In the not too distant past I heard a little story. A story about a guy named Jimbo Holmes who wanted to take over the real estate game… only one problem: he was broke as a joke.
BUT, and this is a big “but”, Jimbo was handy. He could fix damn near anything; call it his “little magic trick.” Anything that needed to be done around the house, from projects big to minute, Jimbo could get it done. One day, despite not having a dollar to his name, Jimbo decided to get into the real estate investment game… how’d he do it, you ask? One word: auctions.
Real estate auctions, as you may soon learn, can be a great place to find investment opportunities. It’s a place for strategic bargain hunting. “As-Is” properties, or fixer uppers, can be an absolute gold mine in the right hands. If you’re a handywoman (or man!), these should be the apple of your eye. Other investors may steer clear of these properties, seeing them as too much work. But for the sweat equity investor, there’s no such thing!
Do you have a specific skill set? Great! When you’re house hunting, keep an eye out for the fixer uppers that may match that. Let’s say, for example, a home is up for sale at a huge discount because the floors need to be completely replaced. But you’re not a tiler, you’re a plumber. This might not be the ideal fit for your sweat equity goals. If you need to hire out a third party to take care of those floors, that could eat into your profits in a major way.
Here’s an idea: many cities and towns offer real estate classes where you can expand upon your skills and allow you to build on your areas of expertise. If by any chance you begin noticing patterns in available real estate fixer uppers, specific elements of these properties that always seem to require improvement or attention, you could key in on building that specific skill set to really maximize your sweat equity value.
Let’s say, for example, you begin to notice home security systems or smart homes are an area most listings are looking to improve upon, you could take classes in setting up and repairing those systems, which would bring tremendous value to the table.
Making the Plan
You’ve picked the property, and it matches up perfectly with your DIY skill set. This fixer upper needs renovations and you’re just the fixer for the job! Now it’s time to huddle up with your investor partner and make a financing plan. A mortgage will likely come into play. That means collecting supporting documents, preparing for a closing, and putting together a detailed outline on when and how the necessary renovations will be executed.
Set realistic expectations, and give yourself a comfortable timetable instead of painting yourself into a corner. Some projects might be quick jobs; others not so much. Consider creating the partnership as step one; step two is follow through. Whatever sweat equity upgrades you promised, you’ll want to deliver in a punctual manner. This will ensure a healthy give and take with your real estate investor partners.
Despite the fact that you likely have a very strong understanding of the time and labor involved in each project, your partners may not. Spell it out for them to make each step crystal clear. This will help them internalize the value you’re bringing to the table with your hard, hands on work. That’s what sweat equity is all about!
Making Sweat Equity Your Business
Want to go even bigger? You could follow the footsteps of the growing number of folks leveraging sweat equity into their own real estate affiliate business. Say you acquire multiple investment properties over the course of the next couple of years… you might consider going pro with your sweat equity skills, even going so far as to hire some people to grow the business.
Low on start-up funds? Consider the possibility of offering your new employees a percentage stake in the business in lieu of bigger salaries. You’re going into this venture sweat equity first, why can’t they? Huddle up with the team, brainstorm on brand and business expansion plans, and go from there.
And of course, as we spoke about earlier, get everything in writing. You’re a small business owner now, so you’ll want formal contracts incorporating a detailed business plan outlining all the terms. These could include but are not limited to things like, percentage shares or points in the company, employer-employee agreements, and additional payout options allocated to each employee in the case of growth.
This way, if at some point down the road you decide to sell the business, all the terms and conditions previously agreed upon by the employees and you will be executed per the contract. No fuss, no muss. Who knows, maybe you’ll even go public! Either way, the percentage shares will have been negotiated and outlined in the paperwork, so you’re all set. Your sweat equity combined with the sweat equity of your team will pay off big as the business grows!
Perhaps becoming a real estate tycoon was always your dream, but you felt like it just wasn’t in the cards due to a lack of capital. Fortunately, as we’ve outlined above, there’s a potential backdoor into the industry by way of sweat equity. Any savvy real estate start-up should see the value in a highly skilled sweat equity partner.
Those fixer upper properties so many potential buyers are too wary to buy? Those are your gold mines! The more work the better if the price is right. Hunt for bargains, and strike when the iron is hot. The lower the purchase price, the higher the upside payoff. Remember this my sweat equity tribe… you’re the key to turning this property around. A high profit margin resale or a revenue stream producing rental or Air BnB is a move that will ultimately fatten your wallet.