Warning: Focus on ROI as Your Only Investment Goal & You May Squander Your Most Valuable Asset

by | BiggerPockets.com

Tax season is done, which means I have more time on my hands to get back into writing. Today’s article offers a different perspective on investing in real estate. I’ve noticed an interesting trend among real estate investors, and I hope today’s article makes you think a bit differently—much like the article I wrote back in February.

Through watching clients and even reviewing my own investment decisions, I’ve noticed that investors will underwrite deals and choose the deal with the highest internal rate of return (IRR). This is, of course, a fine way to pick great deals and invest in real estate.

What is rarely factored into the equation, especially among the new investor crowd, is your investment of time.

Time should absolutely be factored into the investment decision. How much time will it take to acquire, rehab, place tenants, refinance, etc.? You may underwrite a deal with a 20% IRR, but if it takes you tons of time to work the deal, was it worth it?

Investors don’t understand the value of their time. Shoot, I didn’t understand the value of my time until I became a full-time business owner, at which point I already had already purchased 6 units without factoring in how those purchases affect my time. Rentals are relatively passive once tenants are placed, but when those vacancies pop up and units need to be turned, how much effort are you personally going to put in? If you’re like me and your time is more valuable working in your business, all of a sudden your real estate investment takes a back seat or you are forced to work pretty crazy hours.

What is Your Time Worth?

My experience in working with real estate investors and being one myself tells me that few people understand the value of their time. If they did, they wouldn’t perform most maintenance and repairs on their own unless they had a unique competitive advantage over other contractors in the area (at which point they had better be running a business!) or they genuinely enjoyed the various activities.

I’ve seen doctors making $500/hour do the landscaping at their rentals. I’ve seen attorneys making $300/hour paint their own properties. I ask, is it worth it?

True, you can receive joy from working on your rentals. I know I do when I maintain the landscaping at my properties. But I also know that the monetary value of my time plummets when I’m working on the rental.

Though I’ve written about how you can potentially quantify your time, I no longer believe it’s as simple as taking annual earnings and dividing that by a certain number of hours. However, I do feel it’s important for you to develop some form of a baseline hourly rate. Doing so will provide you with a benchmark to base decisions off of and also provide you with motivation to increase your hourly rate.

real-estate-investing-easy

What Do You Want Your Time to Be Worth?

During the first meeting with one of my business coaches, I was asked to write down what I wanted to be paid on a hourly basis. Trying to be somewhat funny, I wrote $1,300/hour. My business coach looked at that number, looked back at me without any change in emotion, and asked, “Why, then, are you still personally handling the scheduling with your clients?”

His point was that I was performing an admin level task that I can outsource cheaply. Every minute I spend working on an admin level task holds me back from achieving my insane “goal” of an hourly rate.

We then proceeded to analyze every aspect of my business. We identified areas where I was under-utilizing my time and developed plans to on board contractors and employees to soak some of that up. The results have been interesting—my time is now focused on higher value parts of the business, sales/marketing and production, rather than admin duties. While I don’t want to downplay any one part of a business, getting a tax return out the door is generally more important than answering an email.

Related: Attention Full-Time Workers Seeking Early Financial Freedom: This New Book is for You

I’d encourage you to think about what you’d like your time to be worth. You can approach this from a 40-hour-per-week standpoint or just an “every hour counts” standpoint. The beauty of real estate investing is that, if you think about it, you quite literally make money while you’re sleeping.

Don’t be afraid to set a ridiculous goal like I did. I’ve since changed my goal to something much more realistic, but setting a high “target” hourly rate in the beginning helped put everything in perspective for me.

Your Time With Friends and Family Matters

If you read my previous articles, you’ll notice that I’m very driven by money (I’m driven by other things, chill)—so much so that I’ve gotten in trouble with previous relationships, friends, and family for only ever wanting to talk business.

However, my perspective has begun to shift. Maybe it’s because I’m getting older. Maybe it’s because of a newfound sense of awareness thanks to the books I’ve been reading. I’m not sure. But what I can tell you is that your time with friends and family matters. It’s immensely valuable time, and the only way it can really be quantified is with the understanding that “I want more of it.”

When my clients are undergoing projects or aiming to expand their portfolios, I’ll sometimes ask them why they are doing what they are. Ultimately, they want to work less and spend more time with their families, all while getting paid.

As your portfolio or operations grow, so do your headaches. With headaches come less family time. In a perfect world, we’d have unlimited family time, no work, and still get paid.

If your goals are to increase your family time and decrease your work time, you need to make sure that your investment strategy and decisions actually align with those goals.

Your Investment Strategy Should Align With How You Want to Value Your Time

Once you have defined what your time is worth, both from a monetary and “family time” perspective, you should ask yourself whether your current investment strategy and investment decisions makes sense.

I often see a mismatch between time goals and investment strategy. Take the guy or gal who quits their job in order to have flexibility to raise their newborn child, only to find that the flipping business they started soon consumes every waking hour they have. Now they are working harder and longer than they were before.

I encourage you to build a passive portfolio or business that earns money while you sleep. This type of strategy will allow for maximum family time while increasing the overall monetary value of your hour. Note that the investment does not need to be super passive from the get-go. You could say, “Within the next five years, I want to have extremely passive earnings.” That may require some hard and long work today. You just need to monitor your strategy over time and make changes. Today, it may make sense to buy single or multifamily property, but by year five, it might make sense to only place money in syndications or other extremely passive vehicles. Don’t fall into the trap of continuously building out a huge portfolio, because one day it will become an operational headache that you likely didn’t intend for it to be.

I can’t tell you what your investment strategy should look like, but I can tell you that you need to think about where you want to be and how your investment strategy will help you get there. Investors often do not understand the amount of time it takes to scale a portfolio or a business—especially new investors who are well capitalized.

life-on-half-income

The Dilemma for Well Capitalized New Investors

I always enjoy on-boarding a client who is well capitalized and has the ability to scale a portfolio rather quickly. If they are a new investor, the first thing I will ask is, “What’s the point? Where is it that you truly want to be in five years?” Most of these folks will answer with a cash flow number to sustain their standard of living.

Interestingly, many of these folks do not want to spend significant amounts of time managing their investments. They are seeking returns higher than the equity markets can generally provide, yet they want to be hands-off.

Once I know they they want to be hands-off, I’ll generally ask probing questions about what they think a hands-off real estate portfolio looks like. The majority of the time, in the new investor’s mind, a hands-off real estate portfolio includes personally owning a large amount rental real estate.

For instance, many of my clients wish to cash flow $15,000 per month. If that’s the goal, then the portfolio really need to cash flow $20,000-$25,000 per month to account for reserves without ever needing to affect the investor’s monthly draw of $15,000. If your average property (assume single family since new investors seem to love single family) generates $200 per month, you need 100 properties to reach the $20,000 per month goal.

Related: 9 Ways to Maximize Your Investing Efforts While Working a Full-Time Job

Can you see where I’m going with this?

How hard it is going to be to manage 100 properties? The operational headache that comes with that is why there is a market for larger assets.

The realization will then dawn on the new investor’s mind. Their idea of a rental portfolio to generate their monthly cash flow goals will be an absolute nightmare to manage.

In comes my recommendation, which is generally along the lines of: “If you want real estate exposure and you want to be passive, you should consider investing in syndications, crowdfunding, REITs, triple net lease properties, or other forms of partnerships.” Basically, be the money guy. Be the bank. The bank collects the checks unless a deal turns sour, which can definitely happen.

I understand that not everyone is “well capitalized” nor can they quickly scale a portfolio. Some of you are just starting out, having bought your first rental, or are aiming to buy that first property. My point with this section is twofold: (1) Set both monetary and time-related goals and make sure your investment strategy aligns with both, and (2) just because an investor is well capitalized doesn’t make them any smarter than you!

We now ask every client who is on-boarding with our firm to provide their goals. Where do they want to be personally in 5-10 years? Forget about the money; just tell me what your dream life looks like. It’s extremely important to understand, personally, where you want to be and how your investment strategy is going to help you get there.

Summary

Your time is an important asset. Every day, people and things attempt to steal your time away from you. Save your money, invest it wisely, and don’t let your investment strategy seep away the precious time you could otherwise be spending with friends, family, or anything else that makes you happy.

How do you figure the value of time into your investment strategy?

Let’s discuss below!

About Author

Brandon Hall

Brandon Hall, owner of The Real Estate CPA, is an entrepreneur at heart who happens to be good at taxes. Brandon is a real estate investor and CPA specializing in providing business advice and creative tax strategies for real estate investors. Brandon's Big 4 and personal investing experiences allow him to provide unique advice to each of his clients. Sign up for my FREE NEWSLETTER to receive tips and updates related to business and taxes.

38 Comments

  1. Christopher Smith

    I remember learning this lesson at the first professional practice I worked at. A colleague saw me making copies of documents from a client’s file. He summarily informed me that a partner better never see me doing that or I would get fired or at a minimum a quick and painful dressing down.

    When you bill your time at several hundred dollars an hour (or more) you simply can’t expect a client to pay that much for routine task performance. You must delegate the performance of those functions to internal
    admin staff or out source it.

  2. Doug W.

    Great article, as always, Brandon.

    I once had a subcontractor say to me: “You never answer your phone after 5:30 pm”. That made me smile because I realized that I was meeting my goal of spending family time with my family and not doing work during those hours.

    Your illustration of managing 100 properties to meet that $20,000 number is a good reminder of why and where building systems is important. It’s also a reason why I like the crowdfunding approach to investing my money.

  3. Robert Grant McEwen

    How you value your professional time and how you value your free time are two different things. That is, you might make $500 an hour working, but you make nothing sitting on your butt at home watching TV. So how much do you value sitting on your butt watching TV? I’d rather change my spark plugs, mow my lawn, clean my pool, than pay someone $50-$150 to do it. Again, it’s that or sit on my butt watching TV. If I paid someone else to do those things, it’s not like I’d be making $500 for that hour that I didn’t work. Now in mid July, I value my INDOOR time much more than spending it outdoors. But the point is that it’s fallacious to value it based upon how much you earn hourly at work. Rather, it’s how much to you value your free time (when you would be doing this). It only makes sense to pay someone else to do it if you’d be willing to pay that amount of money (or more) for that time back or to be doing something different.

    • Brandon Gross

      I totally agree man, it’s two different things completely (work hourly rate value of your time vs free time hourly rate). In accounting it’s not kosher to mix personal expenses and business expenses. The same should apply to time value based decisions as well. If you choose to use this concept, I too believe there should be two separate numbers to use depending on what item your considering.

      With that said, I think this can be way more cut and dry for someone with a W-2 job and no investments vs a person who is a private business owner. In the business ownership case, I could see how this will lead to blurred lines between personal time and business time. The main point of his article appears to focuses on fine tuning private business and farming out time wasters vs personal non-business based decisions (that’s how I read it anyway). I don’t think he was implying that there should be only one number for personal and business related decisions.

    • Brandon Hall

      100% agree. I enjoy mowing the lawn. I could hire someone for $35 to do it, but it gets me out of the house and let’s me just think for a bit without distractions.

      The key is not to perform tasks that you dislike doing or are below the value you could generate with that same time elsewhere.

  4. Franky Maslim

    This is exactly what I’ve always had in mind. Time is one of the key factors, if not the most imprortant. Though I am a brand new “investor” (if I can call myself that), I am working on my 2nd rental property through a PM company, which allows me to be pretty passive (other than signing a some paperworks here and there).

    My goal is to be able to quit my job and spend more time with my family, if I choose to, while still have enough passive income to live the lifestyle I want, AND growing my investment at the same time.

    Your point on having $20,000 passive income to cover for $15,000 goal hits the nail on the head. Always prepare for more than what you’re shooting for. That way, you have room for errors.

  5. Phillip Denny

    Great article. This is on my mind a lot as well. I’ve recently started tracking and paying myself at different rates equivalent to what it would cost me to hire someone. I think its going to help me value my time more, have a more realistic picture of my ROI for real estate and help better capture my company profitability.

    Totally agree with Doug W on setting boundaries/expectations with other people. It’s amazing how many fire drills get taken care of themselves when people know you aren’t available 24/7. Kind of a 4 Hour Work Week strategy.

  6. This is why I like investing in high end neighborhoods in top tier markets. It takes the same amount of time, effort and maintenance for a 1500 sf house whether it’s in Beverly Hills or San Bernardino. But the house in Beverly Hills provides a lot more income. Life is too short to take the low road.

  7. Dan Heuschele

    I have recognized the value of my time but have issues paying for something that I can do easily myself. I realize this flaw but it does not mean that I can easily get past it. This morning I vacuumed a pool for at least an hour. Last week I mowed a lawn and pulled weeds at a rental property because it needed it and the gardener had not been there in a while. It makes no sense but I cannot help myself (but I am working on it).

    I want to be able to delegate all such tasks to a team I can trust to do it but I am not there (either with having the team or the trust).

    So I agree with the point of your article but it is not easy for everyone to implement.

    • Brandon Hall

      I don’t think there’s anything wrong with what you’re doing. I like mowing the lawn even though I could theoretically be working on my business. Just breaks up the day a bit and gets me out of the house.

      There’s a non-monetary benefit to performing various tasks. The key is to not waste time on those that you dislike if you could outsource them for less than the way you value your hour.

  8. Rachel Luoto

    Brandon, how do you define “well-capitalized”?

    I want time with my friends and family, yes, but also want time to learn, network, and build businesses.

    I don’t want more time with my family, I want time to change worlds 🙂

    • Brandon Hall

      Take this with a grain of salt since I work with all levels of investors and the higher end folks have plenty of funding.

      Imo is someone who has little overhead (aside from performing debt) and has $100k to invest is in a great position. My thought on “well capitalized” is someone who has significantly more, in cash or relatively liquid assets, that they can invest in real estate or other asset classes without it affecting their standard of living or causing them to sweat.

      Brandon

  9. Chad Carson

    Great post, Brandon! I definitely resonate with this idea.

    And I just think it’s funny (but great!) that a CPA is asking clients their life goals on the front end of a client relationship. It makes so much sense to understand that with the type of conversations and advice you have to give, but it’s definitely not common! Well done.

    • Brandon Hall

      Thanks Chad!

      The goal thing came about early last year as I was just asking potential clients why they want to invest in real estate because I was curious. Then I realized I can leverage their goals to provide better and more tailored services so we made it an official part of on-boarding about six months ago.

      Now we’re working on a better way to formalize the goals and see how well our clients perform over time.

      Cool stuff!

  10. chris schu

    Work ON your business, not IN your business.

    “… just because an investor is well capitalized doesn’t make them any smarter than you!” Same goes for titles, degrees, net worth, and ones zip code of residence. There are plenty of “investors” that are more sizzle than steak.

  11. Melissa Gregg

    Great post! Just the thing I need to be thinking about as I have been known to say I have too many irons in the fire and need to think about slowing it down a little! Test against the goal wage when taking on new projects and know when to hire stuff out!

  12. John Murray

    The correct combination of work, rest recreation is the key to a great life. Most have to schedule in rest and recreation around work. When you reach the point of passive income is your only income you have made a life goal, life is good. Work when you want, rest when you want and enjoy recreation when you want. It’s a great feeling when you made $250K in BRRR and your total tax liability was less than 10% of the total. Freedom is not free, you have to work for it.

  13. I was ready to leave an angry comment after reading the title. Of course you need to focus on ROI!! That is until I realized that you were making a point about the value of your time. Like others, I also have a hard time paying someone to do something I know I can do better and faster.

    I recently took a big step and signed up with a Virtual Assistant service, FancyHands. Only $5 per 20 minute task. It’s been eye opening for me personally. The task gets done well enough and I get 20 minutes back to spend how I want. That’s a great feeling!

    Thanks for the great article.

    • Brandon Hall

      Quite welcome! Glad I avoided your wrath 🙂

      VA’s can be a godsend. Highly highly recommend you continue exploring even if you have a bad experience eventually. Leveraging money is one thing, but leveraging other people’s time is phenomenal.

  14. Yanna Almonte

    Wow Brandon! Love this article ! That’s exactly my problem. Spending too much time in little things that I could easily delegate. I recently got my priority in order. Health, Family and wealth. I noticed that when I was focusing more in the money part I wasn’t happy. I was becoming what I call a “machine”. Now I got my priority in order and I get so much satisfaction from spending time with family.. however, building wealth is also a priority because I eventually want more time to do the things that fill my hearth. Thank you.

  15. Joshua G.

    “[Y]ou should consider investing in syndications, crowdfunding, REITs, triple net lease properties, or other forms of partnerships.”

    Great article, Brandon. You’ve right on the mark with what I’d like to get out of my investing, i.e., truly passive income. Can you recommend any educational resources related to your above quote?

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here