Derek Morgan
Derek Morgan
Couple talking to a Contractor during Construction
Derek Morgan
Derek Morgan
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What is After Repair Value (ARV)?

Real estate investing is an exciting way to grow your wealth and achieve financial freedom. One important concept to understand before getting started is After Repair Value, or ARV. In this post, we'll discuss the key considerations and tips for accurately calculating ARV and maximizing your return on investment.

What is After Repair Value (ARV)?

After Repair Value, or ARV, is the estimated market value of a property after all necessary repairs have been completed. It helps investors determine how much money they will need to invest in repairs or renovations, and how much money they can expect to make from their investment once those repairs are completed.

To calculate ARV, an appraiser will assess the condition of the property and any planned renovations, and give their opinion on the ARV of the property. The ARV should be based on current market conditions and comparable properties in the same area.

A Step-by-Step Guide to Calculating ARV

  1. Determine the scope of repairs and renovations needed: This includes everything from cosmetic upgrades like painting walls or refinishing floors, to more extensive structural work like replacing windows or doors, installing new plumbing systems, or fixing structural damage caused by water leaks or pests. Do this thoroughly, as unexpected repairs can significantly impact your budget and ultimately your return on investment.

  2. List all of the repairs and renovations that need to be made, then estimate of the cost to complete them. This should include materials, labor, and any other related expenses. To help you with this step, you can try using an online cost calculator or go directly to a contractor who can provide a reliable figure.

  3. Research recent sales data for comparable properties: To accurately determine the ARV of a property, you'll need to consider what similar properties in the same area have sold for recently. By comparing listings or sales records, you can get an idea of what a potential buyer would be willing to pay for your property. A real estate agent can also assist you in getting access to this data.

  4. Finally, you can calculate the ARV using this formula: (Purchase Price) + (Value From Renovations) = After Repair Value.

The 70% Rule

The 70% Rule is a guideline that real estate investors often use to help them determine their maximum purchase target for a property. It suggests that investors should aim for a 30% return on their investment by bidding no more than 70% of ARV minus estimated repair costs on a project. This means that if you want to make a 30% return on your investment, you should bid no more than 70% of the ARV minus the estimated repair costs. The formula for the 70% Rule is: (ARV x 70%) – Estimated Repairs = Maximum Purchase Target.

For example, let's say you're looking at a property with an ARV of $200,000 and estimated repair costs of $50,000. Using the 70% Rule, you would calculate your maximum purchase target as follows: (200,000 x 70%) - 50,000 = $110,000. This means that you should aim to bid no more than $110,000 on the property if you want to make a 30% return on your investment.

Factors to Consider When Calculating ARV

Calculating ARV accurately is essential for real estate investors, but it's not always a straightforward process. Since they can impact the value of the property, here are some key factors to consider. 

Construction costs are not just limited to the materials and labor. Renovations often mean that there are fees and permits that could be required.

There are a number of risks that could affect your return on investment when it comes to real estate investing. These include things like changing market conditions, local ordinances or laws that may affect zoning restrictions, or unexpected repairs that arise during the renovation process. It's important to carefully consider all of these risks when calculating ARV in order to avoid overpaying for a property or investing more money than you can realistically expect to make back.

There's potential for added value through renovations and upgrades. Adding a new bathroom or kitchen, updating the electrical or plumbing systems, or installing energy-efficient appliances or fixtures can go a long way. By carefully considering the potential for added value through renovations and upgrades, you can help ensure that you're getting the most out of your investment.

Tips for Accurately Calculating ARV

Here are a few tips to help you accurately calculate ARV and maximize your return on investment:

- As mentioned earlier, researching recent sales data for comparable properties. To pull comps, you’ll need to look at location, condition, age, number of rooms, lot size, and time frame. To find out more about what makes a property appropriately comparable, check out “The Key Features of Comps.”

- Know what repairs and renovations are worth it. Some features could make or break the sale of a property, which is why we consider taking a look at “Home Features That Sell” and “Common Mistakes that Home Flippers Make.”

- Read further about ARV and stay up to date about the current market. More resources can be found linked in our post, “Quick Guide to Track Your Home’s Value in 3 Steps.”

Conclusion

Understanding ARV is critical to succeeding in real estate investing. It can determine whether a deal is worth pursuing or how much you should spend on repairs.  Calculating ARV accurately requires considering a number of different factors, including the cost of repairs and renovations, recent sales data for comparable properties, and any risks that could impact your return on investment. Continuing your education about ARV, alongside the tips in this post, can make all the difference in your future as an investor.

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