Raise your hand if you agree with this statement: My time is worth a certain amount of money.
Everyone’s hands should be in the air. Disagree? Then consider a thought experiment — would you scrub floors for 10 cents/hour? No? What if someone offered you $10,000/hour? Would you grab a sponge? Of course you would. So would I.
Time, Money & Real Estate
Everyone’s time is worth something different to them. You may be willing to work for $10/hour or $100/hour; choose a number that you think your time is worth in your real estate investing work.
For the sake of argument, let’s say Average Joe’s time is worth $25/hour because it’s near the U.S. median income (and it’s a nice easy number to work with).
Joe flips a contract and earns $1,000. Hooray! Or is it hooray? Maybe.
How many hours did Joe work on the deal? If he spent only four hours, then Joe did well. His labor cost was $100, leaving $900 in profit (not counting costs like gas and his overhead).
But what if Joe spent two weeks struggling to find that deal? What if he looked at 12 other properties that were misses before having that hit? Maybe Joe’s total labor hours were closer to 50, rather than four.
If math wasn’t your favorite subject in school, Joe’s new results would look like this: $25/hour x 50 hours = $1,250 in labor costs. Joe lost money. He should have had a garage sale instead; at least his garage would be clean.
If you’re serious as an investor, you need to know how to accurately calculate the returns on your investments. Labor costs are part of that calculation, whether you or someone else is doing the sweating.
In the example above, consider more profitable ways Joe could have spent his time. He could have taken on a second job or a side gig, worked toward qualifications for a better job, or worked harder on his 9-5 job to secure a killer raise.
By way of another example, what if Joe made $5,000 on one house flip and $7,000 on another, but the latter took thrice as many labor hours? Which one was actually more profitable? It depends, but as an investor, you should be able to come up with a good answer based on how you value your time and how many labor hours each deal took.
Want another real-world example? Let’s say you have $5,000 to invest and are trying to choose between a down payment on a rental property and investing in a mutual fund. Sure, we all talk about “passive income” from rental properties, but securities are truly passive. Your stock broker doesn’t call you up every two weeks to whine about your investment, but your tenants might. There are vacancies, repairs, bookkeeping, signing and renewing leases; rental properties cost labor hours, while many other investments don’t.
Calculating labor costs will help you compare apples to apples, instead of being misled by gross revenue.
Oranges: Do Vacation Rentals Pay Better?
Everyone loves to spout their opinion about whether Airbnb and vacation rentals are “ruining” their neighborhood. Even landlords love to disagree over whether they make a good investment.
In many areas, vacation rentals can easily rake in more revenue than normal long-term leases. But at what cost in labor?
Vacation rentals must be cleaned in between every guest’s stay. The landlords must be on-call to respond to inquiries and availability, book dates, and coordinate with the guests before, during, and after their stay. Vacation rental owners must decorate the unit, furnish it, and keep it stocked with clean, fresh linens. They often provide welcome gifts, like a bottle of wine or a bowl of fruit.
If you don’t pay yourself for your labor, then how do you know if your vacation rental is more profitable than it would be as a standard long-term rental property?
Maybe your unit truly can earn more money as a vacation rental. Or maybe the 15 hours/month in work is not worth the extra revenue. But you just won’t know unless you track your labor accurately, in writing.
The Hidden Benefits of Recordkeeping & Forced Discipline
When you commit to paying yourself for your time, it forces you to track all your working time in writing. And when you track every minute of work that you put in, curious things start to happen.
Going back over your records, you’ll see exactly how much time you spent on which tasks. Were those tasks an effective and efficient use of your time? You’ll be appalled at how much time you spent doing tasks that turned out to yield very little results.
Even among the tasks that are fruitful, you may find yourself shocked at much time you actually spent doing them. “It took me six hours to do that?!”
And if you’re in a partnership with another investor, how much time are you investing compared to them? Granted, if you’re the junior partner that may be part of the deal. But in other cases, tracking your labor hours may provide some startling insights.
On your next deal, you’ll be that much more efficient with your time.
Should I Stay or Should I Go?
Thinking about quitting your day job? Besides the many other reasons to think twice before quitting your job, here’s another angle to consider.
When you track your labor hours spent on real estate investing, you may find some surprises. Over the course of six months or a year, how much did you earn per hour of work spent on real estate investing? You may have earned far less — or far more — on an hourly basis than you do at your job.
Be careful to factor in employment benefits, too; health care or retirement benefits have very real and tangible value.
But by accurately tracking your time spent on real estate investments and being careful to pay yourself for your labor, how well did you do compared to your full-time job? Maybe you’re ready to make the leap to full-time investing! Or maybe you need more experience and a stronger network.
When to Delegate
Tracking your labor hours doesn’t just help with tracking ROI — it also helps you know when to delegate tasks to others.
For example, if Joe spends an average of two hours each month managing his rental properties, then it probably doesn’t make sense to hire a property manager. His own labor costs him $50/month, whereas a property manager will likely charge him 10% of collected rents (e.g. $75/month, for a unit rented for $750).
Or maybe when all his bookkeeping, accounting, maintenance, and tenant communications are accounted for, Joe spends five hours/month managing each rental unit. He’s blowing $125/month worth of time, when he could pay a property manager $75/month to do that work.
It doesn’t stop with property management delegation. Real estate investors can delegate all kinds of tasks, both related to their work (such as bookkeeping) and in their personal life (such as cleaning their home or running errands). How much is your time worth? Can you pay someone else to do that task, for less money than your time is worth?
The Bottom Line: Your Investments’ Bottom Lines
What’s your true bottom line profit after accounting for your labor costs?
Sharp investors always track their time spent on all real estate-related activity and keep detailed notes on what they worked on and for how long.
You’ll quickly spot inefficiencies in your work, and you’ll be able to accurately compare returns as you review your investments. You need to know your true ROI on each investment.
As you gain experience, you’ll find yourself minimizing wasted work, delegating more tasks to cheaper labor and maximizing your true ROI.
Have you tried paying yourself for your time? Abhor the very concept and want to yell at us for proposing such a thing?
Talk to us about your investments — and what you plan to try next to take your investing to the next level!