When investing in real estate, you need to understand various numbers and terms to make informed decisions. One such critical factor is the after repair value, commonly known as ARV. Whether you're flipping houses or considering a renovation project, understanding ARV is vital for assessing the potential profitability of an investment. In this guide, we will delve into the meaning of ARV and explore the steps involved in calculating it.
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What is ARV?
After repair value or ARV refers to the estimated value of a property after it has undergone repairs, renovations, or improvements. Essentially, ARV represents the potential resale value of a property in its improved state. ARV is important for real estate investors who flip houses as it allows them to assess the potential profitability of their investment, considering both the costs of repairs and the potential increase in property value.
The Role of ARV in Real Estate Investing
One of the primary roles of ARV is to assist investors in analyzing potential real estate investments. By estimating the property's value after repairs or renovations, investors can assess the potential profitability of the project. This calculation provides a clearer picture of the expected return on investment and helps in making informed decisions about property acquisition.
Additionally, ARV guides investors in making purchase decisions. Using the 70% rule, investors can determine the maximum amount they should pay for a property. The 70% rule states that an investor should not pay more than 70% of the property's estimated ARV minus the estimated repair costs.
ARV also plays a critical role when it comes to financing and lending. Lenders consider the potential collateral value of the property after repairs when assessing loan applications for real estate investments. The ARV influences the loan amount, terms, and interest rates offered to investors, making it an essential factor in securing financing.
How to Calculate ARV
If you are looking to buy a home and want to know the property's ARV, you can hire an appraiser to do a comparative market analysis (CMA) for you. Alternatively, you can do your own rough calculations. Here are the steps to follow to calculate a property's ARV:
- Research comparable properties: Research recently sold properties in the area similar to your property in size, location, features, and condition. Look for properties that have undergone similar repairs or renovations to what you plan to do.
- Determine the price per square foot of the comparable properties: Divide the selling price of the comparable properties by their square footage. For instance, if a 4,000 sq. ft. comp sold for $400,000, its price per square foot would be $100 per sq. ft. Do this for every comp you find, then average the results to determine the average price per square foot of the comps.
- Determine your ARV using price per square foot: Use this ARV formula to determine your property's ARV:
Average price per sq. ft. of comps x your property's sq. ft. = ARV
Example: $100/ sq. ft. x 2000 square feet = $200,000
Factors Influencing ARV
Several factors influence the after repair value of a property. Understanding these factors is crucial for accurate ARV estimation. Here are key factors that can influence the ARV:
- Location: Desirable neighborhoods with amenities and good schools tend to have higher ARVs.
- Property Size and Layout: Larger properties with functional layouts tend to command higher ARVs.
- Condition: Properties in good condition have higher ARVs compared to those in poor condition.
- Upgrades and Improvements: Quality upgrades and modern amenities can significantly increase the ARV.
- Market Conditions: Market demand, interest rates, and economic factors influence the ARV.
- Local Regulations: Zoning and restrictions can affect the property's value.
Understanding the ARV of a property helps you save a few thousand dollars and maximize your return on investment. If you're ready to embark on your real estate journey, SkyBeam Capital can walk you through the process. We understand the importance of real estate investing and provide our clients with helpful resources to help them make informed decisions. Contact us today!
