Sweat equity refers to a contribution to equity or assets created by people are part of a project that resulted directly from their hard work. The contributions must specifically take time and effort and do not include financial contributions.
In a start-up company, an example of sweat equity would be a partner who does not contribute to the capital by giving money, but by agreeing to work as a manager for sub-par or even no salary.
Sweat equity is also done by most homeowners when trying to selling their property. Simple home improvements are usually done in order to increase the house’s appeal. The home improvements need not always cost money. For example, a simple de-cluttering and rearrangement of furniture may be enough. The great thing about sweat equity in selling a home is that in can lead to a higher asking price even if the property’s market value did not really increase as a result of the improvements.
Sweat equity is also a model used by charities like Habitat for Humanity. Habitat for Humanity helps families buy homes by asking them to contribute 500 hours of sweat equity into the building of their homes instead of paying a down payment. Mortgage payments at zero interest are then made monthly after the family moves in to the new home.