Is understanding ROT, or return on time, along with ROI, return on investment, the key to being a better real estate investor?
By Scot Aubrey
When you hear the word “rot” in relation to real estate, all sorts of bad visions and horror stories immediately come to mind.
In fact, that word often translates in our minds to money, as in, how much is it going to cost me to repair whatever is rotting. Allow me to introduce a new way of looking at this word in a much better way, one that when done right, can actually add to your bank account rather than being a drain on it.
While every investor is intimately familiar with ROI, return on investment, which carries a great weight when evaluating a property, many may disregard an equally crucial factor, and that is ROT, or return on time.
For purposes of this article, we will examine return on time to help you become an even more successful and satisfied investor.
Gut Reaction
If you will, please take the next thirty seconds and stop reading.
I want you to think about your portfolio by specific address if you can and think of or say aloud the address of one of your investments.
How do you feel when you hear that address? Many of you probably have that “perfect” property that houses great tenants who pay on time and even manage some of the most common maintenance items out of their own pocket. This property brings a smile to your face and good feelings, knowing that it is an asset that provides a great return on both your time and your investment.
Others of you had a physical, maybe even violent reaction when you thought of a property that is less than your ideal. Tenants that pay late consistently, that call you for even the simplest repairs, which cause friction with their neighbors. You know the one because it takes up an inordinate amount of your time and more than once you have considered offloading it, and its attendant problems, out of your portfolio and your life.
The Analysis
While return on time is an often-overlooked real estate investor metric, it needs to play a critical role in your decision-making, particularly when time is limited.
After all, time is money and every second you spend managing a property with a low ROT can feel like a total waste because you are sacrificing time that could be spent with family, on a hobby, vacationing or finding your next great property.
While there is no universal formula for ROT, you can begin by evaluating the benefits, satisfaction, or personal wealth derived from the time spent on a specific property. Time is finite, and therefore, optimizing how time is spent is just as important as financial investments.
ROT focuses on the time and the intangible returns that come from using time effectively. ROT is based on the principle that time, like money, is a limited resource. Time cannot be bought back once spent; therefore, ROT considers the opportunity cost of how time is spent.
Is the time spent working on a project worth the long-term value or the personal satisfaction gained from it? That is the key question in any analysis you perform with ROT in mind.
A Balanced Approach
Decision making focused solely on ROT could result in the neglect of profitable opportunities if that is the only metric considered.
Every investment you approach has to include a thorough look at the financial AND time aspects required to create a positive return.
For example, let’s say you found an underpriced property in a great neighborhood, but the home needs an extensive remodel to make it appealing to the majority of the market.
You also found a home in the same neighborhood that is turn-key ready but costs 75% more than the fixer upper. ROI and ROT would be evaluated when deciding between these two projects—one that offers a higher ROI but requires more time, and another that is less lucrative but can be completed more quickly. Only you can determine how much each factor weighs into your decision-making process, but both must be a major component of your final determination.
Conclusion
While both ROI and ROT are critical for evaluating decision-making in both personal and professional contexts, they serve different purposes. A lot of other factors will influence your investment path as well.
Is this a hobby or profession? What is your age and how many years left do you have to grow your portfolio? What kind of financial backing do you have if things go sideways?
These questions, and so many others can help you determine how and when to use ROT as a measurement in your present and future investing. And if you are still feeling heartburn from the earlier exercise where you thought about your portfolio, be bold enough to cut out the rot and move on to an investment that brings you both joy and financial freedom.
About the author:
Scot Aubrey is Vice-President of Rent Perfect, a private investigator, and fellow landlord who manages short-term rentals. Subscribe to the weekly Rent Perfect Podcast (available on YouTube, Spotify, and Apple Podcasts) to stay up to date on the latest industry news and for expert tips on how to manage your properties.
