Focus on ROI as Your Only Goal & You'll Squander Your Most Valuable Asset

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.

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.

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.

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.

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!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.