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What Does Sweat Equity Mean and Why Does It Matter?

As a real estate investor, you’re focused on the numbers: what a property costs, the money it takes to fix it up, and the price you sell it for to make a profit. But there’s another figure that plays an important role in determining ROI, and it has nothing to do with sales receipts or contracts.
As a real estate investor, you’re focused on the numbers: what a property costs, the money it takes to fix it up, and the price you sell it for to make a profit. But there’s another figure that plays an important role in determining ROI, and it has nothing to do with sales receipts or contracts.

Successful real estate investors know there’s more to making a profit than buying low and selling high. When you buy a property, how do you increase its value enough to make the profit you want?

Buying new appliances and adding fresh paint are good starts. But aside from the upgrades, include sweat equity, or the value of your time and labor.

Also, when you’re ready to sell and turn a profit, you want to work with a top real estate agent who will make sure you get the most for your investment and hard work.

But while you get your property in tip-top shape, let’s take a closer look at what sweat equity is and the role it plays in your real estate investment strategy.

What Is Sweat Equity?

Sweat equity is the non-monetary contributions you make in your investment properties. The time and effort you spend on upgrades, repairs, and landscaping has value.

And, since successful real estate investing hinges on boosting a property’s value, you need to calculate your sweat equity when pricing your investment properties.

The value of sweat equity looks different to each investor, which is why it’s such a vague concept. You value your skills and talent in your own way, and your sweat equity is how you monetize your efforts. Essentially, it’s how you get paid to do what you love, whether it’s to flip houses for a living or be a landlord over multiple rental properties.

How Sweat Equity Works for Real Estate Investors

One of the biggest barriers to investing in real estate is not having enough money to get started. But real estate investors can use sweat equity to fund their projects without constantly dipping into their own funds.

For example, let’s say you’ve successfully bought and sold a few investment properties and need $1,000,000 to purchase your next one. You’ve earned a little buzz about your previous successes and can find other investors with deeper pockets than yours can offer to fund your entire project in return for the lion’s share of ownership. They know you’ll put in the work to generate a profit.

Let’s say you decide to give them 80% ownership. Your talent and effort would be worth 20%, and your equity in the project comes at no cost to you aside from the time and work you put in. So, when it’s time to sell the property for a profit, you take your 20% free and clear.

Another Example of Sweat Equity in Real Estate

Sweat equity can be calculated in the literal sense, too. As a house flipper or rental property landlord, you put time and effort into fixing up your properties. These activities are worth something, especially since it would cost you money to pay someone else to paint, make repairs, lay tile, or countless other upgrades.

Many house flippers prefer to do the work themselves so they can get paid through sweat equity. The work you put into a home adds value, and savvy real estate investors will understand how to calculate this cost to add to their bottom line.

Maximize Your Sweat Equity with Clever!

Are you accounting for sweat equity in your real estate investments? Let Clever help you maximize your efforts for a higher ROI!

Clever Partner Agents are full-service real estate agents who have experience working with real estate investors. Our Partner Agents not only help you find great properties to flip or turn into rentals, but can also provide insight on how to maximize your return. And, when it’s time to sell, our flat-rate commission model can help you keep more of your profit in your pocket.

Connect with Clever today to find a Partner Agent in your area and turn your real estate investments into profitable ventures!

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Luke Babich

Luke Babich is the co-founder and Chief Strategy Officer of Clever Real Estate, the free online service that connects you with top agents to save money on commission. He's an active real estate investor and licensed agent in St. Louis, with 22 units currently. Luke graduated from Stanford University and subsequently ran a historic data-driven campaign for University City City Council. Luke's writing has been featured in Homeland Security Today, Mashvisor, Payments Journal, and Bigger Pockets.

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