Sweat Equity Definition: What It Is & How To Calculate It

Key Takeaways


There are numerous ways to increase property value. For instance, you could invest in upgrades, build an additional unit, or install energy-efficient features. However, what if you’re just starting your business and don’t have the means to fund costly projects? Find out how sweat equity is a great way to build up a new real estate business when you’re on a tight budget.

What Is Sweat Equity?

Sweat equity is a term used to describe when a person contributes their time, labor, and effort to a project. It’s a non-monetary exchange used to cut costs and increase value. You’re putting in your own “sweat” instead of hiring someone else to execute a job.

Most often, you’ll see new entrepreneurs or startup businesses using sweat equity to ensure the success of a project or company. Capital can be scarce when you’re just getting started, so sometimes there’s no other option than to put in the work yourself. By rolling up your sleeves and doing the work for free, you can save on the money you would have spent on hiring help.

In some instances, a startup might give its first group of employees an equity stake in the company in exchange for their work. Larger companies might provide corporate shares as a reward.

How Does Sweat Equity Work In Real Estate?

In real estate, sweat equity often takes on a more literal meaning. Real estate investors and homeowners will make repairs or upgrades through their own physical labor. For homeowners, this could help lower the cost of homeownership or increase property value when putting their house up for sale. For real estate investors, this often applies when they’re flipping houses.

If you think about it, paying for contractors, painters, and carpenters can be expensive. If you can do it yourself, you can reduce your costs and boost your bottom line. If you’re open to ideas, here’s a list of DIY home renovation projects you can tackle this summer.


[ Need money to invest in real estate? Attend our FREE online real estate class to learn how to fund real estate deals with little to no money of your own. ]



Sweat equity meaning

Sweat Equity For Real Estate Investors

Sweat equity is a common currency in the real estate industry. For instance, fix-and-flip projects require costly labor. Investors will take any opportunity to reduce costs and increase profits.

If you’re looking to break into the investing business but don’t have any capital, you can exchange your skills to build equity. You can do this by looking for an experienced investor who has the capital and also values sweat equity. If you have any skills in construction, landscaping, painting, plumbing, or electrical, they may be open to a partnership. Instead of a salary, you would exchange your labor in exchange for a percentage of the return on investment (ROI). This requires some risk, as your reward is dependent upon the project outcome.

Keep in mind that there may be upfront expenses that need to be accounted for. For example, if you find a partner who tasks you with renovating a kitchen, are you expected to purchase all the materials? Do they plan to reimburse you for the costs, or will that eat into your equity? Make sure to discuss these stipulations and create a signed agreement to make sure both ends of the deal are held up.

Sweat Equity For Your Real Estate Business

You can also use sweat equity to expand your real estate business. For instance, you could purchase an investment property and do all the repairs and renovations yourself. You might even recruit the help of handy friends and family members. (If you’re lucky, maybe they’ll do it in exchange for some beer, pizza, and good times.)

As you begin to accumulate capital from your first projects, you can gradually expand your professional team. With the support of other skilled workers, you’ll be able to shorten your project timelines and increase the quality and scale of your projects. You might even find yourself paying it forward by giving eager newbies a chance to earn a share of the profit in exchange for their sweat equity.

You can also grow your real estate business by expanding your skill set. You could develop expertise in an area that’s in-demand through hands-on learning or by taking classes. For example, you could become an expert on building energy-efficient smart homes. Having a unique skill set will put you in a great position to market yourself to other investors and contractors. You could also put your skills to use for your own renovation projects. What is sweat equity

How To Calculate Sweat Equity

The value of sweat equity is measured by how much value is added to a business as a result of that sweat equity. It’s easiest to explain this in terms of how much equity an investor is willing to put in for a share of the profit.

To calculate sweat equity, take an investor’s investment amount and divide it by the percentage of equity it represents. Then, subtract the investor’s investment. The remaining number expresses the dollar value of your sweat equity in the business venture. Let’s use an example to flesh out this concept.

Example Of Sweat Equity

Let’s say that your friend wants to invest $25,000 into your latest fix-and-flip project for a 20 percent stake. The valuation of this deal is $125,000 ($25,000 / 20% = $125,000.) Your friend’s stake is $25,000, so your stake is $100,000. If you don’t invest any cash into the project, the sweat equity equals your stake, or $100,000. However, let’s say that you planned to invest $50,000. In this case, the value of your sweat equity is the remaining $50,000. ($100,000 – $50,000 = $50,000.)

This example shows that you control how much or how little sweat equity you put into a project. This largely depends on how much capital you’re willing to invest. If you’re just starting out, you may not have any choice but to put in 100 percent sweat equity. You can gradually increase your initial outlay and decrease your personal labor as you accumulate capital.

Summary

Another great way to think about sweat equity is the time value of your money. Of course, you can spend hours sweating it out on that kitchen renovation to save on your overhead, but could your time be better spent elsewhere? Could you generate more profit by hiring a skilled contractor? Could you be using your time to find buyers or closing your next deal?

Sweat equity is a great way to help build up your business with your own hands. Once you accumulate some capital, however, it’s a great idea to take a look at the big picture and evaluate how your time could be used effectively.

Have you ever had a successful sweat equity venture? Share your story with us below!


Is a lack of funds keeping you from investing in real estate? Don’t let it!

One of the obstacles many new investors face is finding funding for their real estate deals. Our new online real estate class, hosted by expert investor Than Merrill, is designed to help you get started learning about the many financing options available for investors, as well as today's most profitable real estate investing strategies.

Register for our FREE 1-Day Real Estate Webinar and get started learning how to invest in today's real estate market!

Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies