Wealth accumulation and, ultimately, financial independence can come in a myriad ways. Often, we do not realise we can influence our financial situation with what we already know and do.
One of the often-forgotten contributions to wealth creation and accumulation is “sweat equity”, where we do something that does not give us immediate payment – but often significant future rewards.
Sweat equity is no different from other equity. If we invest cash into an investment, we expect it to grow over time, and so it is with sweat equity. A commonly used sweat-equity strategy is to buy a residential property that requires a bit of TLC to make it more habitable and increase the rent or capital value. Some residential properties, such as blocks of flats and boarding houses, increase in value as rent increases. For example, if you purchase a block of flats for $1,000,000 that produces rental returns of $80,000 a year and you increase those rental returns to $100,000 a year, the value of the property will rise to $1,250,000. Increasing the rent by enhancing amenities and making cosmetic improvements, such as painting, decorating, landscaping, etc., can be done over time.
Other forms of sweat equity include:
- Business – buying or starting a business you can work on at weekends to improve it, so it becomes more valuable.
- Authorship – writing a book, whether it be fiction or non-fiction, and selling it.
- Art – creating a sculpture or painting that will have commercial value.
- Music – writing a score for a commercial or a band in order to generate royalties.
- Online information programs – creating a learning program that will help people in a discipline in which you have skills and experience.
- IT – creating software products or games people will pay to use.
We all know something that has commercial value – we may just not realise it.
Of course, there is a price to pay for everything, and the price of sweat equity is the time you must invest. This price could be severe in terms of not devoting enough time to your relationship, family and friends. At other times, it may simply be a matter of not watching TV for two or three hours a day. The time cost varies, but sweat equity can be a highly effective way to increase your financial assets and/or get more income while still working in a permanent job.
I have used sweat equity to accumulate capital in many ways. One example is a multiple dwelling I purchased. I hired a tradesman to help me with the renovations (which were all cosmetic), and I acted as the labourer. It took us about three or four months of working every Saturday and Sunday to get the work done, but when it was finished, I had increased the value of the property by a third and sold it a year later.
On other occasions in my accounting practice, I have taken on messy clients without really making any money from them in the first year. But I put in the effort to clean up their accounting records so that for subsequent years, they were very profitable jobs.
Patience is key. As Charlie Munger says, “The big money is not in the buying and selling, but in the waiting.”
A word of caution on sweat equity: if you want to start or create something from scratch, be realistic about whether people will pay money for it. Passion does not always lead to profit.
If you would like to discuss ways in which you could utilise sweat equity to boost your assets and finances, email me at email@example.com.