Create Value and Force Equity
When it comes to real estate investing, everyone loves to talk about cash flow. Cash flow is how you get paid and how you pay for the mortgage which controls the property and then over time, your share of ownership increases. Well, this blog post is about another way you can increase your equity. That’s through forced appreciate, often called sweat equity.
When approaching a property, always ask yourself, “what am I going to do to create value?” Sometimes you can do this by finding a property that has more value than the seller can recognize in it. That can be simply because of their current use and your intended use or because you have inside knowledge of a marketplace.
Sweat equity is your quintessential fixer-upper. You find a property that is in bad condition, and you fix it up; you make it look better. Now, I do want to pause here and differentiate between flipping and investing. Buying a house to flip could make a great opportunity for somebody, but it’s not real estate investing. It’s more of a business, a business of buying something, adding value to it, and selling it for more. I know many people are doing well in that business, but my approach is different. I prefer to buy and hold revenue-generating assets.
To increase your ownership of these revenue-generating assets, you could do something as simple as replacing carpets and paint the walls. Or demo the old and renovate the property to your liking. The key here is to know the market value for the work you’re planning to do — market value doesn’t equal the sum of sweat equity invested by you and your partners.
You need to know why you’re rehabbing the property. Is changing the cabinets or refinishing the hardwood floor really going to drive enough value to justify the cost? To do that, you’ve got to know the market and the competition, often called comparables. If you’re going to improve a duplex that is the roughest property on the street, you better know the market value once you’re done. You need to know the comparables going into a rehab project.
It’s important to have a team around you who can help you think through this. You’re not going to be able to know everything. A solid real estate agent will be able to help you look at comparables. The people at WorkMand can help figure out costs and connect you with the right contractors to do the job.
Controlling your costs is extremely important. If you underestimate them, you can suck up all your potential profit. Another aspect that is critical is managing the timeline. Make sure you know the time period for getting things done. Are you bringing in appraisers? Architects? Are you personally putting in the sweat or tapping into the WorkMand network of contractors? That all takes time and every day your property is not available for rent is lost revenue.
Now any of you who follow Bigger Pockets will recognize that I just went through the first two steps in the BRRRR strategy. For those of you who aren’t familiar with this concept, I would highly recommend you learn more about that here or here, because once you fill your newly renovated property with a tenant, you can realize all that sweat equity you put into it by refinancing.
Ultimately, this all comes down to value. What does the market value? What do renters value? Forced equity can be an incredible way to make money, but it can also go terribly wrong for you. Be patient, take your time, and meet others you could learn from.
This was a guest blog post by Josh Brook.
Josh Brook is a real estate agent at Wits Realty. He helps people invest in real estate and advises on strategies to generate passive income. Before entering the world of real estate, Josh was involved in multiple start ups in Minneapolis.You can find out more about him here: https://minneinvestor.com/
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