I recently got out of a meeting with one of my clients where we were discussing one of my favorite topics when I was in school: economics and the concept of “opportunity cost.” My client was debating whether to sell his property or hold onto it as a rental. If he decided to sell, he would be netting roughly $75,000 after fees. If he decided to rent, the net would be $200 a month.
My first question for him was what would be the opportunity cost of renting the property if he decided to keep it as a rental? If he did so, he would be netting $200 a month of positive cash flow. The second was if he took that $75,000, could he do something else with that money? For example, buy another property and earn a higher return?
Before taking on an activity, ask yourself if it makes sense to invest your time in it.
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That’s the concept of opportunity cost. Not only does it apply to money, but it also applies to time. When it comes to time, I usually ask myself, “What is the opportunity cost of me taking on a certain activity?” Let’s say I had to wash my car and had the choice of either paying someone $20 an hour or doing it myself. The only way that it would make sense for me to wash it myself is if I made less than $20 an hour. If I made more than $20 an hour, I could pay that someone and then be able to invest more time and energy into more important things like my career and my job.
Before you take on a certain activity, you have to ask yourself if it makes sense for you to invest your time in that activity. You can either do the activity yourself or delegate it to someone else and leave yourself free to focus on higher-dollar priorities. It doesn’t make sense to invest your time into things that would cost you money.
I know what some of you are thinking right about now. Why wouldn’t you wash your own car? Why not change your own oil? Why not input a listing on the MLS? The reason is that I make more than $15 an hour - the amount I should be paying for someone to take care of all of those tasks.
If you’re in a situation like that, ask yourself two things: how much you’re worth on an hourly basis, and how much you can pay for the task to be taken care of. Once you put that situation into that perspective, analyze the choice in terms of your capital. If you’re like my client and have $75,000 tied up in a property, or in a 401(k) account, or an IRA account, could you take that $75,000 and earn a higher return than what you’re currently earning? If that’s the case, then move your capital to the highest return. That’s opportunity cost.
If you or anybody you know is looking to buy or sell real estate, give me a call or send them my way. I’d be happy to help.
