb: [00:30:27] The first step for anyone is just to start doing something and it's super overwhelming when you don't know where to start but oftentimes just studying your situation studying your goals and figuring out some kind of very broad path can bring you to the first action point which will then lead to the next. The next point the next domino and everything will kind of unfold from there.

 

John Errico: [00:30:52] I think it's such a great point. It's such a great point. I don't know how to just do it which is a great slogan as well but it's so many times I think questions will present themselves to me it's like will this work or you know how do I do this or how do I know this.

 

John Errico: [00:31:10] And the answer is always just do it and then you'll figure out if it's gonna work or not and you'll figure out what you need to do. You just need to do it. Don't don't think about it. I mean you can think about it to plan it but at some point just execute and then you figure it out.

 

Ryan Goldfarb: [00:31:23] But understand like understand your downside or under it like be realistic about what your situation is. Don't use everything you have working against you as an excuse but understand that if you have four kids and are living paycheck to paycheck and have very few financial means understand that or understand what your downside looks like and figure out a path that takes you there with a little less risk or with a little less risk upfront maybe that means keeping your job and working on your goal in your off hours but but be aware of well.

 

Ben Shelley: [00:31:58] I think it's it's funny because so much of what we've talked about it talks about how some of the rewards of being an entrepreneur but how the nitty gritty can be so I don't wanna use the word depressing but it can be so tough that the pay off sometimes isn't always.

 

Ben Shelley: [00:32:14] Maybe you feel like it is worth the work that you put in all the time. And I know that for me personally again I thought I wanted to be an entrepreneur when I moved into the brokerage sphere. But when I knew that I really loved it as when I was actually enjoying making cold costs. I mean there were zero moments when I was making I mean literally hundreds of phone calls a week even. And I was enjoying the idea that my life my livelihood was based on the execution of the goal in front of me. And I don't know if that's we that's can be extrapolated into some kind of trait that that is that you find in other people who enjoy being entrepreneurial. But it's it's that kind of thing is is enjoying the little things maybe not accounting that's the one thing I don't enjoy doing.

 

Ben Shelley: [00:32:58] But but I will tell you that outside of that either do we. That's why I do it. Yeah that's shocking to hear it. I just.

 

Ben Shelley: [00:33:05] But just like for us analyzing deals getting looking up calms things little things like that where you think gosh that doesn't bother you argue. I think there's actually there's there's some excitement in that and there's some enjoyment in the whole process itself.

 

Ryan Goldfarb: [00:33:19] Well it's interesting because the example you used of cold calling is such a clear case of knowing your strengths and knowing your interests and knowing your skills because that is something that I absolutely despise and I know there are a lot of real estate investors who make a lot of money on the basis of their cold calling skills but it's just not something that I think I could do I think there's a point at which I could do it effectively but I know it's something that I would always dread. So that's just another example of knowing yourself. The other thing I would say is a lot of these tasks that seem like they'd be dreadful or that seem like they would feel like a waste of time for you to do. There are quite a bit more rewarding when you're doing them for yourself and when you're doing it for some ultimate goal.

 

John Errico: [00:34:10] Yeah I mean the way that I think about it is almost like a utilitarian approach which is that doing what I'm doing is is I'm very confident that the greatest use of my abilities and I can if it's not I can easily make it that I never have the experience doing this where I show up to work and I'm like You know what I'm really a great X and I just don't have a chance to express that in my job. I never basically have that feeling doing what I'm doing. And that's a great feeling because if I think of myself as like a useful implement you know like a something to be deployed in the world what better way to deploy myself than to fully be using all of my skills and time and Yale education and efforts then what I'm doing I truly believe that. So that makes me very deep down on an existential level very happy.

 

Ryan Goldfarb: [00:35:10] It also comes back to having an end goal and a plan because if you didn't think that the end that you were working toward was worthwhile or if Ben didn't think that he wanted to be a broker chugging through all those cold calls or plunging those toilets or making your fourth home depot run of the day would be that much more frustrating. But when you know what the end is in mind and you can just chalk this up to another step on that journey and it's a little bit more palatable right.

 

John Errico: [00:35:37] I think it would be I think some of the things that we have done at least that I can recall doing would be literally unbearable if you couldn't pay me enough money to do it if not for the fact that I felt that I was building something that I cared about that was important to me. So if you find yourself if you want to be an entrepreneur and you find yourself having to do things that that and you don't like it then are you know you don't have to like it in the moment but if you don't like it in the context of what you're doing. I think that's a sign that maybe what you're doing is not the right path for you.

 

Ben Shelley: [00:36:11] It's a great point to finish. And for everyone listening out there. Remember to reach out to us on Facebook brick by brick that's brick X brick podcast. Remember to subscribe wherever you get your podcast and listen to us on iTunes and Spotify. Thanks so much for listening.

The Liberty Hudson team continues their discussion about the construction process. The conversation covers selecting finishes, communicating about timelines, and what to do when your construction project isn't going as planned.

The team also rehashes the importance of documentation throughout the process. (Hint: Document everything!)

 

(Transcript below.)

Ep. 9 - Managing the Construction Process (2 of 2)

Ben Shelley: [00:00:07] Welcome to the Brick x Brick Podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. We are fortunate to have Ryan and John back with us today. Last episode we discussed general contractors, managing expectations, construction pricing, permits, licenses, and much, much more. Feel free to listen back. I would actually encourage it before diving in with us today for today's conversation. I want to start by talking about how you approach the construction process depending on your individual project goals. So we talked in previous episodes about flipping properties as an example where you may be looking to simply move on from your property rather quickly to gain equity so you can continue to invest in a neighborhood versus maybe buying something to rent and hold to create ancillary income on the side for you whether or not you are a primary investor in a real estate market or a part time investor. So I want to bring our experts in and have this conversation for me who is obviously just starting in the business when I'm curious to know and we'll start specifically. So let's look at for example a flip example. How would you guys approach the construction process holistically as well as your relationship with the general contractor with such a specific scope like like flipping a home in a real estate market in mind.

 

Ryan Goldfarb: [00:01:18] Well when it comes to a flip the first thing that I would baseline my my project goals against is what the neighborhood will bear. So if I'm in a in entry level neighborhood where you're mostly looking at starter homes and you know in our area this may be in the three four hundred thousand our price range I'm going to have a very different set of fixtures and finishes and fixtures in mind for a property like that versus in a higher end market around here when you get into the million plus price range. There's only so much that any market will bear and it doesn't make sense to over improve when it comes to the dynamic with the contractor that is going to in part depend on their level of expertise. So if you're bringing in a builder who has a lifetime of experience in the high end space and really has a good eye for design and that's part of what he's built the foundation of his business upon then it makes sense to leverage that and to hear his opinions and to take a little bit of guidance from him. However if you're working with somebody who is really just there to kind of take direction from you then it is incumbent on you to know which direction you want to go and where you want to draw the line as far as finishes and whatnot. And that's really where knowing the comps and knowing the market is going to come into play.

 

Ben Shelley: [00:02:33] So maybe John what what kind of finishes and what kind of things would you look for maybe. I think most people would look at a flip and say probably not going to do luxury finishes for something like that because you're looking to turn it over rather quickly and and probably bring it up to its highest possible ARV within a certain range given your your circumstance your financial circumstances. So maybe you could tell us a little bit about what you would seek for from pricing perspective and also a quality material perspective.

 

John Errico: [00:02:59] I think it really depends. As Ryan alluded to before with the market and where the market is. The overarching thing for me that is most important about a flip is time either time is important in any real estate project or for a flip time is really really money because you're carrying costs. If you're using hard money or you're loaning money whatever you're carrying cost with the property can be very high. So every day or week or whatever that goes by is like actual dollar amount it is like an actual amount that you can ascribe to. So whatever it is that you do I don't think that it's probably hard to say a general statement about like you should use this type of finishes this type or whatever but whatever you do I would say be very very cognizant about the time element and even if you can get a general contractor lined up before you start or have a general contractor come in with you when you're looking at the property you give a quote give an estimate even that could save you a week that we could be a thousand dollars in a flip and that's significant money.

 

John Errico: [00:03:52] So my takeaway for finishes or whatever it might be for Flip is focus on the time element.

 

Ben Shelley: [00:03:58] Because you know the way I think about it too is and Ryan mentioned this before about you know OK if you want something like a luxury finish whether it's a flip or not you want to find people who have expertise in whatever it is that you're looking for and also as to John's point to be cognizant of your own timeline what your cost basis is and what your financing situation is like said hard money you really got to get moving on that timeline. In terms of engaging again though with the GC in the context of your project goals for a rental for example I mean you guys have had experience both as general contractors yourselves and working with general contractors in both types of properties John maybe more so with rentals Ryan maybe more so with flips to maybe talking a little bit more I'd be interested to know at least a little bit more about some of your overarching experiences working with contractors given your different and varying project goals.

 

John Errico: [00:04:42] I mean a lot of times for rentals that depend on the property but I've tried really hard not to over improve rentals because I rent a lot of properties in lower income areas and the phrase that I always use my wife likes uses a lot to is cheap and cheerful. So the idea is that you want to make it look appealing and nice but you don't spend a lot of money on it and you want to be considered that they're going to be tenants living there and so in most neighborhoods I mean maybe the exception of very high end neighborhoods a tenant is not going to treat your apartment in the same way that you as the owner were treated. So you're looking for durable materials. You know one question is something I always ask myself in a rental as you say. Say I decide to put quartz countertops in a kitchen as opposed to granite or as opposed to you know a non stone countertop at all. The question I have is am I going to rent this apartment for more money because I put this thing in. And oftentimes the answer is No. There certainly are scenarios where you could say yeah having a quartz countertop will give me more rent or give me a different caliber of tenant but many times nobody cares and then I got to pay more money for it. That's particularly true in lower income areas like the finishes. You want to be functional nice but nobody's going to pay you more money. Have a nice refinish in it.

 

Ryan Goldfarb: [00:05:51] So the other question to ask yourself is is there are there going to be any other ancillary benefits to having that specific type of finish. So there are plenty of areas where you'll go and you know you may not even be common to have a kitchen backsplash but if you have a kitchen backsplash that wall is going to consist of tile as opposed to just being painted. And when you have grease splattering from a fireplace or water splashing from the sink that's going to be going up against your what your sheet rock as opposed to going up against tile.

 

John Errico: [00:06:25] So when it comes time is painted right on it. That is certainly true. And then there are way gentlemen.

 

Ryan Goldfarb: [00:06:32] I mean there are ways around it but really what it comes out it is not really not just the cost upfront but the ongoing cost both in time in terms of money and time.

 

Ben Shelley: [00:06:41] Well I think it's important to know too that when we talk about less expensive doesn't necessarily always mean less functional. Right. I think there's a difference between function and quality in that generally there's a wide spectrum of functional finishes you can use at lower cost ranges.

 

John Errico: [00:06:55] I think the word is value and it could value value add right, it's the name of the game.

 

Ryan Goldfarb: [00:06:59] It's no different than looking at a piece of property and saying what is the best bang for the buck on this project on this property how do I approach it. And I think you approach every renovation question the same way.

 

Ben Shelley: [00:07:09] So now I'm going to take this in a little bit different direction for four people again like me who maybe have already had some of these experiences just getting into the business with general contractors which is sometimes this feeling that regardless of what stage you are in your project and regardless of what kind of project you're doing it kind of feels like a general contractor almost abandoned you a time. I think obviously these guys are oftentimes working and gals are working on multiple projects at once but I guess I want to know from you guys who are general contractors. Take us behind the scenes and tell us maybe why that is why you felt that way. I mean for me I've actually been reaching out to a GC the last two days who we've done good work with and have not necessarily heard back from an always on a time schedule but I know that he's on it. So how do you fight that as an investor and know when to push and when to hold back.

 

Ryan Goldfarb: [00:07:52] Well the first thing is whether they're giving you a reason for their silence. If they are just not answering your questions for the sake of ducking you because they don't have answers then that's a red flag. If they are working behind the scenes and they have told you that plans are in with the city and they're ready for inspections they are just waiting to hear back on a date. That's one thing that's that's to a large extent out of their control. But if they are just ducking you entirely then then that's a big problem.

 

John Errico: [00:08:21] Yeah I think maybe we can. Don't if you're going to touch on this specifically Ben but talk about the process because that has a lot to do with timing. So there's a lot that goes on behind the scenes with a construction job that isn't obvious to an owner and a lot of that involves other components besides just like guys there with materials installing them in your house. So you know one component is the permitting process. So. And even to step back from that everything as a prerequisite right so you can say like well in order for me to redo my main sewer line what does that involve. Well it involves maybe getting the materials. So OK well what materials do I need. Well then you have to go and measure to see you know how how much of whatever material that you want well to measure you might need to rip down a wall or you might do to do something else and that might involve getting a permit or maybe even getting a architectural drawing if you're going to rearrange something or do something pretty substantial so or structural so every sort of prerequisite kind of lines up and all of those things take time. So if you're starting and saying hey I need to get architectural drawings that might itself take a week because you need to schedule somebody get out there they need to look at the property they need to make an assessment then get back to actually do the drawings find that I need to go and get permits. Well that could take just filing the permits itself could take a week because I need to quarter with a subcontractor I need to do whatever I need to coordinate all sorts of crap then besides getting the permits I need to actually maybe schedule time to do the work that could be another half week week because you know the guy's busy or I can't get the materials there on time whatever whatever. So it's very easy to see how these things can spiral into a month long project even if the actual construction work takes two days.

 

Ben Shelley: [00:09:57] And I guess it's worth noting too that a lot of a lot of things you do right. We talked about permanent and you're exactly right. We were going right to the timing for the construction process. It's so important to keep in mind that there are other factors also outside just the people who are working for you for example getting permits from the city can be an ongoing process where you could be left in the dark and usually are left in the dark up until the point they call you to tell you the things are accepted once things are finalized and put in. And I guess another part like you said John is pulling contractors pulling permits and putting them for you. I think investors often can do that on their own but you know as someone who maybe just investing in a home for themselves oftentimes they'll leave that responsibility to the GC.

 

Ryan Goldfarb: [00:10:34] Also during the process scheduling takes time oftentimes a task like that. That is rather specialized it's not going to be done by your general contractor more than likely it is going to be subbed out to a plumber and oftentimes someone with that specific expertise. So not everyone is available at the drop of a hat. Sometimes it takes a week or so before a guy has an open day in his schedule and that oftentimes needs to line up with the plans or with the excavator schedule or with whatever other pieces of the puzzle are required on that day. So if you miss one day or if the plans aren't ready for that day or the city inspector has to cancel then that may push things back a week. Not necessarily because that guy's not ready but because A, B, and C don't all line up on on another day for another year.

 

John Errico: [00:11:22] I'll give a real life example of we're working on several projects right now mostly for our own investing that we're also doing the construction work on and a lot of it is kind of like Ready Set wait because we'll go to a building will you know the first step for our projects is we'll demo it so with then when the building and then we're kind of to figure out what we want to do with it.

 

John Errico: [00:11:40] So we bring in an architect or a drafter to draft the whole thing. That alone could take I think in our case has taken what two weeks for that to happen. So we wait two weeks for that to happen then during that two weeks. Basically nothing can happen because we're waiting. Our subcontractors like our plumber an electrician our HVAC person is waiting for us to get the drawings. So we just have to wait. So we get the drawings and then we have to give them to the subcontractors. They have to look at it. They ask us questions we tell them what we want. That itself is a back and forth because they have to physically go to the property to do whatever else. So we're waiting for that. Then at some point we say OK we finalize this. No need to get permits. Well now we need to get everybody to get signatures on the permits get insurance information license information get that then submitted to the city. And you know technically we're supposed to wait until the permits are granted to begin actual work. And that could be three plus weeks for it to happen. So there's a lot of delays and say we then do the work right. I'm thinking of another project that's a little bit further on we have the permits we've done the work now we're waiting to get essentially our rough inspections. We can't do anything else until we've passed our rough inspections which are sort of like the first inspections that happen in the construction process.

 

John Errico: [00:12:45] We have walls that are open we have new plumbing new electrical in but we're just waiting for the city to come and look at it. And if they tell us that there's something wrong we have to go back fix it and then call them again. So there's lots of start and stop start and stop processes that go on and to be clear with that.

 

Ryan Goldfarb: [00:13:00] It's not that we don't want to be doing work. It's not the rough inspections require the walls and everything to be open. So anything that would be a logical next step whether it's sheetrock, flooring, painting, cabinets, any of that type of finished work is literally impossible for us to tackle right now because we can't do that until we've passed rough inspections and rough inspections require that all of that stuff still be undone.

 

John Errico: [00:13:25] Right I mean like I would say daily test this is one of your tests and is to call one of our contractors to say hey can we get a quote Can we get the number. Can you sign the permit. Can we submit the permit. That's every day.

 

Ryan Goldfarb: [00:13:36] I'm rescinding our department Yeah. Or are the crawl out of the program in the city right.

 

John Errico: [00:13:41] So it's like it's not like we're just sitting twiddling their thumbs it's like every day we're like Let's go go go go go. But we just can't. There's just no way to do it faster without massively violating the law or creating safety liabilities.

 

Ben Shelley: [00:13:53] And I guess it's important to note the wall you know it's going to sound like it's just a grand defensive of General Contractors. Obviously there's good and bad in every business that this conversation about timing is vitally important to remember for these reasons that that there are actual tangible outside forces that oftentimes cause the reality that you're experiencing of either perceived delays or real delays in these projects.

 

John Errico: [00:14:14] I mean we're we're the most incentivized because the projects that I'm talking about right now are our own investment projects we're also the contractor on it. But these are this is our own money so we couldn't be more incentivized to get it done and even we are waiting weeks for stuff to happen and the contractors won't get paid obviously.

 

John Errico: [00:14:31] No of course. But I mean even if you're cynical about it we have the most incentive to do it and we can't do it any faster than we're doing it. So you as a client if you're looking at it as a contractor just because something's happened doesn't mean you're sitting there.

 

Ben Shelley: [00:14:43] So what do what to what extent. I understand that. It's really the contractors trust responsibility for the most part but to what extent. For me as an investor should I be involved in quote unquote passing inspection as in obviously I'm not doing the actual work I shouldn't be the expert here but is maybe there a level that that we could advise or give advice to to the everyday investor for what they should or should I know or what questions to ask about passing inspections.

 

Ryan Goldfarb: [00:15:05] I don't think the investor or the homeowner should be involved really at all in that capacity that is ultimately on the on the contractor and on the subcontractors but the homeowner or investors should have certain levels of expectations based upon the scope of the work if if the contractor originally relayed that something would be a potential hindrance when it came to inspection time or on the other side of the spectrum if they said that something was going to be easy breezy no problem. That should be taken into account but it's not necessarily their responsibility to ensure that the inspections are passed. It is on the contractor shoulders. Having said that they should also keep in mind that there may be decisions that you as the investor make that will make inspections more difficult she passed down the line.

 

Ben Shelley: [00:15:53] And I think that's extremely helpful to keep that in mind.

 

Ben Shelley: [00:15:56] Again in terms of the overarching context of how you approach your project what you should and shouldn't know. I have here a note that is probably not the friendliest of topics but I think it is worth visiting. Maybe to give some brevity it's something that a lot of people go through which is the idea. Even though you're hiring a general contractor you also could be in situations where you feel the need to fire maybe these outstanding circumstances that we discuss maybe there is something in city is going on or for whatever reason they're just not meeting your expectations. It doesn't have to necessarily be a how do you fire a general contractor but what do you go what is the process and how do you remediate situations which he sees that you're unhappy with how have you guys done it.

 

John Errico: [00:16:33] It's a complicated issue. There are a lot of moving parts. There's the financial part. There's the actual construction part. There's the legality part. There's the city permitting part. I have had to fire contractors before and the one time I did I ended up losing a fair amount of money that I'm actively trying to get back. To be frank I had a contractor who came in this is before we started our contract and company who came in and wanted to we'd hired him to renovate an entire apartment and after maybe two or three months with him doing truly nothing. I mean this is not like him calling William permits we actually had the permits already when we hired him because we had used a previous contractor that we didn't pay any money but had long story. That's irrelevant to your question but we do want to hear the oil. So we had this guy you start doing work we paid him a large deposit that we paid maybe 14, 15 grand. And he did maybe nothing. I mean I would say maybe you did two or three thousand hours of work and so he said look it's not gonna work out. No hard feelings but can we have you know twelve thousand dollars back because we valued his work at that and he said no basically. And so our financial options. So you know at that point there's a decision tree it's like well I could continue using this guy because he's like giving me my money back. But at this point it probably burned every bridge because we said going to fire you. Probably not said I know how to lose. Right. Not very incentive to help us. The second is how can I get my money back then I can touch on. We can both touch on how that might be possible in the third is how do I actually get the work done. So we ended up hiring another contractor and you know from a from a logistical point of view the problem with a lot of subcontracts is that when you bring in a new a new contractor say new plumber and the plumbers the plumbing is like 20 percent done the new plumbers and to come in and say well I didn't do the 20 percent that I need to redo it because I can't put my name behind it. That's not uncommon because oftentimes licenses are at play liabilities a play for these guys and if there's something wrong they could be held at fault because it's their name on the on the job. So the reality is that even the 3000 hours of work this guy did I had to redo and frankly more costs because I had to bring in an electrician and a plumber who just told me that all of his work was crap which I frankly don't think is correct. But there's just no other option. I just had to go with them they had to redo it so I can go more in detail about how I'm trying to get money back from capturing how you could I do want to hear this.

 

Ben Shelley: [00:18:48] I'd love to hear first Ryan's perspective on many said on maybe a situation where you did the same I think you mentioned in previous episodes a very bad experience with some of the very first contractors and general contractor and subcontractors you worked with. And I do think it's an important thing to know which we'll discuss in a second that there's an opportunity cost associated with trying to get your money back when this process happens that's really important I think for people to understand that even if John ends up getting his money back there is also the time waste as well as the amount of money he's spending to proceed to to try to get the money back maybe through a legal legal means.

 

Ryan Goldfarb: [00:19:22] So the actual formalities of changing contractors as far as I've seen are pretty simple.

 

Ryan Goldfarb: [00:19:27] It's pretty straightforward for the instance that I will delve into in a moment. It was as simple as filling out a change of contract form with the building department and essentially transferring the permit or to the new.

 

John Errico: [00:19:38] You say that that simple but it's not that it cannot be that simple because sometimes you need to have decide off of the previous contractor.

 

Ryan Goldfarb: [00:19:46] That's something I was worried about and it was at least in this instance I had none.

 

John Errico: [00:19:50] I've had the opposite experience. Yeah all right.

 

Ryan Goldfarb: [00:19:52] Well caveat everything I just said.

 

Ben Shelley: [00:19:54] This is why we're in this game. Gentlemen I think this is help. I mean this is but it's important to realize it's amazing to two guys who are extremely experienced in the business and in different sectors of business have completely diametrically opposite experiences with this process of cha- what we want a fire of changing general contractors especially in this climate with a lot of people out of work.

 

Ben Shelley: [00:20:12] Hashtag furlough no politics. Ryan please continue. So you wrote off the change. Yeah. So the city and there is no problem the general contractor signed off on it.

 

Ryan Goldfarb: [00:20:22] Right. Well the previous one did not. But the new one did and that was all that was required from the city's point of view. The issue with it for me was more so the emotional toll of doing that. I mean that I remember the time I was I think twenty five or something like that and I was working on my first big project with a contractor who was twice my age whose life's work had been general construction and I had to get him on the phone and tell him Look you're done this isn't working out. And obviously I wanted to get it done. So obviously I wanted to approach it in a delicate manner because as John alluded to earlier there are logistical ramifications of doing this in a way that can be construed as hostile and then they can make your life a little bit more difficult. So I was trying to be cognizant of that and I was trying to approach it delicately so as to smooth over the process a little bit. I remember the toll being quite strong on me like weighing on me for a while before I actually pulled the trigger because at the end of the day I was still new and I didn't really have the right set of expectations and I don't really know what the baseline should be I didn't know how a good general contractor operated. So the fact that months had gone by with virtually no work with still no permits with virtually no updates and very little communication I didn't realize that that was so out of line and so off base especially for a guy who tried to profess his professionalism. But ultimately it was the only way I was going to get that project done and obviously there were costs to doing that. I actually I think just took the route of hey whatever whatever costs I've sunk into this I'm going to chalk up to a learning experience and not take the time and not take the headache to to try to recoup.

 

Ryan Goldfarb: [00:22:08] Also perhaps in part because I'm not an attorney.

 

John Errico: [00:22:12] It's a great point though about what is standard what is the baseline expectation. A lot of a lot of times you don't know that it takes a lot of learning and knowledge and also personal fortitude and confidence to say this is not acceptable to me even if this may be the standard I don't find this acceptable.

 

Ryan Goldfarb: [00:22:27] And from a tactical standpoint I also had spoken individually with both the plumber and the electrician and I had not really had any issues with them to that point. So at that time I confirmed that they would be willing to remain on board without the GC and they were. So that was one thing that I did to kind of mitigate the spillover effect that John alluded to earlier about having to bring in a new electrician a new plumber. There are plenty of other issues with these guys and ultimately there's a lot of to glean from who one associates associate themselves with.

 

Ryan Goldfarb: [00:23:01] And these guys were obviously associated with that general contractor but.

 

Ben Shelley: [00:23:05] It's important to remember again that there is tangible cost there right. Those were not reasonable waiting times given the process that where you already were.

 

Ben Shelley: [00:23:11] I think in the process and you have holding costs to think about so obviously.

 

John Errico: [00:23:15] That's why I like networking and knowing people in the industry it's important because if you literally know no one else that has ever done a gut renovation project with a general contractor you have no basis to say whether something is taking a long time or not. But if you can call up your friend and say hey I'm going to take you to do your whatever it is that you did. And he says oh it took me two weeks and you're know two months then. Obviously that's unreasonable.

 

Ryan Goldfarb: [00:23:35] So last thing I'll say is it's also it can be dangerous to work with someone who knows just enough that they can get by with these things. Most general contractors who operate in this capacity still have some level of experience and can still saying of things to kind of keep you at bay for a little while. So it's on you to be diligent. It's on you to be a little bit proactive and to at least know what's going on as close to the source as you can whether that's you know if the contractor says permits are in or permanent applications are in we're just waiting to hear back from the city. I want to say circumvent your contractor and make him look bad but do it and call the building department and see if the permits went in the day. He said they went in or if it's been or if he said they went in January 1st and it's February 15th. Then you call the billing department and find out that they weren't submitted until January 20. Then that's a red flag.

 

Ben Shelley: [00:24:30] Did that happen?

 

Ryan Goldfarb: [00:24:31] Maybe.

 

John Errico: [00:24:31] Like Ryan said talk to that it's specific talk to the subcontractor. Yeah and just say like How do I what's going on. All right so John do you want to quickly talk about on the bad side what what you're doing to try to to get your money back for this process. Well it would be helpful.

 

Ryan Goldfarb: [00:24:45] I'll leave this to John Errico, Esq.

 

John Errico: [00:24:47] He figures you know as I would say to anyone. And we I think touched on this in the previous episode when you have a register with a contractor you have a contract with your contractor and the contract should specify things like what happens when if things go sour. And also it should specify things like here are conditions that would justify me letting you go. For example if you're super super super late if we have deadlines that are not met for some reason that could be a justifiable reason for letting you go and then you know in some agreements there are specific clauses that say if we terminate at this point this is how much we will get paid or not get paid with the one contractor that I had in question we had essentially drafted it where he just gets a deposit upfront and then he had subsequent paymentsetc. But we had specific dates in the contract to say if you don't you haven't done anything by this date and we can let you go. And he hadn't met. Not only did I get that dated in like two months after it. So our remedy is to say I'm going to sue you for breach of contract because we had an agreement with you and that's a legal process but that's that's what we're doing.

 

Ryan Goldfarb: [00:25:48] What are the chances that you recoup any or all of that.

 

John Errico: [00:25:52] They're low they're low but it's the principle they're low and that's the problem is because a lot of times you know particularly when you're working for people that are gonna do work for less money they might not have a lot of assets or liquidity so you could kind of go down the rabbit hole and attempt to litigate and I'm not advocating that you should or shouldn't it depends on the money and your circumstances. But you know the reality is that there is a reason why contractors are priced differently. And one of the reasons is that a higher priced contractor might have things like sufficient insurance or might have things like solvency where if something goes wrong you can actually expect that you might be able get money out of them and you can think of it almost as an insurance payment. So like I'm I'm paying more money for somebody yeah. But in return I have at least the possibility that if something goes wrong I can.

 

John Errico: [00:26:37] I can be OK.

 

Ryan Goldfarb: [00:26:38] Is the reason that you don't think you will get anything out of this because there are no assets to seize or to get payment off of. Or is it because the the legal process by which you would obtain that is too cumbersome.

 

John Errico: [00:26:50] It's both. I think that there are few assets that are obtainable. I think that the way that this guy is structured his business many assets will not be reachable in a normal sort of lawsuit. And I think the the flip side is that the time and effort and frankly money because even though I'm a lawyer I'm not going to show up in court to sue this guy. Frankly it's not worth my effort even that the time and effort and all that to do it is gonna be too much.

 

Ben Shelley: [00:27:16] So and I think what's interesting too is is that again you see all the different ways that these these scenarios can play out.

 

Ben Shelley: [00:27:24] And I think it's it's important to note that if you are experiencing maybe delays in timing or perceived delays communicate manage your expectations make sure to understand your both your your recourse personally per your contract as well as your future legal means of recourse if you're unhappy with with a contractor and then fundamentally you know a lot of this stuff I think you just learn as you go through through the process itself. You got to try. You got to do it before you understand you're where you need to be in the business and you need to be networking with. I want to just take us through the end here where we let's say we were at the process part of the process where we've gotten through inspection. Take us through to the end all the way up to the point where we need to pay our contractor. Ryan wanted to take us through it.

 

Ryan Goldfarb: [00:28:05] So after the rough inspection everything that's done will be to get you to final inspection and ultimately to get you through the punch list. So again based on your payment schedule certain payment may be due at the conclusion of final inspections. And upon receipt of the CO and payment may also be due based upon completion of the punch list and CO being Certificate of Occupancy contracting fee or depending on the depending on the municipalities we talked about.

 

Ben Shelley: [00:28:34] I mean we just talked about some of the legal recourse you can take but just generically speaking to the end of the project is there maybe certain things are meant in the punch list and obviously as Ryan alluded to the more specific the better.

 

Ben Shelley: [00:28:44] But what can you do maybe both if some of the work is done and maybe there's a dispute or maybe more importantly if you don't like some of the work how do you approach that conversation in respect maybe to payment.

 

John Errico: [00:28:54] You know a lot of times contractors the way that payments are scheduled is that there is a there's a larger payment at the end for completion of work and a lot of times you know there's language or there's an understanding that the completion of work is based either on the original scope or on your satisfaction with the work. So if you're not satisfied with the work there is a perception that you can go in and say hey look I don't like this can you make it hold if it gets under way having a dispute or you think the contractor says hey I've done everything that I'm supposed to do the work is of sufficient quality where you can't be complaining anymore that that gets into too could get into some dicey territory. I mean there are things that contractors can do so. So the most powerful or damaging thing a contractor can do for say non-payment is to obtain a lean against your property like a mechanic's lean and that's a legal concept but the idea is that the contractor has an interest in your property can file an interest in your property that needs to be paid off by you upon sale of the property. Hypothetically could even be foreclosed on by the contractor for non-payment. So that's sort of the most I would say powerful tool in the arsenal of a contractor and I think the exact means that that happens or maybe beyond the scope of this conversation but if you have a dispute with your contractor realize that that could be a possibility.

 

Ryan Goldfarb: [00:30:14] This also comes back to the importance of documentation so you'll have a much stronger case for fighting with your contractor and getting whatever it is that you want done done. If you can go back to a specific contract or a specific point in the contract or to your original scope of work and say hey we specified that we were using twelve by 24 inch porcelain tile in the kitchens and in the bathrooms that we renovated you provided 12 by twelve ceramic and all I'm asking is that you make right by what our original agreement was or something that is clearly discernable by the scope of work.

 

John Errico: [00:30:52] Yeah I have a specific example that we're possibly going to be dealing with. We have a project where we're running we're switching the orientation of a shower so it used to be a shower that was kind of like in the middle of a bathroom. Now it's gonna be on an external wall of the bathroom and we were a little bit concerned that by running water lines through an exterior wall the bathroom the city might give us trouble because those lines are subject to freezing because they're literally on an exterior wall of the bathroom. So in anticipation of this we texted our subcontractor a plumber and said hey is it a problem that we're running water lines in an exterior wall. And he said no it shouldn't be a problem as long as it's insulated. So if it becomes a problem if the city says hey you can't do that then what we're gonna do is say Hey remember that text that we sent you and he said it wasn't a problem. So you need to fix it. If we didn't if we didn't have that text very easily. Not that I don't trust this guy but I'm not saying very easily he could have said well we'll fix it but it's gonna be five grand whether we run the water lines. So that's the importance of having you know we are lucky because we knew that going into it. But it's really important to have those conversations and have that set up because now we can look back at the documentation. I remember the text December 18th we talked about it. OK.

 

Ben Shelley: [00:31:58] Well and that's why it definitely is important to her back on that on this consistent theme that we've talked about. Again managing expectations and communication and why that can be so valuable as you come to the conclusion of your construction process in whatever project you may be dealing with.

 

Ben Shelley: [00:32:13] Two guys to end this conversation about not only the the ending of the construction process itself but payment of your contractors. I want to ask you guys about financing options. I think it's important for people to realize that there are different options and different ways to structure your payment scale and your payment structure with your individual contractors.

 

Ben Shelley: [00:32:31] So guys maybe you can talk about either scenarios where you do this yourself or just options that you know about for individual investors.

 

Ryan Goldfarb: [00:32:37] Well the financing side of this is somewhat broad. There are a few different ways to approach it. There is financing pertaining to the investment itself. There are also specific financing options that are available to owner occupants. Like the two or three car loan program through FHA and then there's also contractor specific financing which is I would say a little less prevalent particularly in this in this space and probably won't apply to a bigger full scale renovation but there are ways to finance where there are contractors who offer financing through a variety of other platforms that would allow you to finance a specific project.

 

Ben Shelley: [00:33:17] Guys I really appreciate your time and expertise as always for the folks listening at home.

 

Ben Shelley: [00:33:21] Make sure you subscribe to us wherever you get your podcast. Reach out to us on the Brick by Brick, that's Brick x Brick Facebook and make sure to listen to us and iTunes and Spotify. Thanks again, gentlemen.

 

In the debut of our new longer format, the guys discuss the construction process through the eyes of a real estate investor and landlord:

  • What is a general contractor?
  • What is a subcontractor?
  • How do I interact with my GC?
  • Where should I spend my money?
  • Who is on my construction team?
  • Who will be working on my project?
  • What is everyone's responsibility?
  • Why is my project taking so long?!?!
  • And much more...

 

(Transcript below.)

 

Ben Shelley: [00:00:07] Welcome to the Brick x Brick Podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. We are fortunate to have Ryan and John back with us today. The focus of this episode will be managing the construction process. While we've discussed investing in real estate at length in this podcast, today we want to focus on the backbone of every real estate investment: construction. If you're like me just getting started in your real estate career I know the construction aspect of the business can cause a lot of stress. So we're gonna take today's episode to try to address some of the most vital aspects of succeeding in the construction business. So guys I'm gonna start as basic as I can possibly get. Tell me what a general contractor is.

 

John Errico: [00:00:49] That's a great question. It's actually not a basic question. I think there's a big misunderstanding about what a general contractor is and what a general contractor does. In my book a general contractor is a project manager. So they're the person overseeing the entire start to finish off a construction project. They may not be actually out there personally swinging a hammer. They might not even have people that work for them directly like employees of theirs swinging a hammer but they're keeping the whole construction process in line. So they're working with subcontractors -- and we can discuss what a subcontractor is later on -- they're working with subcontractors permits licenses all the nitty gritty stuff making sure that that gets done and in an ideal world. Hypothetically you could go to a general contractor and say here's my plan here's my money get it done in this time period and they'll get it done. That's not what happens almost ever in reality. But that is generally how I would think.

 

Ben Shelley: [00:01:46] Maybe you're ever in reality maybe. No I don't. Ryan?

 

Ryan Goldfarb: [00:01:49] I think oftentimes there's another misconception is you'll be at home depot and you'll bump into somebody and start talking to them and asking them where you can find a new switch for your kitchen light and they'll tell you they're a general contractor and they can help you with whatever problems that that you have. And you think oh great this GC is gonna solve all my problems and you know I've got this whole huge project for them to tackle and now I've got my guy.

 

John Errico: [00:02:15] I prefer Lowe's for what it's worth.

 

[00:02:18] Should I start singing jingles. Actually I love Home Depot. I actually heard him say wow that's a great point. Very true sorry right.

 

Ryan Goldfarb: [00:02:27] Anyhow the point to distinguish there is there are general contractors in the sense that they do general construction and they are in a lot of respects handymen. And then there are the class of quote unquote general contractors in the true like capital G capital C way that John described before which is in more of the project management type role where they oversee the project at a very high level. And they're in charge of coordinating all of the moving parts particularly on a larger project. When it comes to the subcontractors and all of the different trades and the timeline and the plans and the permitting, etc.

 

John Errico: [00:03:09] Yeah. And a capital G capital C general contractor usually is licensed it has insurance. So a lot of the guys that you run into at Lowe's or Home Depot will not have a license or insurance or whatever else. Nor will your general handyman and we can get into to when that would be required later. But a general contractor is normally going to have a license and insurance and you can look up their license in the state registries et cetera et cetera.

 

Ben Shelley: [00:03:34] Of course I do think it's also important to note especially for early investors just doing their first project or some of their first few projects that that not to be in this is sort of intimated from from Ryan's point as well not to be intimidated by that G and that C in front of the name of somebody to understand that this is your project that these people work for you if you don't know ask questions make sure you know you're going to be a little self-conscious undoubtedly about what you do and don't know. I know I have been in starting with you guys and in tackling our first projects but I think that it's important to also recognize sort of what you know and what you don't know but also what your contractor knows and doesn't know and I know we have some funny stories about some of those first experiences. But before we go to those I also have this question right. You're going in you're looking around at the sort of construction landscape we're talking about running into GCs at like stores.

 

Ben Shelley: [00:04:22] So begs the question how do I find a general contractor?

 

Ryan Goldfarb: [00:04:27] The two places I would start are in your network and in your backyard. So the first I would approach anyone who you know who is active in the construction space or who has done a project of their own recently and I would ask them what the nature of the project was how they felt the project when who they used and obviously what their what their thoughts were on that contractor. The second thing I would recommend is to look around your neighborhood and find projects that are similar in nature to your own. Particularly when you're talking about a whole house renovation or something larger I would look for structures that are similar because housing stock can vary a lot and renovating an old Victorian is a very different beast from renovating a Frank Lloyd Wright inspired mid century modern house. Shout out shout out Frank Lloyd Wright. So I would I would approach the two I would I would first go down both of those rabbit holes before resorting to something like Yelp or Home Advisor or something like that where I think there's a little bit of gamesmanship going on.

 

Ben Shelley: [00:05:34] John?

 

John Errico: [00:05:35] Well if you happen to be in the northern New Jersey area I have a...

 

Ben Shelley: [00:05:38] You know what I was thinking about making the plot you son of. I mean really this guy I mean you know. But I love your instincts. I know I agree with Ryan.

 

John Errico: [00:05:51] I think I found contractors what so too. We did a episode of networking and that's it. If you go to meetup groups and networking groups for real estate investors you will invariably find contractors. And if you're one distinction that I draw I think is a there are obviously general contractors that do both these types of jobs and we are one of them. But there certainly are contractors that do more work for investors as opposed to primary home owners residents and working. If you're an investor and you want to work in that space working with a general contractor who has experience working with investors who therefore understands budgets timelines the types of finishes that you need as is important. So if you talk to a general contractor say hey what type of work do you generally do is it for homeowners for investors single family multifamily whatever.

 

Ben Shelley: [00:06:42] I think that's true. And I think what's interesting is from our own experiences I know having fielded just a few of these calls to date a lot of times people will say the first things they'll ask on the phone aren't necessarily can you do this work? They'll say where do you work? I think that's a really important thing so does a contract can you find a contractor that has experience in your area and that relates a little bit to what Ryan was talking about about looking in your surrounding area and then what what what are your capabilities in terms of scope.

 

Ben Shelley: [00:07:08] And then obviously those those methods combined can help you hopefully locate the right person for your job.

 

Ryan Goldfarb: [00:07:13] Another just part of the job. Another critical point particularly in this area regarding finding someone local is the fact that all these building departments are very different. Each municipality at least in New Jersey every municipality for the most part has its own building department. And so if you happen to find the one contractor or one of the few contractors who does a lot of work in your specific town particularly with a bigger project their relationships with the building department and with the inspectors and their knowledge of what cities and building departments specific requirements are will go a long way.

 

Ben Shelley: [00:07:51] Yeah I mean it's so funny you mention that too because from my own experience coming into these different building departments has been on almost wild I mean just the different the difference in the people who work there the different expertise the different looks not just in terms looks the building but in all honesty in the demographic because different municipalities also have varying demographics and these have this is this has cultural history too to its socio economic history to it but that's a very vital point because I think maybe the main goal of the GC just in summation is to guide you through this process so that you can build your home to code and pass inspections and you know get your certificate of occupancy. So I want to sort of pivot here once you've hired the GC. Is there a particular way you would go about addressing or talking with your general contractor maybe from the beginning as it pertains to the scope of work. What have you. Or is it more generic across the board.

 

John Errico: [00:08:51] Yeah. Every project is certainly unique and I mean that the types of project that you might hire a general contractor for would range from redoing a bathroom or kitchen to get renovating a house Doing an addition to house or ground up construction of a house Even so one of the most important things to know or to think about when approaching a general contractor is what exactly is the scope of what I'm doing. And if you don't have the knowledge base to to even do that that I would say think about it and search online and watch some youtube videos about it. I mean we work both mostly with investors and investors often know what they want out of a property but it's very frustrating both for the contracting side and also from I think the client side or the investor side. We're going to say for someone to say oh I want my house to look better. So what exactly what are you What do you want.

 

Ben Shelley: [00:09:44] I don't know John better.

 

John Errico: [00:09:46] It's like I want to know that no one will say that that's insane but like you know what I want to redo the kitchen and it's like I don't know.

 

Ryan Goldfarb: [00:09:53] Show you pictures from Houzz or from HGTV and those I just wanted to look like that.

 

John Errico: [00:09:57] And so it's like when you say redo do you mean make it bigger. Same size do you want different materials new materials you wanna replace the cap you know. And people have crazy in the layout.

 

Ryan Goldfarb: [00:10:06] I think that's right. That's something in particular that goes overlooked. That's that's a big difference between just upgrading the cosmetics with the existing footprint versus change like turning it around it's turning it on its head and essentially starting from scratch.

 

John Errico: [00:10:22] Oh absolutely. And they're in their big cost differences too. So you know something that happens a lot is there's a sticker shock with general contractors. So you'll say I want to redo the kitchen and then the price will be forty thousand dollars and be oh my gosh it's way more than I would spend ten thousand dollars. And the reason is because you wanted to instead of keeping the sink where it was you want to move it on to an island and you wanted to instead of moving instead of keeping the Stover was going to move it to the opposite side of the kitchen which are presuming all new plumbing and whatever else. So if if you're not knowledgeable enough to think oh well if I move the sink or if I move the stove that's gonna be a tremendously large cost then it would be helpful to either gain that knowledge or to find a general contractor that's gonna explain that to you and say look we can redo the kitchen like this it's gonna cost that we can do this it's going to cost that whatever else so some general contractors are great at that some are not great at that just depends on what you're doing.

 

Ben Shelley: [00:11:17] You and we are great at that. Ryan who are the best there's no one better to me.

 

Ryan Goldfarb: [00:11:23] The two foundational components of this are communication and expectation.

 

Ryan Goldfarb: [00:11:28] I think John alluded to the expectation front quite quite a bit and quite well just now. But to expound upon that the expectation really sets the precedent.

 

Ryan Goldfarb: [00:11:40] And that in to to a large extent is context driven. So a an investor who's buying a property that's going to be a rental property or an investor who's buying a property for the sake of flipping it is going to have a very different set of expectations than somebody who just bought a piece of land for a million dollars and is building their 3 million dollar dream dream home and he wants every single last detail to be carefully thought about carefully curated and carefully addressed.

 

Ben Shelley: [00:12:14] So so I don't mean to cut you off but I guess it just kind of getting into the weeds a little bit more here. What are the kinds of things that go into creating you know a quote unquote good scope of work. We talked about communication and expectation but obviously I think creating your scope of work is vital for a lot of reasons one of which being also financing because you're going to probably borrow a certain amount of money to do that construction work so maybe talking a little bit about 4 for a new investor how do I go about creating a scope of work that is appropriate for my project and how do I work with the GC in doing that.

 

John Errico: [00:12:44] I think ideally it's a collaborative process between the investor in the GC I think and the architect right. So there it's important to consider that there are other components to putting together a project. So in northern New Jersey I think it's true everywhere but particularly where we operate northern New Jersey. There are a lot of. There are lot of requirements that the city will impose on you to do work. And one of them oftentimes is having an architect to do architectural drawings or whatever it is that you're doing.

 

John Errico: [00:13:13] So sometimes a general contractor will have an architect or draft person kind of on staff or on file and you can say hey just use this person to do the drafting work. Other times it will be the expectation that you will have to go to that architect or drafts person to figure it out. So that would be step one is saying well if I want to do something pretty major I might want to go to an architect or a general contractor that I really trust and say hey here's what I want to do. What do you think I need to get in place to start with. I think it harkens back to my point before. If you don't have the knowledge base to even say here's what I conceivably want then it's gonna be. To use a specific example. I'm thinking about one we had a project where we had someone come in. Someone called us in in Jersey City. They wanted to totally renovate their rowhouse basically and they wanted to expand it make it larger. So they wanted to push out the first floor push out the second floor create a rooftop deck finish the basement this stuff and pretty immediately it became apparent that they knew a little bit about real estate and maybe a little bit about construction because they knew kind of what they wanted it to look like but had no conception of the cost of what it would be. So there or the largest or the logistics so that it's a rowhouse so there's no way to get machinery back to the rear of the property step. That's the first problem. So they wanted to expand the building by a significant amount like I don't know 20 feet or something like that and also dig out the dig at a full basement below that expansion and make their existing basement deeper. So immediately my thought was Well we can't get a backhoe here because there's no way to get stuff to the back of the property anywhere to suffocate to the front the proper base there's no access to the rear of the property from the front. So all that's what have you done with shovels by hand essentially so that that itself enormously increases the cost of everything else that he wanted to. Like rearranging every single wall in the building the rooftop deck ultra stuff. I mean we're looking at a scope that was like probably maybe it would have been cheaper to rip down the whole building industry do the whole thing to begin with. And it was pretty obvious that he had no conception of what that was I think he thought that we were going to charge like 50 grand for this work when like probably we needed to charge like three or four hundred thousand dollars it was so crazy and the other.

 

Ryan Goldfarb: [00:15:32] The other issue with that instance was the lack of communication and the again the the poor expectations so he anytime we kind of broached the topic and to an extent this is on us as well for not understanding that this information is as vital as it really is to avoid us wasting our time. But he was very hesitant to divulge any type of information like what is your budget. And he was doing that from I think from a negotiating standpoint I think he wanted to see where we would come in and then negotiate based off of that rather than saying oh my budgets 250000 dollars and then have us just kind of work backwards into his budget which we wouldn't have done anyway.

 

John Errico: [00:16:11] Yeah I don't want to go crazy tangent here but that's a great topic. Talking about budgets and pricing is that really going to go bad.

 

Ben Shelley: [00:16:17] Well we'll get over but we'll get there. Hold your horses so let's talk about money. He's jumping through the microphone as we speak.

 

Ben Shelley: [00:16:23] I was gonna say you know again I think a lot of these topics want to talk about the relationship which he sees does come back to communication expectation the emphasis there but I think maybe it's helpful for for both new and experience investors to hear this conversation at least it is for me because you begin to have an appreciation. I think it's sort of like brokers to an extent as some of the perception around brokers in the tristate area with GCs I think everyone is always on the lookout for someone trying to do one over on them. And I think it's important to realize that this kind of confusion happens on both sides that there's nervousness and and sometimes miscommunication and lack of clear expectations set on both sides of the aisle and so it is so important especially I think if you have a lower knowledge base or if you're nervous about pricing to be communicative to go out and say hey here are my expectations. Regardless of whether or not you're an investor or you're building your dream home in Livingston New Jersey. Yeah right.

 

John Errico: [00:17:14] I would I would super appreciate it if we could do a project and it's a big project. If the person I'm going to work for says hey look my budget is this amount. Like I mean that doesn't necessarily mean to me that I will. That will be exactly my quote to you. It just means that I have an understanding of what it is that you want to do and then if you say hey I want to my budget is 50 grand but I want to you know put another floor on my house and redo everything on the third floor doing a. Well look that's impossible. That can't be done for 50 grand. So let's talk about a way that we can work together that would be more helpful for you. More helpful for me. You know it just it's very frustrating to waste time because it waste time for us to as a contractor trying to come up with a number if it's like oh what the but we think our number is a hundred eighty five thousand dollars and then he's like well my budget 30 grand.

 

John Errico: [00:18:01] It's like well we just wasted a couple hours come on no because there was no.

 

Ben Shelley: [00:18:04] I think construction is in some ways uniquely difficult in that in that way because it is such a mystery to most people that the pricing is just that there's no.

 

Ryan Goldfarb: [00:18:15] There's no menu there's no mention of price which in some cases isn't necessarily true it's just not always communicated as such and so people just think that the contractor is taking advantage of them when in reality the the breakdown there is just the gap in understanding of what renovating a bathroom truly takes. So yeah I'm sorry the other. The other point I want to just circle back on is when it comes to creating a scope of work notwithstanding the obstacles that John and I just discussed are the three of us just discussed. Once you do get to the point where you are moving forward to the project and you're in the ballpark when it comes to budgeting and you're creating your ironclad scope of work the most important thing to focus on is documenting every single detail that you possibly can and that includes both high level things and as specific as how many recessed light fixtures are going in bedroom number three and potentially even what layout they're going to be or where the light switches right things like that. And this also ties into the value of having an ironclad set of drawings of architectural plans because that is going to have an electrical plan embedded in it which should specify all of these things. And if you're at that point in the process where you're where you have electrical plans then chances are you're moving forward with the project. So spend some time and look through those plans review them in gory detail and if there are some things that you're not quite certain on. Go back to the property and walk through and maybe Mark things out and try to put yourself in the space as it will be when it's finished which I understand can be tough when some people just don't think super visually but some one track that can be really helpful is just taping out the layout on the on the ground so if you have unfinished plywood flooring or something like that just take like blue masking tape and just mark out where the walls are gonna be where the doorways are gonna be where the cabinets are gonna be where the toilet's going to be you'll get a sense of like how much clearance there is between the counter and the refrigerator you'll get a sense of of where the the toilet is in relation to the vanity or the refrigerator depending I look atetc.

 

Ben Shelley: [00:20:37] So maybe on the theme of keeping track of everything of writing everything down documenting everything.

 

Ben Shelley: [00:20:42] One of the things I think that also helps with is if you're in the middle of your either renovation or tear down or reconstruction what have you and you want to change something as you're going through the process now. A lot of people have heard the term change order maybe we can talk a little bit about what that means and how that is priced in the course of construction.

 

John Errico: [00:21:00] Yeah I think inevitably there will be things that come up during even the most well thought out projects that are unexpected. It's kind of a joke or a lot of times people are hesitant to even begin renovation projects because it is that when I open up a wall opening up a wall I mean like when I take off the drywall over the wall and look behind it I'm just gonna discover a lot of things that need to fix. That happens to me every single time that I've ever done that. So you open up a wall and you're like oh gosh like I didn't realize that you know there was this crazy electrical issue hiding behind this wall or that everything is rotten or that there's a plumbing problem or whatever. So I mean once you do that you have the option to not fix it for certain but it's almost insane to not fix it because the effort that it takes to put up a wall and finish it is in a bathroom so you have tile on the wall. The effort to do that is going to be a lot so when the wall is open you might as well take care of it. So that's a pretty common type of change order where it's like oh we open up the wall we found that the main sewer line of your entire house is cracked that we have to replace it.

 

John Errico: [00:22:00] That could be five grand. The other flipside of it is you yourself as the owner might say oh well now that we've gone through the process and now that I've seen what's going on I myself want to make a change to the scope of the work. And that's totally fine to Ryan's initial point knowing that initially is way easier both for probably your pocketbook and also for the project itself but the change order is when a general contractor will say OK now that we've changed the scope of the work you do because you've deserted or because I have strongly recommended it or because there's something way unanticipated we discovered during the process we need to go back and change the scope of what we're doing. And they have a reputation for being expensive because it might be the case that that was just not originally factored in and therefore requires a lot more time maybe another permit maybe another license maybe another even subcontracting trade to come in and do something. I would say bad general contractors will sometimes use change orders as a way to make money. So they'll say Oh I didn't charge enough at the beginning or this project is taking longer than I thought. And I'm not going to make any money in it. So now I need to make a phony change order in order to put in you know a different type of sink than what you said it's gonna be three thousand dollars even though the sink itself is only a hundred hours more or something like that that happens it's happened to me it's probably happened to you Ryan. But that that would be I would say telltale sign of a bad general contractor on the scale of good to bad.

 

Ben Shelley: [00:23:30] And so that brings me also to this is this fundamental question which John you were jumping out of your seat earlier to talk about which is very both very broad and specific at the same time which is pricing. And Ryan what you can continue maybe the conversation a little bit about change orders and expectations of pricing there but just generally I mean standard construction right this great mystery maybe we can try to unravel this for people like me and people listening but can you talk to us a little bit about what are just some standard construction costs that you can run through that vary from project to project.

 

Ryan Goldfarb: [00:24:00] I'll be honest with you I hate this question. It's hard it's hard and it's loaded and it's I'm glad I'm asking you the question.

 

Ryan Goldfarb: [00:24:08] It's really hard to give an answer without having context and without caveat adding it like crazy. But let's say let's take a bathroom renovation as an example. On the surface if you break it down to the components of a bathroom you're looking at generally a vanity a bath or shower. And a toilet. Then you have things like flooring which is usually tile. Oftentimes you have tile on the walls as well. You have cement board as an underlayment for the flooring which sometimes is also which generally goes on top of plywood top floor as well or sometimes goes on top of high whatever as well. You have green board which is the moisture moisture resistant the sheet rock that typically is is used in a bathroom. You have certain light fixtures. You have bath accessories and then you have paint. I'm sure I'm missing some details that maybe I usually can exhaust fan of some sort.

 

John Errico: [00:25:14] Well you have all plumbing and all electric right.

 

Ryan Goldfarb: [00:25:16] So that that is I guess what you would see for the most part that's what you will see on the surface. But the reason why this is such a difficult question to answer is that doesn't get into that doesn't even really touch on all of the components that make the bathroom what it is which is the nuts and bolts of the plumbing and the electrical. So you can have the nicest toilet the nicest vanity and the nicest shower in the world. But if the plumbing behind the wall doesn't work or clogs every other time you use it then your bathroom is going to drive you absolutely crazy. And to John's point earlier while you're doing this project if you look behind the walls and you realize that you're working with like a corroded cast iron stack from 100 years ago that. Is leaking or clogged or just as has seen better days. You'd be foolish not to go in and replace it now when the vast majority of the work has already been done. So that's going to cost more but it's going to in the long run cost way less than when your stack starts to leak like crazy or doesn't flush or everything you know nothing gets through the line and backs up into your brand new bathroom and then you throw everything out and start from scratch again.

 

John Errico: [00:26:30] Yeah I I want to approach the topic from a different maybe a different thinking which is just to just to say everyone should understand that contractors are not necessarily good at figuring out how much things cost. They're just not. So we're not that good at it. I mean I think that we're getting better at it. I've met so many contractors that are really bad at it and there are a bunch of different ways the contractors can figure out how much stuff is supposed to cost. And I'll describe in two. The first is that a lot of contractors literally I shouldn't say a lot. Some contractors were literally pick a number out of thin air. I guarantee you this happens and had 20000 sounds right.

 

John Errico: [00:27:14] Absolutely. I mean like it sounds funny but I mean I don't honey until you experience. Well I don't say that is a bad thing. It's not necessarily that they're like it's super crazy wrong but they'll just say well based on my experience and based on my general thought process I just think that it's going to be about this and though there usually give you you know kind of an estimate or something that says like services and we'll have a number and then we'll just be the number that came up with. I mean this happens more often than you might think. And so people get cynical about the industry because of this doesn't mean that the number is wrong. They might have just just thought of it randomly and that actually might be actually how much they're going to charge but that does happen. The second way is that you'll have an estimator. An estimator is like its own class of person who has usually a lot of construction experience and is familiar with how a construction project will go and an estimated will say Well I think that the materials cost for this particular scope of work will be this number because it's this many square feet of flooring in this many square feet of drywall and whatever else the estimate will also say well I think it's gonna be this many man hours of work.

 

John Errico: [00:28:22] And I think that each laborer or each person's working is gonna be paid about this much money and we're gonna bake in a margin there and the margin is going to be that our cost. The general contractors cost and margins can vary a lot. They can be anywhere between I would say single digit percentages up to 20 percent 25 percent it depends on the work. And that is normally the compensation for the general contractor in an ideal world and assuming will say that your costs your labor costs and your materials costs are this and you will charge a 15 percent margin. And that's what I take home as the general contractor for my effort in arranging everything getting permits getting licenses project managing the whole thing for you.

 

John Errico: [00:29:05] That's my fee. If I'm if I'm wrong if the the materials cost or the labor costs is too high then that just cuts into my margin or it could be wrong the other way. I actually overestimated therefore I get to keep you know the difference between what I thought I was gonna pay out then you know what I actually paid out. So then the third way that contractors will estimate stuff is they'll just look at what the market is or could be for this job and just say well everybody's charging whatever five thousand dollars for a bathroom so I'm gonna charge $5,000 for for a bathroom. I don't really know how to estimate it. I didn't really pull the number out of nowhere because I at least have some sense of what people charge. But that's what I'm gonna charge for.

 

Ben Shelley: [00:29:43] So to what extent am I as the investor or as the person who is building the home hiring the contractor. Am I allowed to push back on the pricing. Now now now you know it's like if you're listening to this podcast right now you're saying wow that John Errico is teaching me a thing or two I need to go back to my general contractor and make sure that everything that I'm being charged is right. So where is that balance. How do you approach that process and what is sort of the right and wrong way to go about it.

 

Ben Shelley: [00:30:08] If you feel that a pricing is off?

 

Ryan Goldfarb: [00:30:10] This Is going to depend on who you're dealing with. If you're talking about the contractor who just pulls a number out of his backside and that number is fifteen thousand and he truly just made it up out of thin air you may go back to him and say hey that seems a little high and then he'll come back to you and say All right thirteen five let's make this happen. When you're dealing with somebody who really knows what they're talking about generally there's a methodology to how they came up with their number. So if they come back to you and say this bath innovation is gonna be fifteen thousand dollars and you say hey that sounds a little high can you do any better. Oftentimes they will say no my pricing is my pricing and oftentimes that is rooted in something substantive but they may say if you're budget like What's your budget this is another reason why communication and transparency and expectation are so important. Because if that person comes back and says Look I really cannot spend more than $13,500 on this bathroom renovation then that contractor can go back and say OK.

 

Ryan Goldfarb: [00:31:12] Well that is reasonable like where we're in the ballpark here. Let's see what we can do to break you know to to get down to your number and to shave some costs down here and there.

 

Ryan Goldfarb: [00:31:23] So maybe you go and you spec a little lower and tile you don't go some custom imported high end marble and you go with a more cost effective porcelain tile or you don't you don't tile all of the all of the walls from the floor to the ceiling maybe you end to 48 48 inches high or maybe you don't go with a custom shower you go with some kind of prefabricated base and you kind of like tile it in and create like a hybrid custom work that way.

 

John Errico: [00:31:54] Yeah materials costs are a big thing too. So sometimes contractors will mark up the cost of materials and sometimes I'll itemize them even on the estimate. So they'll say this door is whatever hundred fifty dollars and you look at it like well how could that possibly be because I could go to Home Depot and buy the same door for 90 bucks. And if you can then you could negotiate the contractor and say I will just buy these particular materials. So there's an estimate there will be something called allowances. And those are often the cost of like finished materials. So usually an estimate will if someone says hey I want to redo my bathroom. The costs will include things like drywall and plumbing material whatever but some certain higher end finishes like the tile the bathtub maybe the vanity will be included as an allowance for the contractor to to buy like a budget number. And you could say look I think that's like way too much or I just want to buy the materials or I don't want you to charge a markup on the materials costs which happens. And another thing too is that particularly in higher end stuff the margin that your contractor is charging is a known thing. It's not a secret thing. I've seen it in contracts all the time where it's negotiated. So it's like look I know we're doing a million dollar project but I don't want you to take a 12 percent margin I want to take an 11 percent margin or a 13 percent margin. And in many cases the general contractor is not really as I said at the very beginning of this episode. He's not he or she is not out there swinging the hammer. They're not necessarily the person that's out there putting in the physical labor so they're subbing out as in they're hiring someone to do a lot of the work for them like a plumber electrician maybe a finish guy maybe an HVAC guy or whatever it might be. So their costs that are might be known. So for example it might be that you know they're plumbers don't charge them 30 grand and they're going to take a margin on 30 grand and pass it along to you. You could say look I don't want you to take a 15 percent margin. I mean to reduce it. So that's another way to negotiate as to saying what is your margin like what are your actual costs.

 

John Errico: [00:33:51] Can I can you talk to me about it and they might want to ...

 

Ryan Goldfarb: [00:33:54] On on the materials front the allowances point is it is worthwhile to make. And I think in reality oftentimes it's generally broken up between a rough rough materials costs and finished materials costs. So the stuff that John alluded to before like the sheet rock or the lumber behind the wall. That stuff is considered rough materials and those are generally embedded in the scope and embedded in the contractors cost basis. But the finish stuff is often where you can see significant variance in the allowance because as I said earlier it could be a super high end marble or could be a more run of the mill ceramic or porcelain tile for instance.

 

[00:34:37] Oh sorry. The others too excited today.

 

Ryan Goldfarb: [00:34:41] The other thing is the other thing I would note about the topic of allowances and who's providing the materials. Is there a lot of contractors who point blank will not allow the homeowner to buy materials and I think there's good reason behind it. It may seem like they're just being a hard ass on the on the front end but from their perspective if it's on the homeowner to buy the materials and the homeowner doesn't know what they're doing or only has like a rough idea of what they're doing they're going to screw up at some point they're going to buy the wrong sized door or they're going to buy the wrong type of vanity or they're going to buy a wall hung vanity instead of a freestanding one and the contractor is going to say Hey well it's more time intensive and more expensive for me to install this. You already have this here where they're going to lose time on the project because you're gonna have to go return this and get a new one or I'm going to have to charge you with a charge you are in slap you with a change order. So. So there are a number of reasons why a contractor may not want you to do that and it's not. It may not just be to extract more cash out of you.

 

Ben Shelley: [00:35:49] And I want to put in an important side note to the pricing conversation before we finish it up because I realized we didn't talk specifically about quote unquote what subcontractors are. Just to clarify here I mean he's a football analogy the GC I guess is kind of acting like the quarterback here he's running the offense and the subcontractors sort of act like the offensive line. And for those who really know football you know you can't really have play good offense without a good offensive line and so he's sort of orchestrate he or she sees me as sort of orchestrating the people up front to try to make sure that the project is moving smoothly and that's where the. When we talk about margins and allowances and pricing more generally it is important. I mean even today we were talking with a guy I was talking earlier with a GC that we're working with but needed to call the electrician to get a different quote. So the GC was giving us you know a number for you know h vac and plumbing and the subcontractor was giving us a quote on a project that he's also GC in for for electric. So it's just it's it's I think it's a careful dance here.

 

John Errico: [00:36:43] Well I would say that I think the GC is more like the coach.

 

John Errico: [00:36:46] I would even say that the quarterback playing the game and I mean he's playing the game he's overseeing. You're right he's not the hammer. He's not touching the ball but he is very much richer and it's I'm getting this analogy right.

 

John Errico: [00:36:57] It's a really important point I'm glad you brought it up I really wanna talk about it. So there is there are.

 

John Errico: [00:37:04] I have a relative who's building a house right now and he's hired a builder to build his house. And some people out there might think oh you've hired a builder so the builder is going to come up you know call it John's building company the builder is going to come up with John's guys and John is gonna come and he's going to have his guys putting up the framing and supporting the foundation and putting up the drywall. And you as a client might say like oh wait a second. Like when I pull up to the house nothing's as John's in it that says you know Bob's like Bob's plumbing company. Like who the hell's Bob. I didn't hire Bob. The reality is that you know in my specific example my relative was building a house. His builder is two people. It's one guy and a secretary. That's the whole company. He's the general contractor. But what he is doing is subbing out all of the work to other people in how construction can get really expensive is the more people you sub about work to the more margins there are for people to collect money on. So I had a project recently where I worked with a general contractor who actually subbed out the entire thing to a different general contractor who then subbed that out to the trades trades being like electricians plumbers whatever. So you know what what a what a subcontractor is is. Those are the people that are actually doing the work. They actually have employees that are out there putting pipes together putting up drywall swinging the hammers doing that stuff. And you as the owner or the investor might not ever know exactly who these people are because you have no your interface with them is through your general contractor. You might not have any idea who's doing the plumbing or the electrical work. Even in projects that right and I've been very involved in where we've used a general contractor we haven't had any clue about who some of these people are. But if you think about it in my case before where I had a general contractor who himself hired a general contractor who then hired subs think about how much margin there is in that you know say that the say that the subcontractors said Oh look it's $10,000 for me for it for my guys to do the labor materials and I'm going to charge you twelve thousand dollars cause I need to take a 20 percent margin. Then the general contractor says well it's $12,000 to me I need to take a margin on that so I'm gonna charge 20 percent on that. And then my general contractor I'm talking about says well I need to charge 20 percent on that. So at the end of the day I'm spending you know maybe six thousand dollars more just because these guys wanted to say about all of the work to other people what we do and what very large construction companies do is they have almost everything in-house so they'll have guys that actually work for them that swing hammers that go out to the job site and actually do labor. So in our company in one of the reasons why our costs I think generally are pretty low why we're very efficient in why we started the company is because we have guys out there that go and actually do construction work they do framing finishing put up walls tile whatever it is we don't we don't sub that out. We do so about things like plumbing and electrical work and that's usually for both experience issues and for licensing and permitting issues. But it is worthwhile to ask your general contractor Look what do you do any work in house do sub it all out. It's not a bad thing if they don't do any work in house but it's important to know that that has a really significant difference on your cost basis.

 

Ben Shelley: [00:40:19] If you're doing work in-house versus having it and I think that's a unique question. And Ryan I want to jump to you on this it's just a unique thing to hear specifically for new investors but really everybody in the business because I think a lot of people would feel uncomfortable asking a question like that because it's almost like asking someone well do you actually do anything that I'm paying you for. But the realities are if you understand the ins and outs of the business and understand the dynamics of what a GC really does as the coach of the team sort of organizing the players then it's actually absolutely vital for you to do that and to think about it when you're negotiating margins on a job.

 

Ryan Goldfarb: [00:40:50] Ryan to counter John's example I think that that illustrates what can be seen as like the dark side of the construction industry where it's just essentially daisy chaining work with somebody taking a little bit of profit every step of the way. There are there are instances where that structure works quite well. There are companies that are as John alluded to earlier like a one or two man shop where all they do is construction management and they have a subcontractor or a tradesman for every specific trade that goes into the project. So everything is highly specialized and that in and of itself can create certain efficiencies. If you think about a company like ours with with employees that do a varying degree or a varying assortment of work everything from tile to sheet rock to framing these guys are quite skilled and quite capable and I think we've been on the whole quite pleased with their work. But if you compare that to a company that does exclusively hanging of drywall or exclusively tiling or exclusively foot flooring relatively speaking those companies are going to be faster and more efficient which in certain cases can create certain cost efficiencies of they're paying

 

Ryan Goldfarb: [00:42:13] If they're paying roughly the same amount for their for their labor and their guys are working on that one thing and they can do it in half the time then that's roughly half the cost basis on the Labor side. So even if you factor in that subcontractors margin in a vacuum and in this kind of like perfect scenario when general contracting and quote unquote construction management is done well it can create a lot of efficiencies and it can create a lot of cost savings. But the caveat is really in the logistics and scheduling because you don't have control over those.

 

John Errico: [00:42:46] And the caveat to me is done well because that's you know if you want to find a general contractor it's important to consider that they have their own contacts in the industry they have their own subcontractors. We just set an example we were working with the general contractor and that general contractor subbed out the flooring work even though we had. We were sort of working it our on our own but we've been working with a general contractor in the past and the general contractor said we'll do the flooring work and they indicated that the flooring guys that they had were going to come in.

 

John Errico: [00:43:18] You got a rock and roll so they said I'm going to get quote unquote quote unquote. They said they're in a get well like 3000 square foot twenty two thousand twenty five hundred square feet. Twenty seven square feet of flooring done in like a day and a half. They kept telling us this right. And we were like great because that's what's what I was talking about. Got Yeah we're gonna pay more for them and subcontracted out there can be margins whatever whatever but it gets done in a day and a half. Great for our guys it might take a week because it's a lot of flooring to lay and so it was determined like Friday's the day they took they're going to come in on Friday. So we're excited we're like oh my gosh these guys these guys must be amazing right. They're gonna come in they're gonna go crazy. They're bringing like 10 guys into that thing and they're with hair like you know I think they're like eight thirty because we were there for something else. We're like there's nobody here is we're here they're finally like one or two guys kind of like rolling around like eleven eleven thirty but it's kind of like okay. Like I guess you're here now so you're gonna go crazy. And like you know it took them probably what like four days or five days like the first day.

 

Ryan Goldfarb: [00:44:11] They I think in the entire day completed two rooms out of eight or so they came in with an attitude.

 

Ryan Goldfarb: [00:44:19] They were very very angry and contrite with me listening to the loudest like how dare you make them come in in 11 Joe listen to the loudest music I've ever heard.

 

John Errico: [00:44:31] Human beings actually listened to like for enjoyment.

 

Ryan Goldfarb: [00:44:34] And on top of that they say they specifically asked me to have our guys move all of the boxes of flooring volume up to the third floor. And I think put all of the boxes in their respective rooms so that they could focus on quote unquote their task of laying a living all of their garbage.

 

John Errico: [00:44:53] Like all of their garbage like all of the boxes all of the scraps everything like that.

 

Ben Shelley: [00:44:58] But I think I think the answer is because we've got we've gone from the bad side to the good side and then instinctually sort of back to the bad side because we always remember. I think those things that go wrong is that there's there's good and bad in both and there are good GCs and bad GCs and you need to do your homework as best as you possibly can to find that person who's right for you. So briefly I just want to recap what we've done so far because we've covered a lot in layman's terms I would say communication and expectation making those things clear is vitally important. That knowledge is power knowing as much as you possibly can about what you're going to be going to do for your project can only help both you and the contractor you work with and understanding and defining your scope as clearly as possible. I know that's very difficult for non investors and people without construction backgrounds but as much research as you can do for your specific area can only help you and we've gone into already pricing and we're always open to questions comments and concerns so reach out to us if you want us to revisit this topic in future episodes. But for now I want to pivot to another portion of the business still working with General Contractors which is permitting and licensing. So as we touched on this very briefly at the beginning the episode but first and foremost maybe the difference between a licensed contractor and a non licensed contractor Gents, maybe you can talk to us a little bit about what is the difference in working with these guys and gals and when is it appropriate to use one versus the other. Or is there a difference.

 

Ryan Goldfarb: [00:46:21] The correct answer I think is to use a licensed and insured contractor for anything you're going to do. I would say that the reality is a little bit different if you're talking about you know you have a little you had a little leak or you had like some kind of like stain on your wall in your living room and you just want to paint a little bit like a small 5 by 5 patch. You're not going to call in a license or you don't need to call in a licensed and insured general contractor to come in and paint that and do that little bit of like handyman work. That is classic handyman work and and it's over. Frankly I think it's overkill to bring in a licensed insured general contractor who's used to working on $300,000 projects to come in and attack a job like that.

 

John Errico: [00:47:11] Yeah it's actually it's a little bit sad that the industry is in such a way but it is expensive to get a license and it is expensive to have insurance that is commensurate with the amount of work that you're doing. So it is the case that being a licensed and insured contractor is just more expensive than hiring someone without a license or insurance. And I think that's actually a shame because I agree with Ryan that the the work the right way to do it and not so much concerned about the license but insurance is a big issue. If you're inviting somebody in your house to do work and they get hurt and they don't have insurance that's a problem. You have a problem from the perspective of a homeowner. Having said that have I had people in my houses that don't have licenses or specifically don't have insurance do work that might be considered hazardous or possible injury capability like yes I've absolutely done that because that's the reality that doesn't make sense for me to pay. As Ryan said someone with a license or insurance to do that type of work.

 

Ben Shelley: [00:48:09] So can you guys talk a little bit about what kind of work requires a permit. Because we're sort of I think beating around the bush and saying well you know there's certain work we just know as handyman work but a lot of people listening may not know the difference. So what might be just a few examples of just handyman work versus work that really would require a permit maybe even from a licensed contractor.

 

John Errico: [00:48:27] It's hard to say because it's going to depend a lot on where you are. Even so where we are in New Jersey I would think is one of the most regulatory heavy environments for this type of thing and maybe the whole country. So you know the joke in New Jersey is that like you you drive a nail into a piece of wood or screw into a wall and you need a permit and that's not entirely untrue. I mean not that literally but that type of attitude is not entirely untrue. There are some obvious things that I don't think require permits any anywhere like painting does not require a permit. Generally in this area laying flooring doesn't require permitting although I think taking up existing flooring possibly might I'm not entirely sure. Very bizarrely putting in a new roof doesn't require a permit in New Jersey and I believe that is a recent chance of recent change.

 

John Errico: [00:49:12] Why is that. I have no idea.

 

John Errico: [00:49:14] I guess the effect of lobbying their roofing lobby has either failed or succeeded depending on if it's good or bad for them. So but obvious things that require permits will be extensive renovations like a new kitchen a new bathroom almost anything that you do with plumbing that is beyond like repairing a very small leak will require a permit. Major additions extensionsetc. Again it's the general contractors job and license to no job and. Purpose To know what permits are required how to get the permits how to work with the city. That's really a lot of times the expertise that you're paying when you're going with a good general contractor beyond all the things that we said before knowing the permitting process is very opaque. Even we who do this all the time there are still things that come up regarding permitting and working with the city that are hard to anticipate and they're different cities city to cities. So that's frustrating.

 

Ryan Goldfarb: [00:50:09] Tight end tight end with the permitting issue is the licensing issue on a bigger jobs in particular. There are often you're often not just looking at one trade or one permit there are usually going to be multiple sub codes that are applicable there. So you may if you're doing a kitchen renovation you may be looking at the building sub code and you're also going to be subject to the electrical sub code plumbing sub code potentially fire sub code. And each of those is overseen a little bit differently and that is the reason why you need all of these different subcontractors because they will each carry their relevant licenses so a home improvement contractor which is the type of license that we have that only that only really applies to the building sub code aspect of the job the your electrician will carry an electric or will have an electrical license and we'll also have insurance that specifically covers the nature of work that the electrician electrician performs. Likewise likewise with the plumber likewise with an H contractor. Likewise.

 

Ryan Goldfarb: [00:51:24] Maybe not from a licensing standpoint but from an insurance standpoint with something like a roofing contractor.

 

Ben Shelley: [00:51:32] You know Ryan and I think it's good that you actually bring up some of these subdivided sections and requirements for building because one of the things we want to jump into when we talk about licenses and permitting is also inspections. I think one of the biggest if not the biggest job of a GC is to get you through all the way. One of the biggest responsibilities of a GC is to get you all the way through the inspection process with the various municipalities that you're building in. So maybe you guys can I mean ask this as simply as I can which is sort of a theme of this episode. You know when it comes to inspections how do I pass my inspection.

 

John Errico: [00:52:04] Well normally that is not something that you as the owner of a project would really have to worry about. So if you have a good general contractor they will take care of the inspections and the permitting and working with the city and whatever else. Sometimes you are aware of them occurring because payment can be tied to that. And so a lot of general contractors will say you know you owe me a deposit at this point and then you owe some more money after the rough inspections are done. So what normally will happen is that a contractor will pull permits and at some point in the process they will begin doing work. And the city will mandate that once a certain bit of work is done an inspection has to occur. Oftentimes the rough process is say a plumber has put in new plumbing but the walls haven't been closed. So all the plumbing is exposed that would be the point of time in which a rough plumbing inspection would occur analogous for electrical HVAC etc etc cetera. So you as a homeowner don't really have to worry so much about passing that or doing anything with it. If the contractor has messed up and is unable to pass the inspections. Messing up is maybe not even the right concept. It could be just the case that the contractor and the city have a disagreement about what is required but if whatever is in the inspection isn't passed it is important to generally know that it's normally not on you as the owner to care about that or to pay more about it. Some unscrupulous general contractors might say what I didn't pass inspections and now I have to do a bunch more work so they're going to pay me more money. That's usually not how most arrangements occur. Maybe it's the case that because of the additional work required the scope will change in a change order will be required because something really unexpected has happened. Based on what the city has said. But if that's a possibility I would really prefer both as a client and also as a contractor to have communicated that there will be no that originally if that was a possibility.

 

Ryan Goldfarb: [00:54:01] All right John hit the nail on the head with that.

 

Ryan Goldfarb: [00:54:05] This is going to be your ability to pass inspections and the speed with which you pass inspections is going to be determined largely by your team and that's why it's critically important to have a general contractor with experience in that municipality and who has a network of trades a plumbers electricians HVAC contractors who have the same degree of experience in that municipality because if they've done it before they can do it again and a lot of those disagreements are barriers of barriers to communication when it comes to expectations for the plumber. The sub code inspector should be avoided by their prior experiences.

 

Ben Shelley: [00:54:48] And that's where maybe relationships that your GC has with the city can also come into play. I think a lot of GC is like too to sort of talk up maybe what cities or what areas they have better relationships and because they feel it does and probably does make a little bit of a difference at times where inspections are concerned. And while it is somewhat of a footnote because it's not your responsibility I think both points should be well taken particularly for for newer investors that if something goes wrong it is really not on you. So in this theme of pricing be aware of that because if a contractor comes back to you and says well I need to charge you more you should be aware of of what's going on and why they're coming to you and saying that.

 

Ben Shelley: [00:55:23] So I want to sort of as a book here I still want to talk a little bit about some questions about finishes but first most of what we've been talking about really falls under the category of something that's called capital expenditures cap ex and obviously there are different ways that investors look at and treat their properties if you're coming in investing in flip then cap ex is probably more of a concern than repairs and maintenance which has more relevance to people who are maybe holding their property long term or currently managing their properties under their umbrella. So guys maybe we can talk a little bit about the difference here and just distinguishing them and defining the terms of again repairs and maintenance versus CapEx.

 

Ryan Goldfarb: [00:56:04] These are really

 

Ryan Goldfarb: [00:56:06] Accounting distinctions. So a capital expenditure is something that is going to go into your basis in the property. So oftentimes capital expenditure expenditures are. Akin to fixed improvements that are going to improve the capital asset or improve the asset on the books. So if you have a house and you spend fifteen thousand dollars to install a new HVAC system that wasn't previously there that would be considered a capital improvement and thus goes on the books as a capital expenditure. The repairs and maintenance classification is just as it says it is repairs and it is maintenance in nature. So if you already have that HVAC system and if you already have that HVAC system and you need to replace an air filter or you need to replace a broken component of your furnace that is generally classified as repairs and maintenance because you are repairing or maintaining an existing component of your system. So when it comes when it comes to tax time the main distinction is your repairs and maintenance are taken as an expense whereas capital expenditures or capital improvements may go onto the books a little bit differently and maybe they may go into your basis in the property which.

 

Ryan Goldfarb: [00:57:44] In a round about way can ultimately be taken as an expense but is generally done so in the form of depreciation and this is a whole other topic for a tax expert or for a tax expert or a CPA to come in and opine on.

 

Ryan Goldfarb: [00:57:59] But high level that's that's the distinction.

 

Ben Shelley: [00:58:02] So for for a final topic here to bookend the segment I do want to talk about the types of finishes that people look for want to ask or ask for scuse me from their general contractors. This is gonna fold in nicely I think with the pricing conversation and how to approach and the dynamic between your GC but maybe if you guys can talk from your bank of expertise about the kinds of finishes you might want for different types of projects and what are some of the cost differences implications, etc. from being you know maybe more specific and wanting something like a luxury finish to something more basic when you're working this out with your GC either one of the.

 

John Errico: [00:58:40] This is more of a general investing question than necessarily a general contractor specific question.

 

John Errico: [00:58:45] But it's really important to consider the end goal of any project that you're working on as an investor or even as a homeowner. So as Ryan alluded to a while ago homeowners the expectation could be that a homeowner might want higher end or maybe more particular finishes to their particular needs or tastes whereas from an investment perspective more than likely you're going to be tailoring the project to the end goal of either a flip or a rental. So if it's a flip you need to take into consideration the neighborhood. What other flips are in the neighborhood. What pricing is sort of like for the property that you have in is a rental. You need into consideration the fact that there might be people living in the property they're not going to treat your property as well as you might assume that a you know a primary occupant were treated at someone as their own home. So it's something that I really wish from a general contracting side that more clients would ask us about. Many we have experience both as general contractors but I would say primarily we are real estate investors and we know a lot about certain neighborhoods certain areas where things are priced at a lot of times people come in with a project and they say hey I want to put quartz countertops here and my response is that well that's nice but it's doesn't make any sense at all to put quartz countertops in a rental in a very low income area. That's crazy.

 

Ryan Goldfarb: [01:00:07] The question you should always ask yourself when you're looking at an investment property or a rental property is when will this finish in some way result in either higher rent or lower expenses over the long. Exactly. That's not to say that you as an investor you should skimp on finishes. I think it's important to consider both the quality of the finish in terms of aesthetics but also the longevity of that finish. So I've actually had this conversation in the past with other investors who do work and who owns a property in some lower end markets and they will often go with laminate countertops in their kitchens.

 

Ryan Goldfarb: [01:00:44] And while I think there are clearly two schools of thought on this but I tend to fall in the side of the argument that I would rather over improve a little bit and put in something like granite countertops as opposed to laminate countertop because while it may not have all that much of an impact when it comes to the rents that counters that granite countertop should last far longer than a laminate countertop would. And if it saves me both the cost and the headache of having to replace it you know five years or 10 years down the line then that's worth something to me and whether whether it can be qualified in the form of rent or qualified in the way of not being an expense in year five or year 10 but rather in year 15 or 20 then there's value to that.

 

John Errico: [01:01:33] Yeah I mean it it's it's important to consider though even if it's a rental How long are you going to keep the property. I mean sometimes investors will talk about ahead this guy in Connecticut actually who managed a bunch of properties and also invested in stuff and he was trying to sell us a building and he kept saying yeah you know I juice it, I juice the building and I so sort of like what does that mean. He's like why. Well he also admitted that he'd owned the building for about 10 years and he had done a lot of renovation work when he bought it. And after 10 years it just so happens that a lot of consumer components start to break. So like hot water heaters generally have like a 10 15 year lifespan sometimes a roof might have a 10 year lifespanetc. So he's trying to say is that he did all the work and now 10 years later he has to put in a lot of money to get it back up to a normal standard there there's gonna be a lot of expenditures that are about to happen. So he wants to offload he doesn't want to pay for those anymore and that's okay. I mean alternatively he could have put in a roof that would last 40 years he could have been in a maybe higher quality high water heater that would have lasted 20 years but he didn't. And that was his investing strategy and that's OK.

 

Ben Shelley: [01:02:33] So these are the decisions as an investor as well as a homeowner that you need to make as as you go forward and I think you have to think of the opportunity cost of investing today maybe in higher quality materials and finishes versus this individual who in 10 years a long time. But now that he's ready to sell he maybe is regretting not quote juicing his property a little bit more is extracted all his ashes from all of the juice and then honestly what it tells you know we mentioned I want to talk more about this but we're going to do this in the next episode about some of those invariable factors which we already things like sorry Ryan now because I want.

 

Ryan Goldfarb: [01:03:05] One of those invariable factors also is while your rent may be what your rent is going to be and that may not change depending on the finishes you may you may attract five or 10 applicants to a listing.

 

Ryan Goldfarb: [01:03:16] If you put in like one upgrade like granite countertops stainless steel kitchen appliance right now you may. Whereas if you don't your rent may may be the same but you maybe only get two or three applicants and having that larger pool to choose from will allow you to pick the most qualified candidate.

 

Ben Shelley: [01:03:35] And that my friends is all the time we have for this episode we are going to continue with a part 2 to managing the construction process where we take you through the ending period. The payment schedules how to address any issues or any successes at the end of your construction project. So make sure you tune in next week to our episode 9 managing the construction process 2. Also feel free to reach out to us on Facebook at Brick x Brick. That's Brick x Brick. Subscribe to us wherever you get your podcasts and of course if you need any construction work in the northern New Jersey area make sure you're going to Liberty.Hudson.com. Gentlemen thank you so much for your time and your expertise as always.