Why We Leave Profit On The Table And Embrace The Power Of Sweat Equity | Ep 62

James: Welcome to the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing. And our mission is to equip people to invest wisely in both properties and residences so that together we can build wealth while improving housing. I'm James, and this is my free sweating wife, Jessi.

Jessi: Oh man, that's embarrassing. I just out

James: you. Yeah. So for those of you, I do sweat for those who don't know what a free sweater is I

Jessi: sweat when I It's not

James: something you wear. It's Nope.

Jessi: Yeah. It is not a free garment. No. It, I just sweat.

James: You just sweat.

Jessi: I sweat when I'm sleeping. I sweat when I move around.

I sweat when I work out. I sweat when I don't want to. Are you

James: sweaty? Are you sweating? Right now in our,

Jessi: well now I am in our Cool. I'm embarrassed.

James: No. Oh man.

Jessi: I'm not sweaty right now. Yeah.

James: Whereas I am, I'm opposite. Like, I get like a mile into my run, I'm like, I think I'm starting to sweat. Oh yeah, and I'm like dripping.

And you're like, what is wrong with you? I'm dripping sweat. Yeah, you're like, you're sweating while you're putting on your workout gear.

Jessi: Sometimes I, it's like highly annoying because I'll be trying to like put makeup on and I'm sweating. Oh, that would be. And it's like, what is happening right now? Stop, body, stop.

James: Stop, body. Oh man.

Jessi: We all know now. That's so

James: gross. Wow. You're welcome for that.

Jessi: Alright, let's move on, I guess. So,

James: yeah, let's talk about sweat equity. That's what I want to talk about.

Jessi: Okay, yes. I wish I built equity by all my free sweating. Oh man, dude,

James: you'd have so much equity. I do not.

Jessi: If I had a nickel every time I sweat.

James: Oh, that'd be gross. You'd have a lot of nickels.

Jessi: Okay, anyways, sweat equity. So, what is sweat equity? Do you know what that is? Yeah, it's like, like, doing hard work to improve something.

James: Okay.

Jessi: Usually a property.

James: That's like half the equation. You do the hard work to improve it, and as a result Well, and

Jessi: then you get Higher value for it.

James: Yeah. So yeah, the idea is it's a way of increasing the value of mm-hmm. Whatever it is, a property in this case. Sure. By putting in work yourself. And I'm gonna slightly adjust that for you there. So that so yeah. Instead of say like, paint a contractor or mm-hmm . Something like that mm-hmm . Yeah, exactly.

So. That's the idea and it is a classic flipper strategy. When people first get started, that's what they do. They buy a piece of property that's in bad shape and then oftentimes they will do the work themselves and capture that sweat equity. It's also

Jessi: super fun to use power tools. So fun. Yes.

James: And then, and then they sell it right to, or refinance it to capture that value that they created with their own blood, sweat and tears.

Yeah. Sweat equity. Oftentimes we talk about that with homeowners as well, right? You buy a property and like, yeah, we're putting in the sweat equity cause they're doing the work themselves. Yeah. It's, it's code for DIYer in a ways, which is totally cool.

Jessi: Doing projects yourself so that later you'll get the value out of.

James: It's, it's a classic strategy and one that we try not to do.

Jessi: Really?

James: Yeah. I know, right? Why? Counterintuitive. Because what we want to do is we want to pass on the potential for sweat equity to the next person. Oh. Yeah. Okay. So what we'll do is, we'll do enough to make it lendable

Jessi: Mm hmm. so

James: that someone can we're going to this that we're sell it to that other person with more upside for them.

So, like, for example, we're going to buy this place that It's it could be worth if it's all fixed up, like worth like 380, 390, something like that. And we're going to buy it and not do any of that. Because we're able to buy it for 300 and instead we'll sell it for something like three 40 and, and we'll do like.

Yeah. And, and so, yeah, we're giving up any

Jessi: necessary improvements to get it lendable.

James: Yeah. And so we're giving up that 500, that 50, 000 of potential upside, but we would have had to spend quite a bit to get that maximum value. And instead we're going to let someone else do it. They'll do their sweat equity and get out of it.

And so I actually got them. I have an example here of kind of how this works mathematically. Ooh. Because I want to walk you through it. So let's say I like examples. And this is, this is simplified. I get that. There's been This is apocryphal. There's been

Jessi: some big rounding

James: I get this. It's not 100 percent accurate.

For this to work. I get this. But Hey, if you want to throw spreadsheets at me, go for it. I love it.

Jessi: All right.

James: Good

Jessi: disclaimer.

James: Let's say that you buy a place for a hundred thousand dollars and

Jessi: you're doing

James: a bunch of repairs, but one of them specifically is a 15, 000 kitchen remodel, right? And it'll increase the property value by 30, 000.

Again, this might be like just that all by itself. There might be other stuff going on. I don't know, but it's a great, like. Hey, put in the 15 do that, but to do that 15, 000 kitchen remodel, let's say there's like 7, 000 in labor

Jessi: that has

James: to happen. Right? So typically what a flipper does is they spend the 15 grand plus whatever holding, lending, whatever costs that are there.

They then sell it for 30, 000 more than what they bought it for. And so they would profit in this case, 15. Yeah. And maybe there's like, um, yeah. Oh, I actually forgot to add a number here. So all those lending, holding costs and stuff like that, let's say it's like five grand, so they make 10. There you go.

So they make 10. So what we would do is, Oh, I have all the math here. Yeah. A hundred thousand. I don't know why I did it twice. A hundred plus 15 for the rehab, five for the holding reserve contingencies, whatever, 120 sell it for one 30. 10 K profit. Mm-hmm . So what we would do is buy it for a hundred and then sell it for one 10.

Jessi: Oh, you still make 10

James: Still a deal. And then so the buyer comes along, it's

Jessi: still a deal for the buyer.

James: They buy it for 110, they spend the eight grand. Mm-hmm . Still on the materials they paid. So that's 118.

Jessi: Mm-hmm .

James: So now they have 12,000 from sweat equity. Hmm. Because it's still worth 130 at the end of the day.

Jessi: Yeah.

James: Win win. Yeah, right? Exactly. Except for the contractor. I guess they don't win, but that's okay. There's plenty of work to go around for contractors.

Jessi: Yeah, I mean, it's true that that homeowner may or may not do everything DIY. And so.

James: Yeah, true. And that's the cool, that's actually the cool part about it, right?

Like in theory. If they decide not to put in the sweat equity, they can still pay the seven grand and there's still a little bit there of equity left. And this is something that we actually did with the property last year on it was on 16th Avenue where it was a guy, he was in pre foreclosure and it was super messy and it had to move fast.

So you couldn't do conventional lending because it was like, it'd go fast.

Jessi: Yeah.

James: We ended up buying it. It needed a roof. It needed some other stuff fixed and. You know, the garbage cleaned out for one. And so we went through and we did enough to get it lendable, which one of them was it was funny, the new buyer, he was going to put an all new flooring, but in order for it to be lendable, you had to have carpet.

And so we just bought some. Cheapy remnant carpet and just laid it in like didn't tag it out or anything. It just laid there. So the appraiser was like, cool, you have carpeting, you qualify. We're like, this is so dumb. And so that was exactly what we did. We kind of found that, that number where he was able to buy it and he's been putting in the sweat equity, barring my tools, which is cool, but putting in the sweat equity to make it better and just capturing that value for himself.

And, yeah, which has been great. And we've got some profit out of it as well. Which just

Jessi: kind of opened up different opportunities. You know, he could fix it up and stay there, and now have a really nice place, and like, have this value that he's put into it. Like, I did that, I fixed that. The pride of ownership.

Yeah, the pride of ownership. But, he could also fix it up and sell it, and take that, you know, difference, and then put it into something else.

James: Yeah, there's all sorts of wins. I tried to, I tried to count a lot of them for us, there's a win. It's less money for us to raise. Right. They're having to raise like in this, like that whole 15, you just don't, which is cool.

Well, it's less work. Yeah. Well, the way I said that is it reduces our risk. Yeah. Yeah. I guess that's, we're not going to find unexpected repairs. We're not going to risk having an inaccurate bid or here's an interesting one, accidentally over improving it for the neighborhood.

Jessi: Right?

James: Yeah. That's a thing.

That's

Jessi: a thing. Cause I, I can imagine like you get in there and you start fixing stuff up and it's like, if your personal preference gets layered in there and then you're like, Oh, you know, this, this type of flooring or this type of fixture, this type of cabinet is just better. Yeah. It's like, okay, well.

You gotta, you have to make hard decisions sometimes to be like, well, yeah, it might be better in general, but not for this particular market or neighborhood. And

James: yeah. Speaking of the neighborhood, I think it's better for the neighborhood too. If you've got an owner who's doing all that work and they got the buy in, they had that pride of ownership.

It's designed the way that they want. I think it's good. And the way that we've been structuring it so far is that there isn't enough equity where if they wanted to hire someone, that's still an option. I think it, it shares the wealth, right? We're not just trying to grab it all for ourselves. Obviously some would have gone to a contractor and just in general, it it's still a way to improve the neighborhood.

And I'm just doing it more feels more organic, I guess, rather than just like coming in and doing all sorts of stuff. So if I had to put it into a single statement, it would be sweat equity creates wealth for buyers, improves housing stock, and aligns with our mission at furlough capital to uplift neighborhoods, improving neighborhoods while building generational wealth.

It was kind of like, yeah, so for us, it's been a cool strategy to, to not do this, what equity and instead pass that on. What do you call

Jessi: that? Because like a traditional flip is you buy it, you improve it, and then you sell it.

James: Yeah there's the kind of fun name, it's called a wholetailing. So you have wholesaling, and then you have retailing, right?

So wholesaling is, hey, we bought this place for, you know, I don't know, whatever. We got it for cheap, and this is what a lot of wholesalers will do, they get it super cheap. And then they do just a small markup and then they sell it to a flipper. And then the flipper goes in, does all the work and captures a lot of that value.

And maybe that wholesaler makes somewhere between like, you know, five, 10 grand for maybe, I don't know, something, maybe more, maybe less, whatever. That's not a good negotiator they are. And so, and so for a wholesaler, their whole name of the game is like, yeah, we're trying to do, you know, Or five of these a month type of thing and just constantly rotating through but they're not doing any work.

And as a matter of fact, they're just, they try to, they don't even want to close all the places. They're

Jessi: finding all the deals. Yeah, exactly. That's the value there. And the

James: retail side is what that flipper does, right? They, after they bought it and fixed it up, they're now selling it to an end buyer, a homeowner.

Yeah. And that's the retail buyer.

Jessi: Okay.

James: So we're kind of. Interesting. We're smashing those two together. Yeah. And saying, well, we're not going to resell it at that wholesale price or also not going to sell it at that retail price. We're going to find that middle ground because we're going to put in a little bit of work, probably.

And yeah, wholetail. That's the, that's the term for it.

Jessi: You're right. It needs a more interesting name.

James: It's okay. But anyway, it's a good strategy. It's one that I like. It kind of fits my personality too. And it means I don't have to have a crew running around everywhere, doing all the work, which is also okay.

There are other properties where we do go and we go for it and we fix it all up and we spend all the money and do it just kind of depends on the situation and yeah, what we think we can get away with, but yeah. That's but anyways, super sweet and easy, nice sweat equity. That's what we do. It's part of our strategy.

And if that sounds cool to you and you're like, yeah, that's, I love that strategy. I love what you guys are doing. It makes a lot of sense from a business model, risk standpoint, and makes a lot of sense for the neighborhood and the ultimate buyers. Man, I would love to talk with you. That'd be awesome. You can check us out at furlo.com and you can learn more about just what we're doing from an investment standpoint and how you can get involved. So that'd be great. So with that, thanks for listening and have a great day.