Are Investors Underestimating the Cost of Time?

Question

A scenario crossed my desk recently that forced us to model two completely different investment strategies.

The property itself wasn't unusual:

• ~1,200 SF house
• Built in the 1950s
• Deferred maintenance
• Functional but outdated layout
• Large enough lot to support additional improvements

The obvious reaction was:

"Tear it down and build new."

But the more we modeled the deal, the less the conversation became about construction costs.

It became about time.

Most investors compare:

• Acquisition cost
• Construction budget
• Projected resale value

Far fewer spend enough time modeling:

• Permitting timelines
• Utility approvals
• Capital tied up during pre-construction
• Carrying costs during delays
• Opportunity cost of capital sitting idle

A full teardown may create a higher-end finished product.

But it also introduces a completely different timeline profile.

A reconfiguration strategy can sometimes produce a surprisingly similar buyer outcome while preserving portions of the existing structure, reducing permitting complexity, accelerating construction start dates, and shortening the overall project cycle.

At that point, the question is no longer:

"Which project creates the most value?"

The question becomes:

"Which project creates acceptable value in the shortest amount of time?"

Because in high-cost markets, capital velocity often matters just as much as construction margins.

I've started wondering whether many investors are still underwriting projects primarily around construction cost while underestimating the cost of time.

For operators active in California and other heavily regulated markets:

How much weight do you assign to permitting timelines and project velocity when deciding between a teardown and a major reconfiguration?

Have you found that faster capital turnover sometimes beats a theoretically higher resale price?

Bruce Woodruff · Answer

This ties in with my post about time, I found that to be absolutely true. For example:

I worked for many years in a small beach community that was restrictive on allowing tear-downs, mainly because of the set-backs and small lot size....you would lose your old (smaller) set-backs if you did a tear-down, whereas if you just strip-to-the-studs, you could keep those old setbacks and more interior square footage.....

So in reality, we were essentially forced to go to with the strip-to-the-studs method instead of a tear-down and build new. What we all found was that we 'basically' built a new house anyway, but waaaay faster and waaay cheaper - no school fees, cheaper permits, etc.

So yes, faster/cheaper/less stress = a big win. IMO new builds are over-rated.

Igor Buryi · Answer

This is one of the most underrated questions in deal analysis, and you framed it really well.

The thing I keep seeing: most underwriting models treat time as a footnote. Acquisition, construction, resale - those get modeled to the dollar. But "how long until capital comes back" usually lives in someone's head, not in the model.

And that's the variable that actually kills returns. A teardown that produces a 10% higher resale but ties up capital 14 months longer can easily lose to a reconfiguration that recycles capital in half the time. Same dollars, very different IRR, because IRR is brutally sensitive to time, and most spreadsheets bury that.

To your direct question: in regulated markets I'd weight permitting timeline and capital velocity heavily - often more than the resale delta. Faster turnover compounds. A "worse" project you can do three times beats a "better" project you can do once.

The honest problem is that most of us don't actually model the downside of delay - carrying costs, opportunity cost of idle capital, the risk that the timeline slips another 4 months. We model the optimistic schedule and call it conservative.

Curious how others here are quantifying that delay risk rather than just intuiting it.

Are Investors Underestimating the Cost of Time?

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