SS73: Why You Should Be Calculating Your Return on Time

Today Charles Carillo is going to be discussing why you should be calculating your return on time.

When underwriting a property, most real estate investors, especially inexperienced investors, do not calculate their return on time. Return on investment is one of the most significant variables to consider when evaluating any investment opportunity.

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Talking Points:

Too often, investors are focused on return on investment, IRR, cash on cash return; but not return on time.
Most real estate investors do not calculate their return on time when underwriting a property; especially new investors. Return on time is one of the most important metrics and should be taken into consideration when reviewing any investment opportunity
There are 2 main important metrics that you need to know when doing this; what your hourly value is and how many hours will this new opportunity require from you personally
Easily calculate your own hourly value by dividing your annual income by 2,000. Someone earning $100,000 per year has an hourly value of $50 per hour
The next is more difficult. Try to estimate how many hours you will be spending on this particular investment; per month and per year. This will allow you to figure out your exact return on time.
If you make $100k per year and the investment you are reviewing at will earn $500 per month but requires 5 hours of your time per month; you are cutting your returns in half.
When I am speaking to potential investors and they are considering becoming active or passive investors; this is the formula I ask them to run on themselves; the problem is though, new investors drastically underestimate the time required.
When you purchase a property to rent out; even if you hire the best management company; someone will still need to handle asset management; if that, is you or another person; it is a crucial role.
With consulting clients, I will list all of their income sources and categorize them by Passive, Semi-Passive, One-Off Active, and On-Going Active. I will then have them color-code the sources by how much they earn each year. This gives you a great overview of how passive or active your income sources are.
When someone purchases a rental property and hires a property manager; I consider that semi-passive; there is passive income but it still requires your time.
When I invest in a passive investment or I invest funds into one of our own deals; the return from that is passive; I do not have to do anything additional to earn returns from that money. Yes, if I am also an operator on the deal, I need to manage parts of it; but I am compensated separately for that.
When passively investing; after I have performed due diligence, signed the documents, and wired funds; I normally will spend about 1 hour per year on that investment. That is a very high return on time.
Now, I am not saying that you need to sell all of your businesses or investments that require your time, but there are ways of increasing your return on time.
Delegation: start delegating more tasks; be prepared to spend hours upfront training but it will be well worth it.
Training: spend more time training your assistants and staff; you need to think long-term and stop being short-sighted.
Avoiding new investments that are time intensive (even if the returns are lower). When we are investing in a project; we will pass on deals that do not meet a specific return for the time required.
Read the 80/20 Principal Book – it is important to understand what your high-value activities are and try to do just that

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing why you should be calculating your return on time. So too often, investors are focused with return on investment IRR cash on cash return, but not return on time. And most real estate investors do not calculate the return on time. When underwriting a property, especially new investors return on time is one of the most important metrics and should be taken into consideration when reviewing any investment opportunity. There are two main important metrics that you need to know when doing this, what your hourly value is and how many hours will this new opportunity require from you personally easily calculate your own hourly value by dividing your annual income. By 2000 someone earning a hundred thousand dollars per year has an hourly value of $50 per hour. Next is more difficult. Try to estimate how many hours you will be spending on this particular investment per month and per year.

Charles:
This will allow you to figure out your exact return on time. If you make a hundred thousand dollars per year, and the investment you are reviewing will earn $500 per month, but requires five hours a time per month. You’re cutting your returns in half when I’m speaking to potential investors and they’re considering becoming an active or passive investor, this is the formula I ask them to run on themselves. The problem being though new investors drastically underestimate the time required to manage property. Even if they have a property manager, when you purchase property to rent out, even if you hire the best property manager, someone will need to handle asset management. If that is you or another person, it is a crucial role and it’s required for any piece of property and any investment to be profitable with consulting clients, I will have them list down all their income sources and categorize them by passive semi passive, one off active and ongoing active.

Charles:
I will then have them color code the sources by how much they earn every year. And this gives you a great overview of how passive or active your income sources are. When someone purchases a rental property and hires a property manager, I consider that semi passive, there is passive income, but it still requires your time. When I invest into a passive investment or I invest funds into one of our own deals. The return from that passive portion, I do not have to do anything additional to earn returns for that money. Yes, if I’m also the operator in the deal, I need to manage parts of it, but I’m compensate separately for that. The passive part though, there’s no other time other than just wiring in when passively investing after I’ve performed due diligence, sign the documents and wired funds in, I normally will spend about one hour per year on that investment.

Charles:
That is very high return on time. Now I’m not saying that you need to sell all of your businesses or investments that require time, but there are ways of increasing your return on time. You know, delegating start delegating more tasks, be prepared to spend hours upfront training, but it’ll be well worth it in the end training. So spend more time training your assistance and staff. You need to think long term and stop being shortsighted and start putting more stuff on their plate and taking it off yours, avoid new investments that are very time intensive. Even if the returns are lower, you know, focus on ones that are gonna be less time intensive. When we are investing into a project, we will pass on deals that do not SP meet a specific return for the time required. And lastly, I would read the 80 20 principle book. It is important to understand what your high value activities are and try to do just that. So I hope you enjoyed, please remember to rate review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then

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