The Value Of Sweat Equity

As most of you who have been following this blog over the past year are aware, part of my strategy to make my real estate investment work is to do the majority of the rehab work myself.  Now for a guy with no prior real estate investing or construction background this was a big step and I’m not going to lie to you and say I wasn’t scared because I was.  I seriously doubted my ability to do the work.  I’ve mentioned many times that before I started this project I didn’t even own a hammer and could barely read a tape measure, but when you have invested a large sum of cash in a foreclosure you don’t have much choice but to make things happen.  I now have almost any tool needed for a home repair or rehab project and have learned to use them effectively.  Finding a way to do most of the work myself was part of my strategy to make my first real estate investment a successful one.  The strategy has two parts: save money on housing costs and make a profit off the improvements when it comes time to sell.  This is where the value of sweat equity becomes noticeable and is the topic of today’s post.

Having zero experience estimating the costs of a rehab project was definitely a liability starting this project.  A year ago I couldn’t tell you what an interior door cost, nor could I tell you what the cost of remodeling a bathroom was.  The $20k that I had initially projected was just a shot in the dark.  Actually, that’s not true.  Thinking back I did have a method of coming up with an estimate and it involved looking at the purchase price, determining what the expected sale price would be after the rehab work was completed and deciding the lowest return on investment I was willing to accept.  This method caused me to walk away from several properties and although it isn’t perfect it did give me a starting point.

So, how much did I save by doing the work myself?  To answer that I’m going to do a case study using the bathroom remodel as an example and compare the costs I incurred with my DIY efforts to those of having a contractor do the work.  I’m going to use a book I purchased before I even bought the property called, The Book on Estimating Rehab Costs ( the author also has really good blog you can find here) to determine the estimated cost of having the bathroom remodel done by a professional.  I’ve found that if you do a little work on determining prices for your area the book is very beneficial, because it gives a range of potential costs based on various locations and divides the costs into labor and material.  I determined that for my area the lower price range estimates applied and I confirmed this by comparing the estimates given in the book to the actual costs of some of the work I hired out.

Sweat Equity Case Study: Bathroom Remodel

When I completed my bathroom remodel the total cost added up to $1759.50.  Below is the actual cost of material for this project but doesn’t reflect the time I have invested. To the right I have provided the estimated costs of hiring the work out:

Costs of material                                              Estimated Cost of Hiring a Contractor

  • Tile/supplies: 282.39                                               $480.00
  • Tub: 189.74                                                                 $250.00
  • Drywall/Cement board: 47.34                                $100.00
  • Plumbing supplies: 109.17                                       N/A
  • Shower/tub faucet: 135.68                                      $50.00
  • Vent cover: 14.19                                                        N/A
  • Vanity base and top: 399.92                                   $100.00
  • Vanity faucet: 103.88                                               $50.00
  • Door: 76.32                                                                 $50.00
  • Paint: 21.45                                                                 N/A
  • Crown: 11.78                                                               $60.00
  • Exhaust fan: 115.88                                                  $40.00
  • Switch/outlet cover: 9.51                                         N/A
  • Mirror: 42.39                                                             N/A
  • Light: 45.78                                                               $40.00
  • Hardware (Towel rack etc.): 54.11                         N/A
  • Toilet: 99.67                                                               $60.00

Total: $1759.50                                                                       $1280.00

This is a rough estimate and I’ve estimated on the low side of what the costs would be.  The items listed as “N/A” are things I would never have hired out in any situation.  For one little room the labor costs add an additional $1200 to the project.  Can you imagine how quickly costs would add up when all the rooms in the house are accounted for?

Many will argue the value of a person’s time needs to be accounted for in this example as well, but I’ve found this hard to value because each project tackled came with its own learning curve, as I had no previous experience.  I also believe that if you are accounting for time you would also have to value the skills that were learned along the way.  The education is worth something as those skills can be applied and refined in any of the future projects I tackle.

For me it has worked out great.  My financial situation has allowed me to take time off to not only do the work, but learn how to do it as well which adds a lot more time to each project.  For others it wouldn’t make sense to do most of the work themselves and hiring someone to do most or all of it would be a better scenario.  In fact I met another first time real estate investor several weeks ago at a property I was looking at rehabbing with a partner.  The house sold before we made the move and I stopped to talk to the guy about his plans for the place.  He is a young professional with a family and has no plans of doing the work himself and even with hiring the work out he’s still making a descent profit for a unit he will only be holding for 6-8 weeks, hopefully.

The point is there are several ways of making money in real estate.  By determining what your goals are and being realistic about your specific situation you can begin to build wealth through real estate investing.  Sweat equity or not, there is money to be made.

What would you do?  Do the work yourself or hire it out?  Leave me a comment and let me know what your experience has been. 

 

 

 

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9 thoughts on “The Value Of Sweat Equity

  1. Its like you read my mind! You appear to know so much about this, like you wrote the book in it or something.
    I think that you can do with some pics to drive the message home
    a little bit, but instead of that, this is magnificent blog.
    A great read. I’ll certainly be back.

    • Thank you for such a great compliment! I don’t know if I wrote the book, just sharing my experience and what I’ve learned as make my way through it all.

      I’ve been trying to add more pics to the posts while trying to keep the overall theme of the blog a minimalist one. However, I have been thinking of using a new theme. Thanks for the suggestion and have beautiful day!

    • Thanks for stopping by!!

      I agree that one can learn anything they put their mind to. This was a big undertaking for me and there were days I just sat back and wondered, “What the hell am I doing? I don’t know how to do this!” The more I did the more I improved and I’m anxious to see how much smoother and how much money I can save on the next project.

  2. I always to everything I can myself. If I’ve never done it before, I hit up YouTube because someone else has already done it and has posted an instructional video.

    I love DIY. The cost savings are obvious. However, I think that I can do a better job than most contractors. No one cares about your work and home more than you. I’ve had way too many people who I’ve hired screw things up or take terrible shortcuts. It is extremely aggravating. Finding good, reliable, reasonably priced help is just about impossible. Finally, I love making something my own. Design and building is fun and the sense of achievement is incredible.

    We were talking to a neighbor a while ago on our street. She mentioned that she bought her home because ‘it was in perfect condition condition and needed no work.’ I smiled a little bit inside because we bought our home for the exact opposite reason; it was horrific and needed tons of work. All of that horribleness saved us a bundle and because I’ve done most of the work myself, I could make a lot of money selling the home not even a year after purchase.

    • I couldn’t agree more with you on finding someone who cares about the work they are doing. Doing it yourself not only saves money, but also give peace of mind knowing the job is done right.

      I think more people should think of the appreciation they could gain from their homes if they picked a place that needed some work instead of relying on price appreciation from the housing market as a whole. There is a world of difference between the two. You can certainly pay to have a home completely done the way you want, but you pay a premium for such a finished product.

      • “I think more people should think of the appreciation they could gain from their homes if they picked a place that needed some work instead of relying on price appreciation from the housing market as a whole.”

        Exactly. On a recent Bigger Pockets podcast (a must listen for real estate investors), they referred to it as ‘sweat equity.’ The great thing is that the skills needed to make an ugly home beautiful aren’t that hard. Learn tile setting, basic plumbing, hanging cabinets, replacing ugly electrical fixtures and you’re most of the way there.

        In my experience, learning how to tile is probably the most valuable. Good-bye linoleum, hello travertine.

      • I like the term “forced equity” and I agree with you that the skills needed are not hard to learn. Once you can differentiate between a home needing minor cosmetic work and those that have structural issues you’re golden. I think what scares people from considering these types of investments is how it “looks”, but those looks are merely skin deep. New flooring and paint alone can do amazing things for a home that looks ugly in the beginning. Having a vision of the finished product is critical.

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