In our last blog article, we discussed what opportunity cost is and how to calculate it, and we shared a few different examples of it in practice. As a review, opportunity cost is what you forfeit when you make a decision. It’s the “cost” of your choice. This second part will discuss how to calculate opportunity costs on your time.
You’ve probably heard the saying time is money. And in business, it’s especially true. When it comes to your time, opportunity cost is what you could have accomplished with the time you spent on your current activity. Every action has an opportunity cost associated with it.
The key to understanding opportunity cost is realizing there is always something else you could do with your time. Even if you’re doing nothing, there’s an opportunity cost associated with that.
Every task you take on has an opportunity cost associated with it. So, let’s look at a few examples of this in action to see how the numbers play out.
For example, let’s say you’re a real estate investor. You find a fixer-upper that you think has potential and decide to buy it. But instead of hiring a contractor to do the work, you choose to do it yourself to save money.
You spend several weekends and evenings working on the house, and after a few months, it’s finally ready to sell. But by doing the work yourself, you’ve missed out on other opportunities.
You could have been out looking for other properties to buy or networking with other investors to find new deals. You could have also been working on your marketing to attract more buyers or sellers. But because you were too busy fixing up the house, you missed out on all those other opportunities. And that opportunity cost can be high.
Let’s say you estimate that it would have cost $20,000 to hire a contractor to do the work on the house. And let’s say you think it would have taken them four months to do the job.
If you could have been making $5,000 per month by working on other things, your opportunity cost would be $20,000 (cost of contractor) – $5,000 x 4 (your time)= $0.
In other words, you would have been better off hiring a contractor and working on other things because you would have come out even.
But what if the work had taken six months? In that case, your opportunity cost would be $20,000 – $5,000 x 6 = -$10,000. In other words, you would have lost money by doing the work yourself because you could have been making money elsewhere.
The takeaway is that when you’re considering taking on a new task or project, it’s important to consider the opportunity cost of your time. Hiring someone to do it for you may save you time and money in the long run.
For the following two examples, you’ll need to know the value of your time.
Let’s say you’re considering hiring a virtual assistant (VA) to handle some administrative work. Their estimated cost is $20 per hour. On the other hand, you value your time at $65 per hour.
To calculate the opportunity cost, we would use the following formula:
In this example, the opportunity cost would be $65 per hour – $20 per hour, which equals $45.
This means that for every hour you delegate to the VA, you’re saving $45 that you would have otherwise spent on your own time doing other things.
While this example is simplified, it illustrates how you can use this opportunity cost formula to calculate the cost of contracting out specific tasks from your real estate investing business to save time.
You could also consider adding another opportunity factor to this formula to account for what you could be doing with the time you’ve saved. This equation would include how much time you could spend talking to sellers and closing deals instead of doing administrative tasks.
For example, you might decide to pay a virtual assistant $1,600 per month (20 hours a week at $20 per hour) to handle your administrative tasks. You value your time at $65 per hour, which equates to about $5,200 per month. And you estimate that you could close one new deal per month at an average monthly profit of $10,000 by spending the time you’ve saved on administrative tasks talking to sellers.
In this case, the equation would look like this:
The opportunity cost in this example would be $5,200 in your time savings – $1,600 for the VA services + $10,000 profit on the deal you got from the extra time, which equals $13,600.
This means that, in this overly simplified example, it could be worth paying a VA $13,600 more per month to save you 20 hours a week so that you could focus on talking to sellers and closing more deals.
While you might not pay a Virtual Assistant anywhere close to that amount per month alone, this example shows how much room you might have to contract out other business tasks that would save you time and help you grow your business.
In the previous example, it was easy to see how contracting specific business tasks can free you up to focus on more revenue-generating tasks.
And since REIComplete offers a completely done-for-you marketing and lead generation service complete with all of the systems, technologies, and VA staff a real estate investor would need to find, work, and qualify leads – we’ll include a final example for calculating opportunity cost on your time by utilizing our services.
In this case, our Done-For-You Services would enable investors to skip straight to the good part, talking to only the most qualified, motivated sellers who want to sell their properties. This means you’ll spend less time doing all the grunt work and more time closing deals.
While several variables would go into calculating the overall benefits of our Done-For-You Services, we’ll keep the equation as simple as possible for now.
For this example, you currently value your time at $65 per hour. You spend an average of 20 hours a week of your own time doing your own lead generation, marketing, and seller follow-up. And you average about one deal every other month at an average profit of $10,000 per deal.
You sign up for our Done-For-You Services Gold Package Deal that’s $1,797 per month for the first 3 months with a $500 onboarding setup fee. You also decide to allot a monthly $2,500 direct mail marketing budget to get your pipeline of leads flowing faster. After 90 days of our services, you’ve got six motivated seller deals you’re closing at an average profit of $10,000 per deal.
In this case, the 90-day opportunity cost equation on your time and these services would look like this:
$15,600 Time Savings calculated at $65 p/h x 240 hours across 12 weeks
($ 500) One-time onboarding set up fee for Done For You Services
($ 5,391) Done-For-You Services Gold Package at $1,797 p/m for first 90 days
($ 7,500) Your direct mail marketing budget for 90 days
As you can see, your net time savings are already netting a positive of $600. This doesn’t even account for your income on your new deals yet!
Now, let’s calculate the total opportunity cost, including the profit you’ve made on the deals you’ve closed since becoming a Done-For-You Service member.
$15,600 Time Savings calculated at $65 p/h x 240 hours across 12 weeks
($ 500) One-time onboarding set up fee for Done For You Services
($ 5,391) Done-For-You Services Gold Package at $1,797 p/m for first 90 days
($ 7,500) Your direct mail marketing budget for 90 days
= $2,209 Net Time Savings ONLY
$15,000 Previous Deal Flow Profit at 1.5 deals in 90 days. (One deal every other month)
+$60,000 Profit on 6 deals captured in 90 days at an average of $10,000 profit per deal
=$45,000 Net Deal Flow Profit ONLY
$2,209 Net Time Savings
+$45,000 Net Deal Flow Profit
Keep in mind, this doesn’t even account for any additional value that you might receive thanks to delegating these tasks to our Done-For-You Services team.
Overall reduction in your stress.
You might enjoy what you do more since you won’t be doing the grunt work.
More free time to spend with your family and doing what you love.
Additional leads added to your pipeline that might close later in the year.
You might be able to finally quit that day job you hate since you’ve finally found a way to achieve consistent and sustainable deal flow using our Done-For-You Services.
No employees to manage, saving you even more time, money, and stress.
Business growth that you may not have been able to achieve on your own.
As you can see, when you consider the opportunity cost of doing something, you may realize it’s more expensive to do it yourself than to pay someone else to do it. This is because you’re losing the opportunity to use your time in other ways that could be more profitable. And you could be missing out on opportunities that can grow your deal flow and your business.
Opportunity cost is an essential concept for real estate investors to understand. By taking the time to calculate opportunity cost, you can make more informed decisions about how to best use your time, money, and resources. And, as you can see from the example above, you may find that paying for a Done-For-You Service can actually save you time and help you make more money in the long run!
If you’re interested in learning more about our Done-For-You Services and how they can help you grow your business, we invite you to schedule a discovery call with one of our team members today. We’d be happy to answer any questions you might have and help you decide if our services are right for you.
Thank you for reading! We hope this article has helped teach you about opportunity co st and how it can be applied to calculate where to spend your time effectively. If you missed part one of this series, we invite you to check it out here: