I really do want to know because my time is not free given there is not enough of it. So when I look at an investment, be it real estate, stocks, or a business venture, how should I account for my time?
Let’s take a simple example of a couple looking to diversify and add some real estate to their investment portfolio. They talk it over, look at the success and failure stories, think a bit about the responsibilities, and decide to look for an investment property, planning to manage it themselves. After 2 months of searching, driving to open houses and viewings, discussing over dinner, running the numbers, many offers, negotiations, inspections, mortgage approval, negotiation, and signing, and eventual closing proceedings, they purchase a condo with prospects of a cash flow positive rental income.
After countless hours of work they now have a property to rent out. Now comes the easy bit. Rental listings, fielding calls of interest, shortlisting applicants, background checks, interviews, viewings, and the eventual contract signing and logistics of occupancy.
Now the checks roll in. They go to the bank and deposit the cheques. Then there’s the property tax payments, regular reading of strata minutes, (hopefully few) maintenance calls, possibly handling of complaints of neighbours (if they’re really unlucky), and the added complexity to their income taxes.
Then there’s handling termination of occupancy, walkthroughs, and negotiation of damage deposit refund. See paragraph 3.
Every few years there will be some semblance of major repairs. Now there are the contractor interviews, planning, negotiation, reviewing and signing of contracts, oversight, and audit of the work; if they’re lucky not much more than this. Or they can go it themselves and do the plans, buy the materials, work weekends, and hopefully not spend crazy amounts of time doing it.
When they eventually sell this property there are outlays including interviewing Realtors, signing the contract, negotiating, giving tenants notice, employing a lawyer/notary, and the eventual property transfer itself. Never mind the tangible commissions and other taxes and fees.
But still, the property, at least as the cash flow statement indicates, is profitable. But what if we simply look at this investment if we assume we are running a business? Here all costs, including the initial investigation, contract negotiations, operations, accounting, and capital outlays, all must be budgeted for as if employees are paid to perform these tasks. The costs conveniently forgotten on the cash flow statement of a small-time investor start adding up.
I hear countless stories about a property being “cash flow positive” looking at the basic cash outlays: rent coming in, mortgage, maintenance, and taxes going out. Yet if we start including other costs, assuming others were fairly paid for doing this work, all of a sudden, given one’s time has value, the “cash flow positive” investment is anything but. Often I hear the justifications for all this; “sweat equity” is a favourite of mine, putting some intangible return on time spent, but an even better one is that renovation and real estate is really a hobby, a pastime whose efforts would be done for free anyways. Right. To be fair I hear the same for other types of investments too. Investments take time to manage, though some take more time than others.
It is well worth asking how corporate investors, who cannot hide all the "other" costs of managing investments on their balance sheets, make a decent return in the first place. If or when purpose-built rentals become feasible in Vancouver again, what type of yield will be required?