What is sweat equity in real estate?

One of the biggest benefits of owning real estate is the opportunity to accumulate home equity. As you pay off the mortgage on a property, your equity increases. However, equity isn’t just the result of making payments. You can also increase the value, and your portion of ownership, through sweat equity with do-it-yourself improvements.

Sweat equity in real estate: How it works

When you’re working hard, you’re likely to break a sweat — it’s the signal that you’re exerting energy. In real estate, if you’re willing to put in the time and hard work to make home upgrades on your own, instead of paying someone else to do it, you are building up what’s referred to as sweat equity. It’s value that you earned without having to pay for it, with only the sweat of your brow and the work of your own hands.

Plenty of homeowners are sweating it out in an effort to make their homes more valuable. In fact, survey data from Angi shows that 81 percent of homeowners completed do-it-yourself projects during the pandemic, and 77 percent reported that their projects were rooted in increasing the future sale value of their properties.

How does sweat equity affect a home’s value?

Sweat equity can play an important role in increasing your home’s valuation. For instance, let’s say that your current home doesn’t have an outdoor deck. But you have the necessary skills to install one, and you put in the work and build it. When you’re ready to sell, a buyer might be willing to pay more based on your addition to the backyard — you’ve increased your home’s value.

It’s important to note that sweat equity may still require spending some money on supplies, though. For example, if you decide to install new countertops in your kitchen, you will still need to pay for the materials themselves. But your sweat equity saves you the money you would have paid a contractor to remove your old countertops and put the new ones in.

Value-increasing projects to try

You don’t have to be a skilled contractor or a master plumber to increase your home’s value through sweat equity. Some small DIY projects can go a long way toward boosting a property’s value.

“Rip up old carpeting,” suggests Michele Messina, a Realtor with RE/MAX Villa in Edgewater, New Jersey. “Another really simple fix is to change your light switches. It gives the house a fresh look. Make sure your gutters are cleaned out — you can do it yourself.”

Messina adds that a simple paint job can go a long way as well. “The smallest thing you can do yourself is paint the house with fresh, neutral colors,” she says. “A little work here can make a big difference when it’s time to start showing your house.”

How to calculate sweat equity

To calculate the value of all the sweat you’re putting into a property, start with the price you paid for the home. As an example, let’s say you paid $350,000.

Over the next few years, you decide to make three major improvements — a kitchen remodel, an outdoor fireplace installation and a basement wet bar — and you’re skilled enough to handle the work all on your own. After the work is finished, an appraisal shows that the property is now worth $500,000, an increase of $150,000.

But that whole amount is not all sweat equity. You have to factor in market fluctuations, plus what you paid for supplies. If the housing market has increased valuations in your neighborhood by 15 percent since you bought the home, then $52,500 of that increase was simply due to the market. And let’s say you paid a total of $35,000 for the kitchen, fireplace and bar materials. With that math, your sweat equity has yielded a return of $62,500. Great job!

Examples of sweat equity in action

In some cases, sweat equity isn’t just about increasing the value of the place you already call home. For example, those in need of a home, or who want to help others achieve that goal, can apply to work with Habitat for Humanity. The sweat equity involved in this program covers a wide range of activities, from doing actual building or repair work on a home to completing homebuyer education classes and volunteering in other roles.

House-flippers also typically employ a fair amount of sweat equity. This process usually involves buying a fixer-upper in desperate need of an overhaul. The good news: You can probably get the property for a low price. The bad news: You might need to put in a lot of sweat to get it into the kind of shape where you can flip the house for a profit. In many cases, though, all that work can really pay off — especially in a hot housing market.

Bottom line

Sweat equity plays an important role in the real estate industry. With higher costs for remodeling and renovation projects hitting homeowners’ wallets, it may be wise to consider tackling some improvement needs on your own. If you’re handy and have the time to spend, you’ll be able to skip the payments to a contractor. When it’s done and your sweat has dried, you will reap the reward of a higher-valued home.