In real estate, sweat equity refers to the improvements made on or the value-enhancing efforts invested in a property that boost its worth. It is considered as valuable as cash equity that is realized when a home is sold for a profit. There is more than one equity player in this real estate model–the third-party investor and the labor and expertise sponsor.
When fixing up and selling a home, most homeowners have more time than money, which means they invest more time and work than funds. This makes sweat equity essential when cash is limited. The term is often used in the world of rental properties and home flipping and, usually, by cash-strapped investors who want to experience the same real estate success as those people in housing reality TV shows.
How does sweat equity works?
It starts with forming a partnership with someone who has the cash in exchange for the valuable labor that you can render in finding a property to buy and/or flip and in establishing the property’s ownership shares.
The person providing sweat equity is responsible for scouring real estate listings, attending auctions, and driving through neighborhoods looking for “For Sale” signs and good deals on behalf of their wealthy partners. He also gathers the paperwork related to a property, compiles a report on the advantages and disadvantages of investing in a specific neighborhood and, most importantly, gets down and dirty to clean up and fix neglected homes.
Sweat equity can be modeled in different ways. The labor investor, for example, will have 18% ownership interest in the deal, while the third-party investor has 82% interest.