Real Estate Agents always love to say “location, location, location,” but the reality is your home’s value is derived from a multitude of different factors. Square footage, year the property was built, specific design features, upgrades, the list goes on and on.
Obviously some aspects of every property are unchangeable. Other aspects, however, seem to be begging for a renovation. And renovation… typically equals increased market value. Especially if it’s a DIY job, a.k.a. “do it yourself,” a.k.a. “hello, sweat equity!”
There’s an old saying you may have heard at some point in your life, and it goes something like this: “hard work pays off.” When it comes to putting sweat equity into your property, truer words may never have been spoken...
Equity, I Wanna Make You Sweat
We’ve already hinted at some ways in which sweat equity can increase the market value of your property, but there’s another form sweat equity can take: if you’re embarking on a new real estate venture, sweat equity can act as your investment in the property.
The work you put into the property inherently adds value to said property. Your efforts literally pay off in the form of home improvement and upgrades. Whether you’re an expert level home renovator, or a beginner, your sweat equity can result in a very tangible R.O.I., or “return on investment,” in the property’s resale value.
But maybe you’re not thinking of selling at all. Maybe you’re just putting in all this sweat equity for your own personal enjoyment. Maybe you need more room for a growing family, or just want to add a swimming pool to cool yourself off in those hot summer months. Regardless of the “why” behind your home renovation, the sweat equity adds value. And by doing the work yourself, you’re eliminating the labor costs, keeping the project’s price tag at an absolute bare minimum. How’s that for thinkin’ of the bottom line!
Flip That House
With the economy soaring back towards pre-pandemic heights, the real estate market is suddenly booming. Buyers are paying tens of thousands of dollars over market value as bidding wars become the norm, nationwide.
For savvy investors, the time to inject a bit of sweat equity into your property is undoubtedly now. Your next appraisal could skyrocket with the proper upgrades, and, if you’re looking to sell, that spells serious cash in your pocket. Instead of dumping a bunch of capital into labor costs for the expansion or amenity upgrade, consider doing the job yourself to maximize the R.O.I.
If you went into the real estate purchase knowing it was going to be an investment property, fixing it up so you could rent the unit, or Air BnB it, with the ultimate goal of flipping it, your sweat equity could pay big time dividends when it’s all said and done. Post sale, go ahead and subtract what the unimproved property would’ve been worth from the actual sale price to get the exact dollar value of your sweat equity -- not bad, right?!
Leverage Those DIY Skills
Some people are natural landscapers. Others can’t stop themselves from building (looking at you, Mr. Construction Worker!). Some of us are plumbers, electricians, painters… the list is truly endless. What do you see when you look at those skills? If your answer is “sweat equity,” you’re on the right track!
You don’t necessarily need to invest a bunch of capital to do home improvement. Conversely, if you’re looking to get into the real estate business, but you have more skills than cash, you could try partnering up with some real estate investors who value sweat equity and are in the market for handymen (or handywomen!).
Once you’ve zeroed in on your area of expertise, you can put together a brief presentation or business plan displaying the sweat equity value you bring to the table. Once you know you can succinctly lay out how you’d improve a property, it’s time to locate real estate investors. Some of these could be people you already know, like family members, or close friends, or co-workers… as long as the person has capital and interest in investing in real estate property, they’re a fit.
Understanding the Risks
Before partnering up with anybody, you’ll want to be 100% certain they’re well aware of the inherent risks that come with investing in real estate. Ideally, your partner will be someone with enough capital saved up that this proposed investment doesn’t break their bank.
Lay out, in great detail, the value each of you are bringing to the table. The money man (or woman) and you, the DIY sweat equity guy (or gal). End of the day, you’re creating this partnership in the interest of improving the property for future financial gain.
Play it safe: keeping both of you happy means signing a written contract that formalizes the partnership, in effect making it official. You’re Mr. or Mrs. Sweat Equity; clearly defining the specific value of the manual labor you’re investing into this property is paramount. One option is structuring the contract in a way that outlines a predetermined percentage of the profits upon sale of the property. This is of course if the intention is to flip the house. If you’re renting the unit, you’ll want to discuss the profit sharing of the operation as you’ll be collecting revenue on a monthly basis.
Remember the Hard Costs
Labor is one thing. Parts are another. Hard costs incurred during any renovation or home improvement need to be accounted for. That stainless steel dishwasher-fridge combo? Hard cost. The Central AC unit? Hard cost. 500 square feet of marble floor tile? You see where this is going…
Installing these appliances or that new floor, or creating that oh so special outdoor patio set-up… all falls under your labor. Your sweat equity. But the materials themselves that you’re buying for this? That ain’t sweat equity. It’s not the hours you’re putting in, or the back-bending work (bending, not breaking my friends)... that’s all stuff you accounted for in that contract we discussed in the last segment. But this stuff… is what’s known as upfront costs. And like it or not, they’re comin’ out of someone’s pocket!
But again -- at this point you and your investor have a contract ironed out. Now it’s time to find the right investment property. You’re looking for one thing and one thing only here: UPSIDE.
Here’s where you’ll need to do your homework. With the proper due diligence, you’ll be able to pinpoint the best deals in the haystack of real estate listings. Look for properties with the lowest sales prices on blocks where comps are higher. In other words: you want the cheap house in the ritzy neighborhood. Not the most expensive house on the block. Look for undervalued properties, even fixer uppers (a sweat equity investor’s dream!). Time to get handy!