As you’ve probably pieced together from the previous section, the term “sweat equity” came about from the sweat someone put into a project. So when people talk about sweat equity, they are referring to the physical labor and mental effort, and time they put into a venture.
Sweat equity can be used to lower someone’s cost of homeownership. You see this a lot with real estate investors. These kinds of people flip houses for profit, but they use sweat equity to their advantage by doing repairs/renovations on their own or with a team of family or friends. All of this is done before the house goes on the market.
Paying crews of contractors or painters can get extremely expensive, so a DIY approach like sweat equity can help you save a lot of money when it comes time to sell.
Sweat equity is also important in the corporate world because people need to create value from the efforts of another person or another company.
Many startups are typically strapped for cash, so owners and employees accept salaries that are below the market value so they can have a stake in the company, which they hope to eventually profit from if the business is sold years later.