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Real Estate Investment Returns: The Labor Component

laborminiThe street terms "value added property", "turnaround opportunity" and "sweat equity" all translate into the reality that certain properties, when combined with the right owner offer return opportunities not available from financial (paper) investments. But the addition of the owner's labor represents a non-cash capital addition to the investment. A professional real estate advisor will recognize this capital addition and consider it as part of the overall investment strategy.

Purveyors of financial assets have developed suitability standards for stock market investments. Similar standards are also implicit in real estate and their explicit consideration is possible for real estate investors. In fact, standards for real estate investing lend themselves more readily to quantification than do financial assets. A real estate investor must consider the time spent and the efficiency of his time, the latter being a function of age and ability.

In the graphic we see the investor's expected return (er) surface as a function of his efficiency (?) and time devoted to real estate (Sr). The flat gray plane represents competing returns from passive financial instruments. A holistic view of real estate counseling suggests that only those investors with the requisite time and skill to produce returns above the flat plane are suitable for real estate investing in which active participation is required.