Sweat Equity

AAA

DEFINITION of 'Sweat Equity'

Contribution to a project or enterprise in the form of effort and toil. Sweat equity is the ownership interest, or increase in value, that is created as a direct result of hard work by the owner(s). It is the preferred mode of building equity for cash-strapped entrepreneurs in their start-up ventures, since they may be unable to contribute much financial capital to their enterprise. In the context of real estate, sweat equity refers to value-enhancing improvements made by homeowners themselves to their properties. The term is probably derived from the fact that such equity is considered to be generated from the "sweat of one's brow."

INVESTOPEDIA EXPLAINS 'Sweat Equity'

For example, consider an entrepreneur who has invested $100,000 in her start-up. After a year of developing the business and getting it off the ground, she sells a 25% stake to an angel investor for $500,000. This gives the business a valuation of $2 million (i.e. $500,000/0.25), of which the entrepreneur's share is $1.5 million. Subtracting her initial investment of $100,000, the sweat equity she has built up is $1.4 million.

Likewise, the work an auto enthusiast puts into rebuilding the engine on his 1968 Mustang to increase its value would be considered sweat equity, as would the work done by a homeowner to install a new deck.

Valuation of sweat equity can become a contentious issue when there are multiple owners in an enterprise, especially when they are performing different functions. To avoid disputes and complications at a later stage, it may be advisable to arrive at an understanding of how sweat equity will be valued at the outset or initial stage itself.

RELATED TERMS
  1. Grunt Work

    An expression used to describe thankless and menial work. Grunt ...
  2. Bird Dog

    A real estate investing term that refers to someone who spends ...
  3. Equity

    1. A stock or any other security representing an ownership interest. ...
  4. Asset

    1. A resource with economic value that an individual, corporation ...
  5. Personal Property

    A type of property which, in its most general definition, can ...
  6. Real Estate

    Land plus anything permanently fixed to it, including buildings, ...
Related Articles
  1. Home & Auto

    Foreclosure Opens Doors For Real Estate Investors

    Learn how to spot hot properties that you can turn around for a profit.
  2. Home & Auto

    Top Tips For First-Time Home Buyers

    Follow this step-by-step guide to make your homeownership dreams a reality.
  3. Home & Auto

    Do-It-Yourself Projects To Boost Home Value

    These simple projects can add value to your property without taking too much out of your wallet.
  4. Home & Auto

    Real Estate Deal-Breakers That Shouldn't Be

    Some things can get in the way of owning your dream home, but they don't have to.
  5. Home & Auto

    An Introduction To The FHA 203(k) Loan

    If you're looking at a fixer-upper, the Federal Housing Administration rehab loan may be the mortgage for you.
  6. Home & Auto

    4 Types Of Home Renovation: Which Ones Boost Value?

    You think your updated house looks great, but potential buyers may not feel the same way.
  7. Home & Auto

    Simple Ways To Invest In Real Estate

    Owning property isn't always easy, but there are plenty of perks. Find out how to buy in.
  8. Fundamental Analysis

    What is a good interest coverage ratio?

    Learn the importance of the interest coverage ratio, one of the primary debt ratios analysts use to evaluate a company's financial health.
  9. Fundamental Analysis

    What is a bad interest coverage ratio?

    Understand how interest coverage ratio is calculated and what it signifies, and learn what market analysts consider to be an unacceptably low coverage ratio.
  10. Technical Indicators

    What is a good gearing ratio?

    Understand the meaning of the gearing ratio, how it is calculated, the definition of high and low gearing, and how they reflect relative financial stability.

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center