What is sweat equity?
Sweat equity is hard work that creates value. Instead of investing money, you're putting in your own time and effort, typically with physical labor or by providing expertise. As a current homeowner, sweat equity is typically the increase of home value as a result of a do-it-yourself (DIY) project. Let’s take a closer look.
What does sweat equity mean in real estate?
Sweat equity can mean a few things in real estate, but for current homeowners, it means investing your time, effort — and even labor — into a project rather than paying someone else to do the job. The word “sweat” is nearly literal.
How sweat equity works
Homeowners can use sweat equity as a long-term strategy to increase their home’s value. Although DIY projects often involve a lot of hard work, homeowners can enjoy the fruits of their labor by living in a home with updated features. Eventually, this project potentially helps increase their profits when they put it up for sale. Ideally, the home sells for more than it would have (in that current market) without the DIY project.
For example: Instead of paying a contractor for materials and labor, a homeowner does their own repairs. After saving money on the project and selling the house, the homeowner may profit more than they would have if they paid a contractor out-of-pocket. The idea is that you’re spending less money for potentially bigger gains.
Sweat equity considerations
While spending less money is naturally an enticing prospect, it’s worth recognizing the reality of what certain projects might mean for you. For example, if you’re not an experienced contractor, then your work may reflect that. This is especially important to note if a project involves safety concerns, like dealing with electricity or plumbing. Working on those projects may require more advanced skill than, say, repainting the walls or refinishing the cabinets.
Overall, when it comes to sweat equity, considering what you do or don’t feel confident taking on — and the quality of the result — is paramount to your success and safety.
Sweat equity and home equity
Your home equity is how much your home is worth minus how much you still owe on the mortgage. If the homeowner is hoping to increase their equity in the property, applying sweat equity is an attractive lower-cost prospect. For example, you buy a fixer-upper worth $500,000. While you still owe $200,000 on the mortgage, over time you invest your time and effort in improvements that increase the home’s value to $600,000. This effectively increases your equity from $300,000 to $400,000, allowing you to potentially make more money when you go to sell the home.
In summary
For a homeowner, sweat equity is an increase in home value due to DIY home improvements. Although you may not see immediate profits from sweat equity, it’s typically a financially friendly, long-term approach to hopefully increasing your home’s value beyond what it would be without your hard work.
