Sweat equity + fixer-upper = happy marriage?

Does a fixer-upper and sweat equity equal a marriage made in heaven or a disaster waiting to happen?

Sweat equity is a concept often romanticized by newbies to the real estate market--both retail buyers and investors. This is because they often underestimate the time and money needed to bring the project to completion. Let's take a look at a few considerations that should be made before purchasing a fixer upper:

1. Start small

If you're new to real estate and getting into a fixer-upper--whether as an owner-occupant or investor--start small. Plan early and familiarize yourself with the process to avoid being overwhelmed with the issues that can arise from larger projects. Doing this any other way, you set yourself up to tap your financial reserves, drain your time and perhaps challenge your sanity. Remember, what can go wrong most likely will. Give yourself breathing room to handle it.

2. Planning for the unexpected

Buying, fixing and selling a home is no easy task and not one that should be entered into lightly. It's never simple, and it is a venture that must be handled with a great deal of planning. When something doesn't go as expected, you need to have the cash, patience and tolerance to manage issues as they come up. You need a lot of time and energy to make sure that the property is brought to an acceptable condition, whether you plan to occupy it or get it ready for sale to a third party.

3. Run your numbers

Calculate the value of your time. Be realistic. If you are not already involved in other money-making ventures, then you're in the clear for sweat equity. However, if you are involved in other income-producing work, then calculate the loss of opportunity while fixing the home yourself vs. the cost to pay someone to do it for you--or to purchase a comparable home with the necessary upgrades already present.

For example, if you're a small investor operation, then it's worth it to complete the work yourself. However, if you're a larger operation with multiple properties, then it may make sense to have an outside party complete the work if it will take you away from securing and completing other potential deals. Still, each situation is different and warrants specific determination of time and value based on individual circumstances. Ultimately, it comes down to how large your operation is and how valuable your time is to you.

In the end the market will decide the worth of your sweat equity by the final selling price, not the arbitrary value you put on it. Happy fixing!