Real Estate Investor's guide to investment property ARV
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Real Estate Investor’s Guide to ARV (After-Repair-Value)

A higher ARV may imply more profits but could involve proportionally higher renovation costs. Conversely, a lower ARV could offer a low-risk investment opportunity but might limit your profits.

But how do you calculate After Repair Value in a fluctuating market, and what really influences it?  

Let’s find out. 

How to Calculate After Repair Value for Real Estate Investing

Run & Analyze Comparables (Comps)

First things first, analyze comparable properties, or comps to estimate the After Repair Value of an investment property. 

Comps are similar properties in the same area that were upgraded and sold recently. Such property transactions can provide valuable insights into target investment property’s potential value post-repairs.

Look for properties with similar size, features, and location to ensure accurate comparisons. 

After Repair Value Formula for Real Estate Investors 

The following two methods help determine the potential value of a property after repairs. 

  • Average Sales Price Method: Calculate the average selling price per square foot from comparable sales. Next, multiply it by the estimated post-renovation square footage of the property to get a rough idea of its After Repair Value.
  • Price-per-Square-Foot Method: Multiply the property’s total square footage by the average price per square foot of similar properties in the area. This Afer Repair Value formula gives a quick estimate of potential ARV based on market trends and property specifics. 

Estimate Renovation Costs to Refine ARV

Make a detailed list of investment property renovations before you can flip it, turn it into a rental, or sell it for top dollar. 

Flippers and other investors can rely on a comprehensive house flipping checklist to make sure they don’t miss any important steps.  

Be sure to get quotes from more than one contractor to understand renovation expenses better. 

Consider both materials and labor costs when you calculate After Repair Value for an investment property; your ARV estimate should also factor in potential hidden fees like permits or unexpected structural issues.

You can better predict what the property will be worth post-renovation if you understand the current market trends. 

Experienced investors make it a point to study factors like supply and demand, interest rates, and economic conditions; these factors directly affect property prices in your market.

Adapt your ARV estimate to match market trends to ensure your investment stays within the house flipping budget and in line with the prevailing market trends in your city or state.

The 70% Rule and ARV in Real Estate

This rule advises paying a maximum of 70% of the property’s value post-repairs minus renovation expenses. It sets a clear limit on how much to invest in a property to make a reasonable profit after renovations. 

When you follow the 70% rule, your property investment will have have a safety cushion against unexpected expenses or market changes.

Do Existing Tenants Affect the After-Repair Value of a Rental Property?

Good tenants who care for the property  and pay on time can boost its value. On the flip side, troublesome tenants can lower the property’s worth.

So, when you calculate ARV for rental properties, be sure to consider the leaser terms. An extended lease with low rental income potential can limit post-repair income. This can affect the property’s overall value.

Long-term leases with reliable tenants do provide stability. 

On the other hand, short-term leases with frequent turnover may be seen as risky and have less ARV.

Consider tenants’ behavior, payment history, and lease terms to assess their impact on the After Repair Value of a rental property. 

Frequently Asked Questions

Can I Use ARV to Determine the Best Exit Strategy?

You can choose to sell an investment property for profit, rent for passive income, or refinance for long-term growth. 

ARV formula for real estate investing helps you choose an exit strategy that aligns with your financial situation, immediate goals, and the current market conditions. 

Are There Any Pitfalls to Avoid When Calculating ARV for a Property?

Be cautious not to underestimate repair costs, ignore current market trends, or rely too heavily on online tools like After Repair Value calculators.  

Double-check your calculations and seek input from other investors or contractors to flip a house on budget.  

Can Upgrades Increase the ARV of a Property Beyond the Initial Calculation?

Renovations and upgrades can significantly increase the After Repair Value of an investment property beyond the initial estimate. 

Investors should focus on the important features, maximize space, and enhance the overall aesthetics to increase the perceived value of an investment property. 

With the right upgrades, you could potentially sell your property for a higher price than you initially thought. 

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