“There was one time I really got him steamed up, though. I was nine. He finally let me play with his butane torch.”
“Well, what happened?”
“I got to ride in a fire truck. And we got a new garage.”
–Tim and Randy from Home Improvement
When I know how to do something and I know that I can do it well, I really do prefer to do it myself rather than have someone else do it for me. Whether it’s grilling a meal or doing my own bookkeeping for my companies, I’ve found it hard, even in financial independence, to get beyond my frugal tipping point and pay someone else to do what I know I can darn well do myself, regardless of whether or not it’s a reasonable tradeoff given the value of my time.
If I was handy (which I’m not), I would probably go down the same path when it comes to doing work on rental properties. I can envision a parallel universe where I am actually capable of doing home repairs and renovation work, enjoy it, and can perform miracles (to the me in this universe) of actually having good-looking end results from my handiwork. I can imagine bringing over a six pack of beer to the rental property, ripping out floors or knocking down drywall, getting my sweat on, drinking some of the aforementioned beer, and, at the end of the day, patting myself on the back for making progress while adding a couple of points to my Man Card™.
But, even if I possessed said skills, it might not make economic sense for me to do such a project.
Let’s look at an example from a house that we recently purchased south of Fort Worth, Texas, and continue pretending that I could actually do the work that was required and leave the house in habitable, rentable condition rather than what would actually happen – condemnation of the house as uninhabitable by the local authorities, leading to bulldozing of the entire structure.
In the condition the property was in when we bought it, our property manager could rent the house out for $1,025 per month. We know this because we leased it back to the seller for a couple of months so that she could find another property to move into. With some upgrades, she could lease it out for $1,150 per month.
When we priced out the upgrades, the cost was $17,435, of which about $4,000 was materials and $13,435 was labor. Without including any increase in the value of the property itself (a likely $0.85 to $0.90 return on the dollar), we were looking at an 8.6% return on investment.
The repairs took about 4 weeks and approximately 500 man hours to complete, and a month later, the house was rented on a two year lease for $1,150 per month.
Would it have been wise for Parallel Universe Me to tackle the repairs?
Let’s put a couple of constraints on my imaginary clone’s superhero abilities. First, let’s assume that I can only work on weekends and maybe one night a week (I do, after all, have a financial planning company to run (where, by the way, I know that you can find an awesome Fort Worth financial planner) and clients to serve), so I can only work 20 hours a week on a rehab project. Additionally, since I’m only handy, and not a handyman, it will take me 50% longer to get to the same results as it takes people who do that type of work for a living.
Therefore, it would take Parallel Universe Me 750 hours to complete the rehab work (500 hours that it would take the pros * 1.5 adjustment factor) on this property, and, given the time constraints, it would take 37.5 weeks (750 hours / 20 hours per week) to complete the work.
That means it would take Parallel Universe Me 33.5 weeks longer than it would take the pros to do the same work.
Given that there are 4.33 weeks per month, this means I’d not receive 7.73 months’ worth of income, or $8,890 in lost rent.
In this case, if I had the skills, I would have saved $4,545 (the lost rent added to what I paid for the labor) by opening up the wormhole and letting a handy alter ego do the work.
The breakeven for this decision is 11.68 months. If Parallel Universe Me (the handy one) could not complete the work in just under a year, then it would make sense to hire someone out to do the rehab.
There are two scenarios where, if you truly do know what you’re doing swinging a hammer and running a table saw, it makes sense to do the work yourself:
- The foregone income from rent while the house is unoccupied is less than what you’d pay in labor to get the work done. I just showed you an example of how to do the calculation. If you can finish the work in under (cost of labor / rent per month) months, then do it yourself and save some money.
- You’re capitalized enough to swing payments on the property, but not enough to swing hiring the labor. This is probably symptomatic of you being undercapitalized, period, but if it’s your first property, then you may have to trade some of your own labor, and perhaps some friends’ labor with payment of beer, for creating that equity. Don’t let the potential sweat equity gains cloud your judgment too much though. Even unoccupied houses have costs: the mortgage, insurance, and property tax are the biggest ones that continue no matter who resides there.
#2 depends on creating sweat equity being the highest and best use of your time. If you run another side business, get paid by the hour, or could potentially hustle up more deals, then spending evenings and weekends swinging a hammer may not create as much return as alternative activities. That’s a calculation you’re going to have to figure out.
How have you made the sweat equity versus hiring out decisions in your investment properties? Let’s talk about it in the comments below!