Musings: Valuing our time & ‘poor man’s thinking’

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The Property Voice Podcast - Musings: Valuing our time & ‘poor man’s thinking’

How much is our time worth? How can we value our time and decide when to DIY and when to delegate or outsource instead? These are the questions posed in today’s episode, where we consider concepts such as our required hourly rate, opportunity cost and return on time invested among other things. The big question is: do you know how or do you know why? All will be revealed…

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Resources mentioned

• Property Investor Toolkit – here is the book link on amazon.co.uk & amazon.com in case you would like to get yourself a copy to accompany this series

Today’s must do’s

1. Stop for a moment, reflect on how you value your own time and try to apply one or more of the techniques & methods below to re-evaluate where you are spending it...and perhaps if you should change tack a little. Are you an investor or a landlord? Do you have poor man's thinking? Add prioritisation and time management into your regular goal-setting and review process
2. Subscribe to and PLEASE do review the show The Property Voice on iTunes…and while you are at it please help us to spread the word by telling all your friends too!
3. Send in your property stories, questions or moans to podcast@thepropertyvoice.net and we will try and feature YOU on the show too!
4. If you would like to, grab yourself a copy of the book: Property Investor Toolkit (link in Resources above)

Get talking!

• Join in the discussion, either here in the comments section below, or anywhere else on the Blog
• Start a conversation on Twitter with us @PropertyVoiceUK or on our Facebook page

Transcription of the show

Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again today.

After the shock, discussion and further uncertainty resulting from our last episode on the Budget changes, I thought I would discuss something a little different today. Let’s talk about valuing our time and what I like to call ‘poor man’s thinking’. So, let’s get right into the heart of the matter with Property Chatter.

Property Chatter

This musing comes as a result of a recent debate I became involved with, when a self-managing landlord started to question whether they could take on any more tasks in their portfolio and if not how to decide which tasks to give to someone else to do instead.

This of course raises another debate – landlord versus investor, which we have referred to in series one, particularly around lettings and management if you remember.

Perhaps one way of defining each perspective is this:

A landlord may get paid money in return for their time in, whereas an investor receives a return on their time invested, there is a subtle and yet distinct difference…notably leverage, an investor can effectively create more time that a landlord cannot beyond the standard 24 hours in a day.

We could in fact substitute the word time for ideas, money, skills and so on and derive the same difference.

Isn’t this a little like the difference between an employee and a business owner or entrepreneur?

If so, is property investing an employment activity or a business? I know it can be a controversial topic but should frame the subject a little I think.

Personally speaking, I am firmly in the 'investor' camp, as I have decided that my personal time and location independence is very important to me. Others will say, do as many tasks yourself and retain all the revenue, however, even if we do go down the self-management / landlord route, at some stage we will reach a tipping point due if nothing else to not having enough hours in the day...and this discussion can help both at the outset in deciding how to value and use our time, but later on as well, when perhaps we start to realise that we have less and less free time available anymore.

The concept that started my thought process here centred on the relationship between time and money. It is easy to fall into the trap here. The belief that our time comes for free and there can only be an upside if we either make or save money by giving up some of our free time to do so. Equally, it is not unlimited in amount, as we each get the standard 24 hours a day…unless some of you have a time machine or something like that.

I mean compared to watching Game of Thrones or Big Brother, surely the idea of earning or saving say £25 for an hour of our time has to be a no-brainer right? Aha, some of you Game of Throne fans are now not quite so sure are you…and this thought helps us to appreciate that it is not as simple as saying our time comes for free anymore is it? I am already hinting at one of the factors or methods that will help us to decide, so before I get too far ahead of myself, let’s set up the outline of the discussion first.

Valuing our time and deciding how to spend it

So, I wanted to set down some of the factors that come into play when we start to place a value on our time. Then, we can use some of these factors or methods to help us to decide which tasks we will do and which ones we won’t.

Mechanical / formulaic factors influencing our decision

There are of course some mechanical or formulaic factors that we can use and principally these are:

• Our equivalent hourly rate
• Opportunity cost
• Return on time invested or ROTI
• Marginal income
• After tax adjustment position

Before we look too far into these concepts, let’s introduce another one…the concept of poor man’s thinking. I guess the simplest way that I can describe poor man’s thinking is to realise when we might be seeing expenditure as either a cost or instead of as an investment. An investment should by definition create more value than it costs to generate it. Value here could be financial or non-financial, such as time, as we shall see when we start to look more closely at valuing our time.

This will start to make more sense as we go…for now, just keep in mind the idea of poor man’s thinking, or too much reliance on expenditure as a cost rather than potentially as an investment. I will return to this concept a little later.

So, when looking at placing a value on our time to undertake a task or job in our property business, such as finding a tenant, painting and decorating, undertaking repairs and so on, we could start by considering our equivalent hourly rate.

Equivalent or Required Hourly Rate

How much is our required hourly rate? To illustrate, a £25k per year salary is roughly equivalent to £15 per hour or £105 per day (35 hour week with 5 weeks off Incl bank holidays). However, if we already have a full-time job, we could argue this should be at a premium, as it is your personal time after all – do you remember the idea of time and a half or even double time for working weekends and public holidays?

We should also not forget to add in travel and admin time into the total job cost. Whilst it may seem obvious to use your own salary level here, however in reality, we should probably be using our desired annual salary instead.

We may be paid £25k or even £50k a year currently say, this would be equivalent to around £15 or £30 per hour respectively. I hear many property investors wanting to earn sums of £3k, £5k or £10k per month from property. That would be equivalent to around £22, £36 or £72 per hour on a salary equivalent basis.

If we were to factor in higher tax rates, travel and admin time, other time off or ‘downtime’ and overtime pay rates, we could easily see these sums start to further increase.

So, once we have identified our required hourly rate we could then make a simple decision when presented with a task – is this worth my time? Alternatively, what we could do instead is have a rule that says: I will outsource all tasks that cost me less than my required hourly rate going forward, or something like that.

Before I move on, keep in mind what I said about poor man’s thinking and for the time being resist the temptation to shout but it will only cost me money if I give the job to someone else! Hold fire and hear me out in full before doing that.

Next up to consider is the idea of opportunity cost

Opportunity Cost

Opportunity cost is the price we have to pay as a result of taking an alternative course of action. It could be either financial and / or non-financial, but here and for the purpose of this discussion, I am going to say it should be non-financial, like time with friends and family. So if we get that call to go and change a light bulb on a Friday evening, the opportunity cost of going to do the job could be the loss of time with the family to say watch a movie together for example.

That’s the concept, so perhaps to help us decide, we could devise some rules, such as never work on a Sunday, or I will work a maximum of 3 nights per week, that sort of thing and then delegating anything else to someone else instead.

Return on Time Invested (ROTI)

ROTI is not a flat bread, it is a kind of a hybrid between the first two items I have already mentioned – our required hourly rate and opportunity cost. With ROTI, I look at my effective financial return per hour I spend 'investing' versus 'doing'. For example, if I know I can produce a £10k return on a project that involves my personal engagement as an investor, rather than as a ‘doer’ (for example in painting and decorating), for say 10 hours, then I know that my effective ROTI here is £1,000 per hour. Clearly, it would be a challenge to then accept undertaking work that saves me say £15 an hour, or it could cost me £1,000 an hour instead. This is how it combines our required hourly rate and opportunity cost concepts. Therefore, I would look to spend more of my time doing tasks where my ROTI was the highest and less time when it was the lowest.

Marginal Income Method

This is where we basically know that we have our basic lifestyle expenses covered from our regular activities (day job, investments, etc.) but then we decide that say doing a day's painting to save paying a decorator £150 is worth our while.

To illustrate, for example, if we wanted to fund a nice meal out for two (Tim Ferris 'Dreamcosting' principle), then we could decide to undertake such a task ourselves to either earn or save that £150. The challenge here of course is that we often can't draw the line on when enough is enough I guess. So one idea is to set our income or dreamcosting goal and don't do anything more ourselves once we have reached it...this would help us to avoid falling into the trap of chasing the next pound all the time and start enjoying what we already have instead, which hints at some other factors that come into play, which I will mention next.

Before I move off the mechanical or more financial factors, one quick word on tax and how this can play its part. If we earn money, then we need to gross it up to account for the tax we will have to pay…

For example – when we considered earning £15 per hour, was that before or after tax? If we want to earn £15 per hour after tax, then this should really be grossed up to around £20 or even £25 per hour depending on our tax rate.

However, if we have to pay someone else to undertake a task for us, then we should really deduct an allowance for the tax as we won’t have to pay instead. This is because we would be able to offset the cost against our tax bill, or pay tax on the money if we did the work ourselves. To illustrate, keeping with our £15 per hour idea, this could fall to around £11 per hour or less, again depending on our tax rate. This may be a tricky concept to understand, especially on an audio recording but let’s just say, avoiding paying someone else £15 an hour doesn’t really save us £15 an hour at all – it will be closer to £11 in our pocket, or perhaps less once the tax is taken into consideration. That is quite a stark thought when we get our heads around it isn’t it?

Other factors influencing our decision

Lifestyle choice & preferences

For some people, certain tasks do not feel like work at all, they just love doing it. For example, this could be dealing with people, or mowing a lawn, although I wonder if it extends to every task on our task list? Equally, related to the opportunity cost idea I referred to earlier, what about our location preferences, holiday time and such like? One thing we could do to help us decide how to use our time could be to rank which tasks we like the best and least, potentially earmarking those we enjoy the least to outsource.

Some other deciding factors to consider when valuing our time

• Geography – where we live versus where our investments are; this affects not only our personal time but also response times for tenants and such like. A different spin on geography is the idea of Geo-arbitrage as Tim Ferris describes in his book The 4-Hour Work Week. For example, London labour rates versus Grimsby labour rates – I really have seen teams travelling to London to undertake refurbishment works from Grimsby, Portugal, Poland and elsewhere, as even with the travel and accommodation, it can work out less expensive. Equally, outsourcing using services such as elance, upwork and such like, allows us to leverage lower cost economies to deliver admin work at a fraction of the cost of doing it in the UK.
• Expertise - Our skills, competence & capabilities or strengths and weaknesses will also help us decide, when to use our own time or not. I have to say that sometimes the worst culprits for doing too much are those that know how to do lots of things. Remember ROTI, opportunity cost and required hourly rates for example?
• Capacity – there are only so many hours in the day and who says we should be working for 7 to 10 of them anyway?
• Quality – I have seen some horrible botched DIY work when walking in to view properties. Basically, bad DIY reduces selling prices and valuations, so it can be a false economy if we are the ones responsible, or an opportunity for a discount of someone else is! Further, when I used to work in an engineering & service environment, there was an emphasis on first-time fix. A 2-hour job with 30 minutes each-way travel time can take either 3, 6 or 9 hours, depending on whether it is fixed on the first, second or third visit.

So, what does it all mean? I guess it means it is not as simple as saying, I make more money when I do things myself. There is always a price to pay for everything we do or don’t do…sometimes that will be a financial price, sometimes an emotional, social, lifestyle one and so on.

The key then is to step back before we plough into doing everything ourselves and make a more rational judgement about what is the best use of our time with our investor hat on. Equally, if we have been at this for a while, we may wish to stop and take stock every now and again – it is a useful exercise to do this each year when we are reviewing our goals for example.

In conclusion – if we want to top up our earnings or even replace a modest income by investing in property, then I dare say that many will be tempted to D-I-Y as much as possible. However, if we have more of a business or investor mindset, then we may take a leaf out of the books of the best businesspeople, who realise the power of leverage, be it time, money, skills, knowledge or contacts and so on. There is a compounding or multiplier effect in leveraging other people in our business and certainly if we have large ambitions, it will be absolutely essential to get our heads around this concept and apply it sooner rather than later.

We don’t want to be busy fools now do we?

Equally, one of my favourite sayings is:

Those that know how usually end up working for those that know why

Now there’s a thought worth dwelling on…

I hope you found this musings episode enjoyable…and if nothing else it’s a little bit of respite from all the talk of Budget and clamping down on landlords of late isn’t it? It all goes in the same general direction however…being professional in our approach and if we are, then we will improve the results of our investment property businesses and our day-to-day lives more and more I am sure of that.

As usual the show notes are available at our website www.thepropertyvoice.net

Thank you very much for listening to another in my Musings mini-series.

Until next time on The Property Voice Podcast…ciao-ciao