Are You Making Money, or Just Playing Business?

[Drago Stanimirovic]

I've been thinking about something that I suspect a lot of people in real estate don't really calculate.

Do we actually know when we're making money?

Let's say you spend a few months working on something. You make calls, chase documents, meet people, drive to properties, negotiate, solve problems, deal with contractors, answer emails at night and spend a few Saturdays doing things that somehow couldn't get done Monday through Friday.

Then the deal is finished. You made $5,000. It feels pretty good. Five thousand dollars arrived at once, so naturally your brain registers it as: "I made $5,000 on that deal."

But did you?

How many hours did you spend making that $5,000? How much driving did you do? How much did you spend along the way without really thinking of it as a business expense? How long was your own money tied up? How many evenings did you lose? How many other things could you have been doing?

I'm not suggesting we start billing ourselves $300 an hour every time we answer an email. That would be equally ridiculous. But I do think receiving money in lumps can play a strange trick on us.

If someone works 150 hours for a paycheck, it's fairly easy to understand what his time was worth. If you spend those same 150 hours over three months and then receive $5,000 at closing, somehow it feels completely different.

The check is bigger. The math isn't. And at some point you have to ask yourself a slightly uncomfortable question: "Am I doing business, or am I playing business?"

Now, there's nothing wrong with a hobby. People restore cars. Trade guitars. Renovate houses. Buy and sell things. Spend hundreds of hours doing something they enjoy and occasionally make money from it. That's great.

But making money from something doesn't automatically make it a profitable business.

If you spend 200 hours to make $3,000, you've essentially created a $15-an-hour job for yourself. Except this particular job doesn't give you health insurance, paid vacation or a pension. And you're risking your own money.

Which leads to an even more uncomfortable question: would you have been better off saving? Or investing the money somewhere boring and doing absolutely nothing?

No contractors calling. No driving across town. No emails at 9 PM. No money tied up. No deal falling apart three days before closing.

Maybe the return would have been lower. But once you account for your time, expenses and risk... Would it really have been that much lower? 

I don't think the answer is necessarily that we should outsource everything. Especially when you're starting out, doing things yourself is how you learn. Sometimes those poorly paid hours are really tuition. You're acquiring knowledge, contacts and experience that may pay for themselves many times over later.

But eventually, a business has to become a business.

And I've started thinking that one of the most honest ways to evaluate a deal is very simple: put yourself in the expenses. Not at some imaginary CEO hourly rate. Just honestly.

If the numbers still work, wonderful. If the deal only becomes profitable because your own labor is valued at zero, perhaps you haven't created a business yet. 

Maybe you've created a job for yourself. Maybe you've created a hobby that occasionally writes you a nice check. There's nothing inherently wrong with either one. But I think you should know which one you're doing.

(Have you ever calculated what you actually earned per hour on a deal? And did you still like the number afterward?)