What Does Sweat Equity Mean? Pros And Cons of Sweat Equity Strategies.

Sweat Equity Strategies are active strategies that require work from you, but little to none of your own money. Here is a list with the pros and cons of the three most common Sweat Equity Strategies that require little to no money down:

Short-Term Rental (STR) in your own property: 

One of the fastest and most low-cost ways that you can start investing in real estate is to turn part of your home into an STR using AirBnB, VRBO, travel nurse sites, etc. You can rent out a bedroom or even a couch (I know someone who has successfully AirBnB’d his sleeper sofa in his 1-bedroom apartment in the heart of Hollywood, CA for years now!) If you have a little more money and/or space, you can build out a separate unit for this purpose and have more privacy. 

Pros:

- Fast to get started. You can get going with what you already have.

- This is a very low-cost way to get started making money from properties and the price starts at $0.

Cons:

- You are hosting strangers in your home.

- This strategy is very property management intensive. Guests can stay for as little as one night, so you’ll need to manage frequent cleaning, check-ins, marketing, and/or hire someone to do it for you.

- Not all municipalities allow STRs. Check with your local government to see if any restrictions exist or might be on the horizon. 

Wholesaling:

Wholesaling is getting a property under contract for the purchase at a specific price and “flipping” or assigning the contract to another buyer for a higher price. The difference is the wholesale or assignment fee - money you made for helping the people on either end of the deal. 

Exa., you find a house from a motivated seller and get him to agree to sell it for $60,000. You enter into a purchase and sale agreement. You find an investor who will buy the house for $70,000. He’s willing to do that because if he fixes it up and rents it out or flips it, he will still make a profit. At closing, the escrow company will take $70,000 from the investor, give the seller $60,000, and you will receive $10,000 for your efforts.

Pros:

- This strategy can be lucrative and net you money quite quickly.

- You don’t need to have good credit or money to get a house under contract (though sometimes you may need to provide the seller with an earnest money deposit to secure the contract).

- It’s regarded as one of the easier strategies for making money as a real estate investor and is often seen as a “stepping stone” for buy-and-hold investing.

Cons:

- If you don’t find a buyer for the property you could end up losing your earnest money deposit and/or hurting your reputation.

- You need to understand the market that you’re wholesaling in and know your numbers. You want to provide your investor buyers with good deals AND get a decent assignment fee for yourself, not just one or the other but BOTH.

- This strategy does not provide the tax benefits you receive when you hold onto the rental property.

- There are no guaranteed or passive streams of income using this strategy. 

Joint Venturing with Money Partners:

With this strategy, you find a partner who will provide the money for your venture while you do the work (i.e., provide the sweat equity.)

Exa. you find a property to flip for $50,000 that will need $20,000 of work. You have a friend with some money, but no time or desire to do the work. The friend will contribute $70,000 to purchase and rehab the house. The two of you will both own the house 50/50 and split the profits 50/50. You’ll find a team of contractors and a realtor, manage the rehab, and then work with the realtor to get the house listed and sold. When the sale is complete, the project made $40,000 profit after costs and expenses. At the end of this venture, your friend will receive her $70,000 plus 50% of the profit ($20,000). You’ll receive the other 50% of the profit and have $20,000 for your efforts.

Pros:

- You don’t need to have the money to acquire a property.

- You don’t need to have good credit.

- You’re able to create a vehicle that will benefit both you and your money partner(s).

Cons:

- You’re doing all the work, and you need to make sure that you know your numbers so you have profit.

If you use this strategy to flip and are holding the property for less than a year, there are no special tax benefits or passive streams of income.