I think one of the most important things for real estate investors to be educated on and aware of is what they are getting themselves into when they decide on a particular investing strategy.

For the record, I don’t think any strategy is the wrong way to go. I only think a strategy is the wrong way to go if you chose it naively with no idea what you’re getting yourself into. And in those situations, it may not actually be the strategy that is wrong… It may just be that the strategy is wrong for you.

With anything in life, and especially with investing and entrepreneurship, education and self-awareness are huge.

If you’re educated about what really goes into an investing strategy and you have self-awareness surrounding your goals, skills, and interests, and you can weigh those things against each other, you will be miles ahead of the crowd.

The Definition of Investing

If I pull up the handy Google and ask for the definition of the word “invest,” this is what I get:

Invest: 1. Expend money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture.

I want to highlight two words in there—expend and money. Notice it only specifies money. So if I buy some stock shares with my money, then that fits this definition. The only thing being expended is money.

The Definition of Working

If I pull up the handy Google and ask for the definition of the word “work,” this is what I get:

Work: 1. Activity involving mental or physical effort done in order to achieve a purpose or result

2. Mental or physical activity as a means of earning income; employment

3. A task or tasks to be undertaken; something a person or thing has to do

Activity and tasks are the key words for me in this one. So this one is me doing something, or putting a mental or physical effort in, or what have you. Most of us are pretty familiar with this term.

Now, I’m not sharing these definitions with you because I’m trying to be condescending or explain the terms to you—I know you know what these words mean. I am including them because they very clearly show the difference in the two terms at an extremely universal level.

In one of these scenarios, money is being invested. In another one of these scenarios, effort is being invested.

Investing and Working in Real Estate

So why am I harping on these two words? Well, it’s simple. Investors oftentimes don’t seem to understand the difference when it comes to their real estate investments.

Let’s go back to buying a stock share. Is that working, or investing? All day long, that’s investing. Why? Because the only thing you are putting into it is money.

What about your nine-to-five job? Is that working or investing? No doubt, that is working. Why? Because what you are putting in is effort. (I realize some people may need to invest money into their “work” but that is a different context from what I’m talking about here.)

Those two examples are very obvious. But what about real estate investing? Where do things fall in this industry?

Well, we actually start to enter a gray area.

Let’s use flipping a house as an example. If you go into real estate investing and you decide to flip a house, is that a straight investment?

Most people seem to think so. But let’s breakdown the tasks involved with flipping a house:

  • Purchase a distressed property
  • Fund rehab materials
  • Perform rehab
  • Sell property

If we were to pull down those obnoxiously haughty definitions of invest and work, do all of these components fit into the investing definition? Nope. I see them more broken down as follows:

Invest:

  • Purchase a distressed property
  • Fund rehab materials

Work:

  • Perform rehab

We can all agree that if you only purchase the distressed property and purchase the rehab materials and then sell the property, you won’t make any money. So in this case, the key to your profits is in the work. The money you invest lends its hand toward the profits and is an important part of it—but without the work, the profits won’t appear.

So at the end of the flip, when it’s all complete and you’ve successfully flipped the property to a buyer, you walk away with a chunk of cash. That cash is usually what people consider to be the profit from their investment. But of that cash, how much of it is a return on your actual investment (i.e. the money you expended into the project)? And how much of that cash is essentially payment for the work (or sweat equity) you put into the project?

If you work a job, you are typically paid for your time and effort. You likely get paid per hour—even if you’re on salaried pay at your job, you are still worth a certain amount per hour. So you just did all the work to rehab and sell this property. For those parts of it, some of that financial return/profit is really just payment for your time and effort—just like any other job.

So how much of that profit is a return on your monetary investment (which is what investing is really about)? And how much of it is just payment for your time?

Sweat Equity

A common and fun term you might have heard is sweat equity. Sweat equity is defined as “an interest or increased value in a property earned from labor toward upkeep or restoration.”

The definition of the term really brings together this idea of having to work in and for your investments. There still is an investing component: the increase in the value of the property once you do the work…