How do you account for the value of your time?

6 Replies

One thing I've noticed about comparisons of real estate strategies is that returns of very active forms of investing are often compared to very passive forms of investing as though the time invested does not have any monetary value. 

This seems contrary to the idea of running your real estate investing like a business. In a small business, the way to calculate the owner's TRUE profit is to subtract all costs, including a market-based salary for the owner, from revenue. (This approached is laid out very well in the business book Simple Numbers, Straight Talk, Big Profits!). 

The closest thing I've seen to this is real estate investing talk is the process of analyzing deals with a property management fee, even if you plan to do it yourself.

I'm very curious about whether or not anyone any part-time active real estate investors out there are paying salaries to themselves or family members (even if just on paper) and including that data in ROI calculations.

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1. There's no "this is the way" in real estate. We're not dealing with "the Force" and there are no Yodas out here.

2. If your time would be spent on some other financial endeavor, and you are looking at pure financials, then absolutely you have to consider the dollar value of your time. If your time would be spent watching TV, or wasting time in some other method, then you have converted non-productive time into productive time, and the calculation is meaningless. Who cares if you make $5/hr working on real estate if a)you like it and b)the alternative is spending $5/hr watching tv?

I would hazard that most people don't calculate their time costs because it is time they would have been spending unproductively anyway. In other words, especially on the front end, most RE investors have regular jobs and this is more or less a "part-time" job. At some point, if/when they scale up, they either leave their regular job and go into this full-time or begin to parcel out some/all of the responsibilities. That is the point at which their actions have financial opportunity costs, unless from the beginning they were going to either work on RE investing or work part-time at Subway. That is when it becomes important to know the financial cost of your actions from a "I'm not going to do this myself" point any more. That is why it is recommended, for example, that if you are going to buy & hold property, you include the cost of property management in your initial calculations, so that you can see if/when you "graduate" to virtually passive management, you can pay for that management. 

Finally: most people grossly over exaggerate the value of their time. I hear this all the time "Why should I do a $25/hr job when I could be making $1000/hr finding deals?" Except that most people won't spend that hour they paid for whatever finding deals, they will spend it watching Dancing with the Stars as @Brandon Turner likes to illustrate. So there's nothing wrong with either approach, but be honest with yourself. If you don't want to do something, you don't have to justify everything in financial terms. Some things are done, or not done, just because it feels good/bad to do them. 

@Mike Wright 

The natural questions everyone is going to want to know the answers to here is:

1. What did you do different that made the property sell for $250k when it didn't sell for $225k?

2. Where are the agent fees in your spreadsheet?

3. Does Texas allow loan assumption without triggering a due on sale clause?

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