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. Real Estate

    Land plus anything on it, including buildings and natural resources.
  2. Grunt Work

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

    A real estate investing term that refers to someone who spends ...
  4. Personal Property

    A type of property which, in its most general definition, can ...
  5. Asset

    1. A resource with economic value that an individual, corporation ...
  6. Equity

    1. A stock or any other security representing an ownership interest. ...
RELATED FAQS
  1. What is the long-term outlook of the chemicals sector?

    The long-term outlook for the chemicals sector, as of 2015, is good, primarily due to continuing emerging market opportunities. ... Read Full Answer >>
  2. What does inventory turnover tell an investor about a company?

    The inventory turnover ratio determines the number of times a company's inventory is sold and replaced over a certain period. ... Read Full Answer >>
  3. What proportion of the chemical sector is related to life sciences?

    The subsectors of the chemicals sector that are related to life sciences, pharmaceuticals and agricultural chemicals, make ... Read Full Answer >>
  4. What level of mergers and acquisitions is common in the chemical sector?

    The level of mergers and acquisitions (M&As) in the chemicals sector has surged to an all-time high since the turn of ... Read Full Answer >>
  5. How are C-suite officers measured on performance?

    Evaluation of C-suite officers, especially the chief executive officer (CEO), is an important element of fundamental analysis. ... Read Full Answer >>
  6. How do I perform a financial analysis using Excel?

    Investors can use Excel to run technical calculations or produce fundamental accounting ratios. Corporations use Excel to ... Read Full Answer >>
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. Technical Indicators

    Will These High-Flying Stocks Stay Hot in 2015?

    These 10 stocks were on fire in 2014. Will they stay hot?
  9. Fundamental Analysis

    Invest in Cancer Research with These 3 Stocks

    These cancer research stocks offer both a high ceiling and the potential to save lives.
  10. Charts & Patterns

    Should Investors Get Into Oil Now?

    Oil has enjoyed a steady climb after a violent plunge. Where is it going next, and how can investors profit?

You May Also Like

Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  3. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is ...
Trading Center