What is the value of DIY?

Question

My wife and I are finished fixing up our first flip. We calculated our repair cost and there was about $19,000 worth of work done by contractors. We spent another $8,000 on materials for DIY such as flooring, paint, and landscaping. I think that we would have paid a contractor another $8,000 for labor if we had them do the work. I'm estimating that our repair cost is $35,000 and we need to use that to calculate our profit. My wife thinks that we should not add our labor into it. Her argument is that we would have been sitting on the couch watching Netflix if we didn't have this house to work on and we should estimate our repair cost at $27,000, thus feeling like we made more profit.

Who wins this argument?

Mike Cumbie · Answer

@Benjamin Aaker

The wife wins....

Not that she is right, but you should know that answer by now.. "Yes dear you are right, good idea"

:)

Jeff B. · Answer

Out of pocket costs are always deductable, but the IRS code clearly states, your personal labor (even if you're a professional tradesman) on property you own is NEVER deductible.

Remember, there's three answers: Right, Wrong and the IRS :grr

Michael McCartney · Answer

I can see both sides of the argument. I don't think you should if you were not planning on working at another job earning money while you were working on your house. If you gave up some hours at work so you could finish painting or do some landscaping then I think that should be account for but if not and you would have just watched Netflix as you said or some other activity that was not making any money I don't think you should account for that $8k the contractor would have cost you.

Benjamin Aaker · Answer

Thanks for all the great advice.  Account Closed I'm not sure what labor vs materials goes for in this area.  That is a very good question.  My books have information about the bills but not the materials cost.  What is the ratio in your part of the country, or is there a standard amount that BP recommends?

Account Closed · Answer

My pleasure.  Back in my youth, when I swung a hammer doing side-work building all-wood decks, I could do a 1:1 ratio and make decent weekend money... but that was some 30 years ago!  Nowadays, with the manufactured deck and rail materials on the market, the cost of materials can far exceed the labor cost!  That is the only time in my career that I've used ratios.

To provide some additional examples which may provide insight into why this is a questionable practice in my opinion:

- I recently purchased a $300 kitchen faucet for less than $100 (it was the last remaining one on the shelf and so was on clearance (the model, although a top rated product in this price point had been discontinued by the manufacturer - although more likely just the model "number" was discontinued, but that's another topic altogether).  When my plumber installed it, he charged me for his time... period.  Had I paid $300 for the faucet or received it as a gift, his cost to me would have not changed.  Thus, same product, same installation, but very calculable different ratios.

- Floor coverings can have a wide spread of cost... as a general rule, does it cost more to install cheap vinyl/carpet/tile than it does using moderately priced material?

- A gallon of paint can be had for just a few bucks... even premium paints (just ask to see the ones that were mixed/colored wrong).  I'd be lucky to get my painter to take my call for what I might pay for that paint.  Heck, I might spend more in fuel just to go pick it up.  The cost and value (very different things of course) to apply the paint to going to be exponentially greater!

If you want to get an idea of what the labor value might be for the DIY work you've done/may do in the future, call a few pros who do that type of work and ask.  With things like flooring in particular, they may very well provide you with some SF pricing for labor only (e.g., sand and refinish hardwood floors/typical: $3/SF plus $1/LF for shoe moulding). Just keep in mind that carpet and sheet goods are typically bought and sold in rolls, which include waste... and often, the price per SF is based on the amount of material needed/purchased, not the net amount installed.

Account Closed · Answer

Sounds like you've already received the domestic advice about who wins the argument and why!  That said, which is more important to you two... "feeling" like you made a profit or actually realizing one?

There are a lot of things to consider in the equation (but here are just a few):

Did the DIY work take longer than a contractor may have taken... were you working evenings and weekends and it took weeks or months to complete, versus a contractor who many have taken only days?  Don't just count the actual time doing a task, but include the hours and expenses (fuel, etc.) in getting the materials (if you picked them up yourself) and more importantly, the overall timeline (from first touch to last) that the DIY tasks took (e.g., you might be installing flooring in one room, while your wife is painting in another, but neither of you could then be working on the landscaping at that time, whereas contractors should be working on these things simultaneously).   If it took longer for you to do them, what were the increased carrying costs and was there a cost in the delay in getting the property on the market?

Is your 1:1 ratio of materials to labor accurate for the work completed?

How does the quality of the DIY work compare to that which paying a contractor $8K to have done it (perhaps the value of the DIY is greater than what $8K could have bought)?

What is the cost of lost opportunity in relation to your skill-sets?  Might your time net greater returns pursuing your next deal instead of DIYing it?

All that said, if you passed-up watching House of Cards, then it's a slam dunk, you win!

Arlen Chou · Answer

@Benjamin Aaker What you, and many people out there, are doing is mixing opportunity costs with real costs.  They are not the same...  The real cost you would have seen would have been $15/hour you paid somebody to paint the walls.  You did save that cost because you did the work yourself.  As @J Beard points out, the IRS does not allow you to deduct your time spent on your own property. Therefore, you are essentially not allowed to pay yourself for your own work.  If that is the case, then the number you can plug into your calculator for your labor is a big fat goose egg...and your  profit calculation should reflect that.

Therefore, what you are actually trying to add into the equation is an arbitrary number for "opportunity costs".  In many cases, this is a valid point and people who have large potential to make more money doing something else, besides working on their own properties, will hire somebody else to do the grunt work.  However, as your wife points out your opportunity cost lost in doing the work yourself is the time watching TV and not $8000...  Basically your wife is nicely trying to say your time watching TV or doing other stuff is not worth $8000.

I would side with the IRS and the wife on this one.

Good luck!

-Arlen

Benjamin Aaker · Answer

@Hugh Ayles Thanks for the comment. I'm talking about personal purposes rather than tax purposes.  I want to get an idea of the costs for the next flip.  As @Alexander Felice stated, the contractor is a lot more efficient than me (even if I'd like to believe otherwise), and I don't want to do this much work on flips in the future.  I get a lot of satisfaction knowing the job was done well, by me, but it will not be economically feasible beyond 2-3 flips per year.  I really appreciate all of your expert advice.  I'll ask my wife to read these excellent posts and will give you an update with her comments.  This should be fun...

Hugh Ayles · Answer

Are you talking about personal purposes or tax purposes?

If ti is personal, go with what makes the wife happy.

I am not an accountant so please verify with your accountant, but I don't think you can calculate your labor as an expense unless you are set up as an S Corp.

Steve Vaughan · Answer

The true value is the sense of accomplishment.  You did it yourself (for better or worse) and nobody can take that away from ya.  Well done!

Glad you are pricing your labor on a multiple cost of material basis and not hourly.  You probably don't wan't to put the math to that.  Hope your sale goes well @Benjamin Aaker!